Why the foursquare and American Express deal is really big

Screenshots from foursquare's AMEX integration

Foursquare’s new deal with American Express will allow AMEX cardholders to save money on purchases at select retailers including Sports Authority and H&M. As important as the deal is, I think the technology is more important.

We’ve heard a lot about NFC lately. Products like Google Wallet can talk to the payments network and transmit your credit card, loyalty program and promotion information.

I’m sure it will happen over time, but the benefits are marginal at best. Yawn.

What’s really exciting is what you could do if you flipped the model and had the payment networks talk to your phone. That’s exactly what foursquare is doing. When you redeem an offer, American Express sends a confirmation to your phone.

The payment network can reach out and touch your phone. That’s huge. That enables a lot of possibilities:

  • Risk reduction and increased convenience. If you’ve ever been traveling and had a card rejected because it was flagged as suspicious, you know how frustrating this can be. Instead of declining the transaction, it would be routed to your phone where you could authorize it. This also saves a phone call to unblock your account. Fraud reduction, more transaction volume and operations cost reduction. A credit card company’s trifecta.
  • Online transaction authorization. Similar to above, a notification to your phone could be used as secondary verification of online transactions.
  • Parental authorization. Parents could provide a restricted prepaid card to children. On every transaction, they could remotely approve or deny it. Some merchants could be automatically authorized. This would be a great addition to American Express’s PASS product line.
  • Promotions. Offers based on your recent purchases and location could be sent while you’re in a shopping mood. If you just made a purchase at mall, you might get an offer for discounts on dinner and a movie.
  • Access for the blind. A text-to-speech engine on the phone could provide an overview of the merchant and amount to help the blind.

An application like this also eliminates the two-sided market problem that NFC has. As much as Google would like to have NFC terminals everywhere, that will take a long, long time. Merchants don’t have to do anything to the installed terminal infrastructure to make this happen. It’s all between the backend and your phone. It also works with a much broader base of phones than NFC.

This type of integration also eliminates the need for training retail employees and doing POS integration. These are both significant hurdles to running promotions.

Loopt’s u-Deals offer an interesting twist but with many challenges

Loopt today announced a product called u-Deals that turns the Groupon model on its head.

Instead of a large team of sales people who go out and sell businesses in anticipation of consumer demand, Loopt is trying to collect the consumer demand and use it to generate merchant interest.

It’s an interesting twist, but it has a lot of challenges.┬áThe biggest challenge is┬ácannibalization. People are going to want discounts on places they already frequent. Businesses generally don’t want to offer huge discounts to regulars. If they want to reward someone, they don’t need to pay a hefty cut to a deals provider to do it.

Here are some others:

  • The places that come to mind to most people are the popular places. Those places typically don’t have an incentive to discount. If you’ve already got a 1-hour wait for tables on a Friday night, why would you lower your prices? That would be silly. I would really love a discount to flour+water, but I’m not getting one.
  • Groupon and LivingSocial have set unrealistic expectations for people in terms of discounts. Many businesses can’t afford to offer such steep discounts. I would expect that consumers would ask for similar steep discounts and the businesses would refuse.
  • The businesses that typically need to offer deals are businesses that people haven’t heard of. The deal is a mechanism of creating awareness of a business. Obviously this doesn’t work with the Loopt model — in order to create the deal you have to be aware of it.
  • Consumers are generally passive and reactive. u-Deals requires consumers to do too much work in exchange for an uncertain payoff. Even if you could get all of your friends excited and wound up about it, there’s a good chance the business doesn’t accept the deal. I don’t want to risk my social capital like that.
  • The model doesn’t work for many categories. Restaurants don’t generally offer group discounts. (Despite the name, Groupon isn’t a group discount.) It may work for things like amusement parks.
  • There is a lot of latency. With Groupon and the other daily deal providers, you can use your deal within 1 day of seeing it. With Loopt, you’d have to request a deal, encourage your friends to request it, wait for Loopt sales to close a deal and then redeem it. This could take days, if not weeks.

LivingSocial brings yield management to small businesses

LivingSocial is testing a new product that allows businesses to offer real-time discounts to local consumers, according to AllThingsD.

LivingSocial’s existing product works much like Groupon. You sign up for a deal and typically purchase goods or services for half off the retail value. These deals can be redeemed over a 3- to 12-month period, depending on the deal.

While some have called these deals yield management tools, they’ve actually just been customer acquisition tools. In fact, some businesses have been so overwhelmed by these offers that they’ve had to hire extra staff to handle the influx of new customers. Some undoubtedly have had to turn away full-price customers to service the discounted customers. One of the challenges businesses have faced is that although they’re seeing new customers, those customers are getting a bad impression because the business is overwhelmed.

The key to effective yield management is to shift demand to when you have excess capacity and to charge a premium for the times that are at highest capacity.

Many small businesses already do this. Happy hours at bars are a simple example of yield management. Come in from 3 to 6 and drink for half price. There’s a high fixed cost (staff is already there, rent, electricity). As long as you cover the marginal costs of food and drink, you can generate extra profit during that otherwise dead time.

This could prove to be a boon to businesses who need to generate extra business quickly. For example, a spa that finds itself with massage therapists with a slack appointment book could send out a 1-day only deal.

While the details of Living Social’s implementation aren’t out yet, here are some things I’d like to see:

  • Ability for the business to control the amount of offers that are available. You don’t want to go from a situation where you’ve got a lot of spare capacity to one where you’re overwhelmed by demand. A limit would also create incentives for users to claim an offer quickly.
  • Ability to more narrowly target customers. The current regions are too large to ensure that the customers reached are likely to be repeat customers.
  • Ability to target specific products. Chicken moving slower than beef tonight? Half off chicken dinners!
  • Ability to exclude customers who are too close. You don’t want to offer discounts to people who are already at your business.