LevelUp was originally created by SCVNGR as a daily deal competitor to Groupon , but repositioned itself in October as more of a loyalty app with its own payment system. The new direction has helped LevelUp attract 200,000 users, who are spending $2 million a month with the app. That’s up from 100,000 users and $1 million in spending reported in March. The service is now used by 3,000 merchants in eight markets. The new money will help LevelUp expand its footprint across the nation.

Here’s what SCVNGR’s chief ninja Seth Priebatsch had to say about the funding: “Our vision is to make LevelUp the first interchange zero payment network. That means we’re working to bring the cost of moving money down to nothing and enabling businesses to re-invest that cost into growing their businesses, by  attracting new customers and bringing them back more often.”

LevelUp, which has raised $32 million so far, is still growing but it offers an interesting option for merchants. It gives them a way to attract new users with small discounts and offer loyal users rewards for coming back. And with a Starbucks-like barcode payment system built in, it can close the loop on offers so merchants know the effectiveness of working with LevelUp. That gives LevelUp a pretty impressive package of services it can deliver to merchants, who are being offered all number of payment, loyalty and offer tools from Square, PayPal, Groupon, Google Wallet and many others.

Now, it looks like LevelUp is pushing even harder on its payment angle and is hoping to differentiate itself by being ultimately cheaper for merchants. Groupon is also testing out a new payment service that will offer a 1.8 percent transaction fee with a 15 cent transaction charge. Lower transactions fees could ultimately help merchants in the long run but it’s also confusing for now, seeing so many options in the market.

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Turns out there’s been a fair amount of demand among a variety of merchants for just such a system, and LevelUp is starting to capitalize on that. The company, part of Boston-based SCVNGR, said it is now doing $1 million of transactions a month through its payment system, which now has 100,000 users. Users are using the payment system two to three times a week on average, the company says. Payment volumes have been doubling in the last six weeks, and merchants are climbing on board, with 1,400 signed up, including 400 in February alone. Another 600 retailers are set to come on board this month, according to LevelUp.

One million dollars is small in the grand scheme of things, and LevelUp still has more growing up to do. It’s only available in eight markets (Atlanta, Boston, Chicago, New York, Philadelphia, San Diego, San Francisco and Seattle). It’s going to face a lot more competition from Google Wallet, Isis, PayPal, Visa, Square and others.

But it is showing that a start-up can make some noise in this crowded field of mobile payments, and it’s providing a lesson in how a payment system can work when it’s integrated into a deals and loyalty program.

LevelUp’s growth shows that there are going to be other viable mobile payment systems beyond things like Google Wallet and Isis, both of which rely on near field communication.

I talked to Seth Priebatsch, “chief ninja” at LevelUp, who pointed out the similarities between Starbucks’ payment system, and said that’s been the biggest driver of sales to merchants. Many businesses have wanted to embrace a simple mobile payment and loyalty system, but Starbucks wasn’t offering its solutions to other businesses. Starbucks said recently that users loaded $500 million into mobile accounts in December and conducted more than 26 million mobile transactions last year.

“Starbucks is our best sales person,” Priebatsch said. “They have closed more deals for us than we could have done ourselves.”

Priebatsch said in the more than 2,000 store locations where LevelUp is used, some merchants are seeing more transactions through LevelUp in the first 30 days than through American Express. LevelUp offers a loyalty and analytics platform that allows merchants to reward first-time and repeat customers with discounts. The LevelUp payment system has interchange fees of 2 percent, compared with rates of about 3 percent for most credit card transactions.

When a user goes to pay, the LevelUp app creates a one-time QR code that the merchant can scan with an iPhone or Android app on their phone. Or they can use a new T-Mobile terminal that houses a dedicated phone that scans LevelUp QR codes. Consumers can conduct transactions through a LevelUp app on the iPhone or Android devices or through a mobile web version or a separate payment card.

