Category: groupon

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

Rakesh Agrawal

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. The biggest challenge is cannibalization. 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.

Shop talk: Square and Groupon

Rakesh Agrawal7 Comments

Today I had the opportunity to talk with Dave from Chili Inside / Chili Outside a food cart operating in Portland. Chili Inside recently ran a Groupon and also uses Square to take credit card payments.

The key takeaway here is that simplicity sells. The credit card acceptance market has been complicated to understand, with setup fees, monthly fees, minimums, upcharges for certain types of cards, etc.

Not only does simplicity make the initial sale, it makes it easier for those customers to evangelize your product because they’re comfortable explaining it to others.

Square

  • Dave found out about Square when his son, Alex, spotted it at another food cart in Portland.
  • Other providers “seemed more daunting to even look into.”
  • “When Square came along and it looked easy and simple. It was.”
  • Before Square, he would try to get customers to pay with cash on hand or direct them to a mini-mart to get cash. One of Chili Inside’s older Yelp reviews says, “Only cons were they are not set up to take cards which cost me $2.50 around the corner to use the ATM.”
  • Customers have reacted very positively to seeing the iPhone with the Square reader. “Most everybody is pretty dazzled by it. It’s really fun to show it off.” Dave also showed me his technique to get it to swipe the first time every time.
  • He uses the Square reader daily. About 1/3 of his transactions are by credit card. During the time I was at the cart, at least three people paid with Square.
  • Square’s pricing was lower and less complicated than other vendors.
  • He is pleased with the real-time reporting capability. “We’ve got real time feedback virtually on every credit card swipe we take.” He showed me the screen with transactions that had just happened.
  • He was pleasantly surprised that a Square representative gave him a phone number to call with questions.
  • He would like to see the tipping option more prominent in the interface.
  • He has evangelized Square to other businesses locally. Square sent him a bunch of readers and he has been handing them out.

Groupon

  • Chili Inside ran a Groupon promotion on the same day as several as other Portland food cards.
  • 533 Chili Inside Groupons were sold. A normal day is 20-30 customers. Groupons were about a month worth of business.
  • In the week since the Groupon ran, about 35 have been redeemed. Dave estimated that 20 of them were from people who hadn’t heard about Chili Inside before.
  • Dave’s primary goal in running the Groupon was to introduce customers to his food and inspire repeat business. As a new business in the area, it was important to reach an audience. (See 5 cases when it makes sense to run a Groupon.) “Most of the people that purchased the Groupon didn’t know we were here and they live within blocks. We believe when people have our food, they’ll come back.”
  • Chili Inside uses an iPhone to scan the bar code on Groupons to redeem them.
  • He had approached Groupon months ago and never heard back. Then a rep called him about the food cart day.
  • Groupon has approximately 500,000 people on its mailing list in Portland. Chili Inside sales were 0.1% of that.
  • He has been approached by other deals sites, including LivingSocial.
  • Dave wouldn’t disclose the terms of the Groupon deal.

Google

Other

  • His wife monitors Yelp reviews and updates Facebook and Twitter pages.
  • Dave wasn’t aware of foursquare.

Note: As with most such research, when I mention that someone isn’t aware of something, it isn’t a criticism. It’s meant to highlight that even though people in the industry talk regularly about services like they’re ubiquitous, they aren’t.

See also:

6 cases when it makes sense to run a Groupon

Rakesh Agrawal6 Comments

There has been a lot of discussion of late on the pros and cons of running Groupon offers for businesses. Here are five cases where running Groupons make the most sense:

  1. You have a new business. If you’re a brand new business and don’t have existing connections in the market, Groupon can help introduce you to your local community. A good example of this is the Globe, a pizza place in Portland that recently opened in a troubled location. A new business also avoids a significant cost that many businesses forget when doing the Groupon math: margin lost on existing customers who instead use a Groupon, turning a full-price sale into a 75% off sale.
  2. Your business has a subscription model or high lifetime value. This category includes gyms, yoga studios, flight schools. Many of these businesses already regularly run introductory specials, such as the first month for $30 (regular price $120). Converting a onetime flight lesson into thousands of dollars in ongoing schooling makes a lot sense. In cases such as gyms and yoga studios, the incremental cost of serving customers is small. Even in these cases, you need to be sure to cap the deal at a manageable number. You don’t want overcrowding that frustrates your loyal full-price customers.
  3. You have fake pricing to begin with. Many businesses have fake pricing. If you shop at FTD, furniture stores, mattress stores or the Gap and pay full price, you’re a chump. The regular discount levels at these sorts of outlets run 30%-50% off. Starwood Hotels offers a 50% off certificate that you can buy with 1,000 Starpoints. But the discount is valid only off the “rack rate,” not the prevailing rate. In 12+ years, I’ve only found the “discount” to be valuable once or twice. Even then, it amounted to 5-10% off the regularly offered rate. If you have fake pricing, Groupons can work for you. But don’t push it too far — FTD wound up not smelling so good when Groupon customers discovered that in order to use their discount, they had to go to a special site which had even higher prices than FTD’s regular site.
  4. You have a third-party really footing the bills. Magazines and newspapers fit into this category. The real goal here is to sell eyeballs to advertisers. For newspapers, auditors will count it as paid circulation if the customer pays even one cent per issue.
  5. You are running an event with excess capacity. If you have an event like a theatrical performance, concert, etc., with a fixed cost of production and you’re unlikely to sell out, Groupon or other deal providers can help fill the audience.
  6. You are going broke anyway. A Groupon can be the ultimate Hail Mary. With Groupon, you get your share of the deal within 60 days. Maybe the extra cash flow will help you smooth over tough times. If it works, great. If it doesn’t, well, you were going out of business anyway.