The next step for LevelUp is to open up the system to even bigger players. It released an API today that allows point-of-sale makers and software companies that service POS terminals to integrate LevelUp into existing terminals. And Priebatsch said LevelUp is working with more than 10 point of sale terminal makers and software providers and will have some announcements soon.

The integration will make LevelUp available to a modest 3-5 percent of terminals by this summer, but it gives LevelUp an opening to compete in much bigger retail chains. He said LevelUp will be able to compete across the board, against Square for smaller merchants and Google Wallet and Isis for larger merchants, without forcing them to make big hardware upgrades.

LevelUp is interesting because it started with deals and discounts and later integrated payments. Many of the emerging wallets have evolved the other way around. Either way, it’s clear that you’ve got to have more components than just an alternative to a credit card swipe. Consumers need discounts to lure them in and merchants need more ways to engage customers.

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So what was missing? Seth Priebatsch, founder of SCVNGR, said it needed a better take on building loyalty for merchants. So Priebatsch went back to the drawing board and has relaunched LevelUp with a new approach to driving loyalty that begins with credits for users who visit a business and includes a new mobile payment system built by SCVNGR.

LevelUp, take two

The new LevelUp works like this: Instead of buying a deal outright, say $20 for $40 worth of food at a restaurant like other daily deal sites work, LevelUp offers a more modest instantly redeemable credit of perhaps $5 or $10 for customers on their first visit. The new service is now expanding beyond Boston and Philadelphia to New York City and San Francisco

To pay, users just link a debit or credit card to their LevelUp app and present their app to merchant, flashing a QR code. The code can be scanned by the merchant using their own mobile device or special Android devices provided for a limited time by SCVNGR. The credit is immediately applied, and users can start working toward their next reward, which is triggered after a certain dollar amount in purchases is made. While plenty of others are doing punch cards, Priebatsch said LevelUp works because it’s tuned to provide the most incentive for consumers to come back, which he said requires a reward to be unlocked after about the equivalent of four to five visits, and it has a payment element.

The payment play inside the app provides a number of benefits for both consumers and merchants. Users don’t have to mess with coupons or worry about loading up an account. The app draws money when it’s used and makes payment easy, kind of like the Starbucks card mobile app, only without the need to fill up an account. And it can provide transaction information to users.  Google Wallet also provides some similar benefits with its NFC payment system, but initially, it can’t provide consumers much immediate information on transaction history because many of the payment terminals aren’t updated to pass on purchase data.

A new upside for merchants

The new LevelUp payment system is even more helpful for merchants. Priebatsch said SCVNGR has done some clever work on the back end to reduce the fees on payments by about 35 to 50 percent compared to using the same payment source with a credit card swipe. More importantly, LevelUp can provide users and merchants with instant information on the transactions, which can help merchants understand how effective their offers are, who their new customers are, what their habits are and how best to target them. Essentially, LevelUp can own the entire deal process, from the first deal offer to redemption, something Google, PayPal, American Express and others are doing as well.

Priebatsch said the LevelUp service, which has quietly been in testing for the last nine weeks at about 500 locations in Boston and Philadelphia, has proven to be a helpful tool for merchants with consumers. LevelUp’s 100,000 users are turning to LevelUp about twice a week now and are tipping about 21 percent at sit-down restaurants. Priebatsch said 45 percent of customers return to pay full price within one month, and 65 percent of customers at quick service restaurants do so within 30 days. Users increase their spending by 38 percent on a transaction when they unlock new credit. LevelUp isn’t taking a cut of transactions but is instead charging merchants a $55 monthly fee.

Priebatsch said the first version of LevelUp, which he said made money, worked like many other daily deals in building buzz and attracting users to a merchant, but it didn’t solve the problem that it can be expensive for merchants and can hurt their brand. Now with credits applied only when people show up the first time and then after several visits where people pay full price, a business has a better way of managing how much they spend on discounts and they can do it in a way that doesn’t paint their brand with a big discount label. Instead, it emphasizes loyalty.

But will consumers buy in?

I think there are decent ideas at work here. It’s clear that any daily deal system needs to be a win for merchants, and some critics of Groupon accuse it of not being ultimately beneficial for merchants, so a more retailer-friendly system has merit. It’s also helpful for merchants to not have to offer such big discounts and associate their name with huge deals, which can erode their brands. In theory, building a payment network makes some sense because you can streamline the purchase process and provide instant information to both consumers and merchants about transactions. And you can close the loop on offers so merchants understand how their deal investment is doing.

But it remains to be seen if people will step up in big numbers to have their credit and debit accounts linked to a LevelUp app. Starbucks’ success, however, suggest it might work, though SCVNGR will need to do a lot of marketing to get the word out about LevelUp. But it’s still going to be an uphill battle. It’s a very crowded market, and Groupon and Living Social are still the best-known names in this space, with Google coming on as a rising challenger.

From the sound of it, LevelUp as it was first conceived had a tough go initially. It’s unclear whether the app will be able to do a whole lot better on a big scale, even with the new updates. The early results sound promising, but even with some interesting ideas, it’ll take a lot of work and money to ensure that consumers and merchants take notice. This could be the last gasp for LevelUp — or the major tuning it needed to finally get going.

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The latest example of businesses shying away from location-based games is Gowalla’s announcement today that it is doing away with items in its next release of the app. The items were virtual goods picked up by users for visiting locations, which could then be traded or left for other users. Gowalla’s CEO Josh Williams said items were used by less than half a percent of its active users.

He said virtual goods unlocked through real world interaction is a remarkable idea, and one that helped Gowalla get its start. But now it causes more distractions than joy for most. What Gowalla will focus more on is helping people explore the world, in keeping with its passport theme.

SCVNGR, another location service that wants to build a game layer on top of the world, invites people to play and create location-based games. But these days, the big news for SCVNGR is around LevelUp, a daily deal program that uses some game mechanics to build consumer loyalty for merchants. LevelUp’s game elements are more limited, however, and consist mainly of establishing three daily deals instead of just one to ensure that consumers come back to a business.

SCVNGR still has a business built off its traditional gaming model but it seems like that real dollars are in tapping local advertising dollars through LevelUp. SCVNGR’s move with LevelUp seems to acknowledge that games by themselves have a limited appeal, and that the real opportunity is in improving on the daily deal market.

Foursquare also has also moved beyond games and is focusing on more recommendation services through its Explore tab. More recently, it rolled out a list function for curating and sharing locations and event check-ins, which allow people to use Foursquare as more of a digital scrapbook. And the company’s been lining up big daily deal discount partnerships with Groupon and Living Social, too. As Foursquare co-founder Dennis Crowley told me last week, the check-ins were the first step in building up a user behavior that can unlock a lot of other services and features. Games were the first reason to check-in, but now there are plenty of other reasons to do so.

What it all means is that location is maturing, and while there is still a place for games, location-based services are becoming more about business. Which makes sense, because these companies are interested in making money first and foremost. We’ll still have game mechanics, and other start-ups might come along with even better ideas on how to use games and virtual items, something others have argued that Gowalla didn’t manage well enough. And gamification can still work as a motivational force for all kinds of behavior, though it needs to consist of more than just badges and virtual goods.

As Gowalla’s Williams points out, there’s a lot more to location than games. A JiWire survey last year found that scoring points was the least popular reason for checking into a location, while getting a deal was the most popular motivator. There’s so much opportunity for end users in terms of discovering the world, documenting travels, unlocking deals and finding people nearby. And many of these things are easier to monetize for companies, too. So while I don’t think we’ve seen the end of games in location, it looks like we’re moving on to bigger ideas and more lucrative opportunities.