PayPal + Where set to take on Square

Rakesh Agrawal1 Comment

eBay announced today its purchase of Where, a mobile location service. Where has been in the mobile location space for a long time — well before today’s media darlings. (See my initial Where story from 2007.) While others have sucked up much of the media oxygen, Where has been the little engine that could, hitting 4 million unique users per month.

It has a large installed base of users across not only smartphone platforms like iPhone and Android, but also featurephones. Where has gone through a number of incarnations, including a local portal, local platform provider, mobile ad network and buddy finder. Its current consumer product offers a wide array of location-based services. Where has also been experimenting with Groupon-like deals.

The combined resources of Where and PayPal would give eBay a terrific way to attack the multibillion-dollar untapped local opportunity that Square has been gunning for.

As I’ve written before, payments processing isn’t the end game for Square — it’s an entry point into the much more lucrative demand-generation space.

Payments processors generally take between 1% and 3% of the sale. Demand generators, like Groupon, are currently taking 50%. (I expect that this will drop dramatically, but there’s still a lot of room in between.)

At its current pricing, Square is likely to be losing money on each transaction because it no longer charges a fixed rate per swipe.

Square’s merchant offerings are excellent. It offers a dead simple way for small and micromerchants to take credit cards. Its recently announced presence in Apple retail stores makes signing up for Square even simpler than it already was.

But we haven’t seen much activity on the consumer side. Consumers get an elegantly formatted receipt, but there’s no other mechanism for interacting with them. (Square is undoubtedly amassing a mailing list to do this in the future.)

A combined Where and PayPal would give eBay the ability to offer both payments processing and demand generation. With an existing base of more than 4 million users, Where is a good way to prime the pump. Local merchants who take PayPal could be highlighted in search results. They could have ads placed automatically across Where’s ad network.

The key thing to remember about local merchants is that they are incredibly pressed for time. A simple, integrated offering would have tremendous appeal.

Have doubts about eBay’s ability to succeed in mobile? Erase them. They’re already claiming to generate nearly $2 billion in mobile purchases a year.

See previous coverage of Where.

Disclosure: I have consulted for Where in the past. I know the team, including Walt, Dan and Ivan. Congratulations, guys!


Local restaurant tries do-it-yourself Groupon

Rakesh Agrawal4 Comments

I was checking Twitter today and came across this local restaurant trying a Groupon-like offer on its own:

 

Wildwood in Portland is trying a do-it-yourself Groupon with its Twitter and Facebook followers.
Wildwood in Portland is trying a do-it-yourself Groupon with its Twitter and Facebook followers.

Wildwood is an upscale and top-rated restaurant in Portland. It has 4 stars and 101 reviews on Yelp and 5 “Best Ever” awards on Hotpot.

It has 745 likes on Facebook and 632 followers on Twitter. These are well above the market medians of 398 and 352. (It’s impossible to say what the unduplicated reach is across Facebook and Twitter.)

So how is this different from running a Groupon?

  • More revenue for Wildwood. It gets to keep all of the revenue generated. In a typical Groupon deal, Wildwood would get about $15 for each $50 gift certificate sold. Here, it keeps the entire $30. Given that food costs are typically 30% of a restaurant’s expenses, Groupons are break-even at best just on incremental cost.
  • More restrictions on redemptions. Groupons usually have longer redemption times and fewer restrictions on redemption. They are often valid for a year and can be used at almost any time. These certificates are only valid for dinner on Sunday, Monday and Tuesday and not valid for alcohol. It’s essentially a yield-management play, used to fill seats when the restaurant would otherwise be empty. Some restaurants use OpenTable’s Dining Rewards to accomplish this. These factors combine to increase the restaurant’s profitability on the deal.
  • More qualified customers. The restaurant is essentially reaching people who have already expressed some interest in it. Some of these are undoubtedly existing customers.Groupon brings in a much broader range of customers. That is both a blessing and a curse: some will be potentially new customers who will become repeat visitors; some will just be deal seekers who are unlikely to return. For many businesses, the primary market area is a 5-mile radius. Groupon’s coarse geographic targeting amounts to casting too broad a net for many local businesses.
  • No online purchases. The deal requires that customers visit Wildwood to buy and pick up the gift certificate. This is both good and bad: it means that customers are more qualified because they have to visit twice. They are more likely to live nearby and thus more likely to be repeat customers. But it also serves as a significant deterrent to purchase.
  • Limited viral distribution. Wildwood may reach some new prospects as other retweet/share the link. Twitter accounts like EaterPDX sometimes share such announcements. At the time of this writing, two people had retweeted the offer, for an additional 1,000 potential impressions. But it’s not likely to spread as virally as deals on Groupon and LivingSocial do. Both platforms offer built-in financial incentives for sharing deals with others.

I’ll check in with the business later in the week to see if they’re willing to share the results.

As I wrote earlier, businesses and consumers are directly connecting with each other online. In some ways, you can consider Groupon an arbitrage business — using its skill in marketing and online customer acquisition to deliver traffic to local businesses. (Much like ServiceMagic and 800-DENTIST.) As local businesses get more sophisticated and adopt tools like Facebook and Twitter, this will put margin pressure on Groupon and its peers.