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You can be like American Express, a 162-year-0ld financial services company that is marshaling its vast resources in pretty impressive ways to create what could be one of the strongest offerings in the local commerce space. It just inked a deal to bring personalized deals to Facebook through its Link, Like, Love platform and previously signed up partners in Foursquare and SCVNGR’s LevelUp to also distribute deals. The recent deals essentially allow card members to link their credit accounts to these social services, which can then offer them deals that can get connected to their card. When they go to redeem an offer, they just swipe their card and the transaction is processed automatically. Any discount is applied as credit to their American Express account.

I sat down and talked with American Express’ David Wolf, the VP of global marketing capabilities, about American Express’ approach to this market, what sets it apart and how far it can go in the daily deals space. He told me AmEx is uniquely positioned to excel in this market because of its close relationship with consumers and merchants and the valuable information it can offer businesses. And he said that while NFC is something the company is looking at, its card-based deals system works in a frictionless way today.

Take a look at the video below.

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Alexander the Great once set his own warships ablaze to ensure there would be no backing down from a pivotal attack on the Persian army. It was either conquer the enemy or swim home. Nearly 2,300 years later, SCVNGR founder Seth Priebatsch isn’t looking to take over the world. Instead, he wants to build game layers atop it. But he wants to follow Alexander’s example just the same, and he’s already making money doing it.

“I’m a big believer in that ‘burn your ships before facing the Persians’ metaphor. If you’re going to do a startup, don’t half-ass it,” says Priebatsch. Rather than igniting a fleet of ships, the SCVNGR founder dropped out of Princeton at age 19 to try to create a similar high-stakes, all-or-nothing atmosphere for his startup.

Now 22, the Boston-based entrepreneur — who describes himself as “extremely unbalanced” — often sleeps in his tricked out, 26,000-square-foot, industrial office space, which houses his 44 employees (and 30 summer interns) and comes complete with moving walls and nine bamboo gardens. He has no girlfriend, no dog, not even a goldfish. “I do have a pet robot,” says the startup founder,” but I don’t have to feed it.”

And while he probably won’t be invited to speak at any seminars on work/life balance any time soon, it’s hard to argue with the results his focus has achieved. Eighteen months after its launch, the Google Ventures-backed startup is doing something few venture-backed startups are doing: making money. According to Priebatsch, the company made its first million dollars in revenue over a six-month period in 2010, and matched that within the first six weeks of 2011.

In a nutshell, SCVNGR tries to deepen experiences at locations by creating simple game-like challenges for its members when they check in.  It now has more than 3,000 enterprise clients — from Coca-Cola to the U.S. Navy — that are building challenges for users on the mobile platform. And while large corporations pay to use the SCNVGR platform, consumers and small businesses can build on it for free, although that might change as the company looks to add new features.

Meanwhile, Priebatsch has also been forging ahead with a second venture to build a “deal-layer on top of the world.” With LevelUp, SCVNGR is competing with local deal programs like Groupon and Living Social by offering a series of three deals to consumers, who unlock each one as they try out a business. Encouraging customer loyalty is radically different new twist to the daily-deal market.

Two months into a pilot program in Philadelphia and Boston, LevelUp says it has about 200 SMBs offering deals to 100,000 registered users, divided equally between the two eastern cities. The company said its high-watermark for a daily deal has been 1,400 takers. ”By volume, we are already in the top three players in Boston and Philadelphia,” Priebatsch said. “[On] any given day, it’s Groupon, LivingSocial, LevelUp … which is pretty sweet.”

Although he wouldn’t say how many people have purchased from the site, the company did share some initial data on customer loyalty and its new daily-deal offers: 50 percent of LevelUp users who have purchased Level 1 have ‘leveled up’ to Level 2, it said, and 20 percent of users who have purchased Levels 1 and 2 have already ‘leveled up’ to Level 3.

Priebatsch says he knows LevelUp is having some success, because it’s irritating his competitors. “I always know I’m doing my job right when I get hate mail from people whose businesses I’m affecting,” he said. “When we launched LevelUp and three weeks in I got hate mail from some of the folks at Groupon and Living Social … I was like, ‘check. Doing my job.” The emails weren’t mean, he added, but were evidence that “we are causing disruption in Boston and Philly.”

And what about his unbalanced approach to this competition? “If you are a 20-something and you’re just dropping out of college, be balanced later,” he said. “Now is the time to be completely lopsided and run with it.”

Post and thumbnail photos courtesy of Flickr users Steve Evans and Tech Cocktail

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SCVNGR, the real world location-gaming service, is applying game mechanics and a new business model to daily deals in an attempt to strengthen the relationship between merchants and their customers. With LevelUp, a pilot program that begins today in Philadelphia and Boston, SCVNGR is hoping to compete with local deal programs like Groupon and Living Social by offering a series of three deals to consumers, who unlock each one as they try out a business. The company is waiving any fees on the first deal to help encourage businesses to try out the service.

By leveling up — a term that comes from video games, and means that users unlock rewards as they complete certain levels — SCVNGR believes it can prevent consumers from abandoning a business after one daily deal and give merchants a shot at turning them into regular customers. That’s been one of the problems in the local deals space: Groupon and others are great at driving traffic to a business with big discounts, but then it’s up to the merchant to keep them coming back, and many consumers simply move on to the next deal.

LevelUp requires businesses to offer up three discounts or offers rather than just one. Consumers start with a “Try it” offer, then if they come back unlock a “Like it” offer and then have the chance to get a “Love it” deal. But SCVNGR is taking a different approach by waiving its fee for the first offer, only taking a 25 percent cut on the second and third level up. That contrasts to other daily deal programs, which can take up to half of the revenue from a one-time deal.

“Our job is get customers to come back,” said SCVNGR CEO Seth Priebatsch. “If they’re not coming back, we haven’t done our job; we’ve just created another Groupon clone.”

Priebatsch said LevelUp isn’t just meant to dangle more deals in front of a user. It allows businesses to boost follow-up visits by increasing the discounts available for higher levels to reward repeat visits. Or it allows a merchant to lead people along a path to discovering its services: A rock-climbing company, for example, can offer a beginner course as its first level and an intermediate course for its second offer. LevelUp doesn’t require a certain number of users to activate a deal — customers have seven days to redeem the first offer and then the merchant can set time limits for the second and third offer. It’s up to merchants if they want to offer additional discounts to customers beyond the three level ups.

Priebatsch said SCVNGR has analyzed its own data and found that it takes three visits by a consumer before they are likely to become a regular at a business or at least have that merchant at the top of their mind. He said the goal with LevelUp is to create regular repeat customers, who make up 60-70 percent of revenues for many local businesses.

“The guys who come in once a year are not meaningful for a business,” he said. “The people who come in once a week, that’s meaningful.”

Some other local reward systems use game mechanics. Foursquare, for example, has been offering specials for mayors, the top visitors at a location — but what SCVNGR is offering is a dedicated service that combines the reach of location-based services with the scale and power of bigger daily deal programs. It makes a lot of sense to me because what businesses want is a long-term relationship with consumers and real loyalty. Many are already paying to offer daily deals. But I think it helps if the system is designed for repeat visits.

The fact that SCVNGR is also not taking a cut of the first deal is also going to be an attractive proposition for merchants. They’ll still need to dole out a fair amount in discounts, but the risk is lessened if a campaign doesn’t perform. That should give businesses some incentive to try this out. If this works, I can imagine other daily deal sites might follow in SCVNGR’s footsteps.

LevelUp is the latest move for SCVNGR, which recently hit 1 million users and received $15 million in funding. Priebatsch said the company is using much of its existing sales staff to launch LevelUp. If the trial goes well, Priebatsch said the program will be expanded to other cities.

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SCVNGR is a location service that tries to deepen experiences at locations by creating simple game-like challenges for its members when they check in. The Boston-area start-up shared some data with me from an ongoing campaign with Buffalo Wild Wings, a national sports-bar chain that is seeing a boost in extended engagement from its use of SCVNGR. Since the Home Court Advantage campaign began on Jan. 3 for the college basketball season run-up to March Madness, the chain has seen 77,538 players participate in SCVNGR’s challenges at its restaurants, one in three of whom returned again. Players have completed an average of six challenges and have created almost 7,000 challenges collectively.

With SCVNGR, big businesses can pay to run their own challenges and reward members for completing certain activities. Or users can make their own games and add them to the list of challenges at a location. At Buffalo Wild Wings, users earn a couple of points for downloading the iPhone or Android app, for example, then earn more points for things like taking a picture of rival fans. Players can earn free sodas and discounts after hitting certain point triggers.

Jeremy Burke, brand manager at Buffalo Wild Wings, said the campaign has exceeded the chain’s goals by keeping customers more engaged and loyal to the restaurants while expanding the company’s online presence. He said the campaign has created 38 million social impressions, with 45 percent of players sharing their completed challenges on Facebook or Twitter. He said the company’s Facebook page has also reached 4 million fans, aided in part by the campaign, and restaurants are consistently seeing 2,000 new players a day.

“This is about knowing your customers better and engaging with them socially and competitively,” Burke said. “They’re staying with friends, and this allows them to engage longer and share with them.”

Burke said the appeal of SCNVGR was in enabling the chain to build custom campaigns around different sports seasons. Players, for instance, can compare their scores on a Home Court Advantage campaign microsite. Burke said players are not only more engaged with the Buffulo Wild Wings brand; they tip their servers better too.

For SCVNGR, it’s proof that location can be powerful and lucrative. In talking to CEO Seth Pribatsch recently, he said the key to location is treating each place differently. For businesses who create unique location experiences for customers, they have a better shot at engaging them rather than having them just do a generic check-in. The business deal with Buffalo Wild Wings, SCVNGR’s largest partnership with a full-service chain, also highlights the moneymaking opportunities for the location service. The campaigns command a premium and are extremely sticky; Priebatsch said more than 80 percent of its 1,000 corporate customers are repeat clients. That’s likely how Priebatsch can claim that SCVNGR is out-earning Foursquare “10-to-one or 20-to-one each month,” as he did in an interview with Inc. last month.

These are still early days in location, but the lessons SCVNGR is learning are helpful across the industry. Location-based services can be very beneficial in building engagement, bringing in customers and driving repeat visitors, but the services need to provide memorable experiences. Users are more likely to tweet about a game they played at a restaurant than just visiting the establishment, and they’re more likely to create content when it’s built around fun. Now, there’s a potential for this to be a bit of a novelty for users, who haven’t experienced real-world games like SCVNGR’s. But if the challenges are kept fresh, and the experience evolves over time, there’s no reason why this can’t be a major component to the growing location game.

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SCVNGR, which is on pace to hit a million users soon, competes in the location-based space with Foursquare and others, but it emphasizes real-world games and challenges, which Priebatsch told me are much more engaging than simple check-ins and badges. He said  85-90 percent of the time, when SCVNGR users post an update from a location, they share about a challenge, not just a generic check-in. Challenges can be something like taking a picture of an item from a business, which can decide to offer a reward to customers. SCVNGR makes its money by charging large corporations to build challenges atop its service. More than a 1,000 companies have signed on as partners, including Coca Cola, which ran a successful campaign at a number of malls during the holiday season.

As I noted in my previous story, SCVNGR has its own take on location, which will increasingly separate it from location rivals like Foursquare, which also utilizes some game mechanics and boasts 5 million users. Now whether adding game mechanics to locations is a business that can scale beyond early adopters and support a $100 million valuation is an open question. But the business seems to have its share of believers.

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