Groupon, Google, Ebay or Amazon: Who Will Win The Local Market?

No doubt he local space is heating up.  We are starting to see an all out war and currently there are 4 major players lining up their guns and taking aim on the local marketplace.

Groupon recently went public on the Nasdaq and is the undisputed king of daily deals, creating a new movement in local commerce known as the group coupon.  Yet things are not all rosy as they also created quite a bit of controversy as they approached the finish line.  Their numbers are greatly scrutinized  and they can’t seem to shake questions regarding the validity and sustainability of their current model.  Groupon no doubt made a significant splash in the local space, but do they have what it takes to transform our daily consumer lifestyle?

Google’s eyes have been on the local economy ever since they realized a critical mass of searches are local in origin.  Early on they knew local was a goldmine, the tough part has been designing products which bridge the gap between local consumer and local merchant in a way that adds value for both.  Google Places, HotPot, the purchase of Zagat, the failed acquisition of Groupon, and now Google Offers are all attempts to make a play on the local marketplace.  But to date it is hard to argue they have made any significant progress in solving the local market conundrum.  Will they do it?

EBay, the buyer/seller marketplace who has lingered on the outskirts of the web for more than a decade (and hinged earnings on a payment platform) looks to be emerging as a solid player in the local marketplace.  The combination of a number of acquisitions have placed them in a drivers seat helping power the next generation of location specific platforms.  Milo, Magento, Zong and Where all offer unique value propositions that when grouped together create a strong combination – and a strong competitor to the Googles and Amazons of the world.  This is one to watch…

The king of worldwide online commerce is Amazon, and I guarantee they their sights are set on the last mile of the web – the local market.  Their $175 million investment in LivingSocial seem a lot like a “look and feel” investment as they watch how the landscape is taking shape.  Make no mistake, the leader in worldwide e-commerce would love to be the worldwide leader in local commerce as well.  The question is, do they know how to do it in the way the everyday consumer will appreciate?

Ultimately, it is nearly impossible to predict who will eventually win out in the local market.   Remember, Google was late to the search party…

Another valid question is: will any of these major players hit the home run or will a new, tremendously different but effective startup with a better combination of commerce and communications transform our everyday consumer experience?

Share your thoughts in the comments.

 

Advertisements

The Mechanics Of A Sustainable Business Model

I am just going to say it: I don’t buy it – Groupon’s decision to postpone their IPO has little to do with market conditions and more to do with recent missteps and investor doubts on the sustainability of their business.What do I mean?

Everyone has their own opinions, and here is mine – Groupon rushed an IPO as fast as they could knowing their current model was unsustainable, and is in need of an influx of cash before the bricks started falling off the building.  It seems the beginning of the end is already upon them.

We can speculate how the story will end but in reality I don’t know any more than you do.  This might be a good time to back up a bit and get a grasp of how an early stage company can sidestep this mess all together.

The Startup:

The purpose of a startup is to find a repeatable and sustainable business model.

Repeatable.  Sustainable.  Business.  Model.  Scalable.  Period.

It is easy to get jealous of stratospheric growth companies such as Groupon.  I mean who wouldn’t want to be a major shareholder of such a hot web startup.  Yet let’s get something straight: Groupon’s daily deals model is not sustainable.  It’s repeatable, yes.  But sustainable?  No.  When you are paying off past customer debt with today’s customer revenue and never seeing black ink, the model is broken.  When the majority of your “customers” (read businesses) aren’t coming back in troves to frequently repeat their experience, the model is broken.

I doubted the validity of the mass discount daily deals concept from the beginning.  Over the last few years I have kept a keen eye on the emergence of this entire “deals” market, and have been pleasantly proven correct.  Like a miser with my palms together and a snarky smile, I have watched as everyone jumped in the fray only to realize they are chasing after the pot of gold at the end of a seemingly never-ending rainbow.

Incidentally, I am not alone in thinking about daily deals un-sustainability.  Here’s one.  And another oneAnd here’s another one.  (search “daily deals not sustainable” and see what pops up.)

I wonder if any of these deal companies ever sat down to draw out their model, expand their business model canvas, if you will, and determine who is involved, where value is created and how it can be sustained?

My guess is no.

Groupon stumbled upon an anomaly when it was still called ThePoint.  All the other’s observed Groupon’s rapidly growth and rather than doing the hard work of critical thinking, they just determined it was a solid business.  They figured copying was they best idea.  Until it wasn’t…

The Business Model

A business model describes the rationale of how an organization creates, delivers and captures value.

So how do you figure out a sustainable model to orient your business around?

As the CEO of Order SM, it is my job to figure out how to strategically grow and sustain our business.  Here’s how we approaching it.

When building out a startup one of the most important pieces to the puzzle is revenue generation, or the business model.  Using the Business Model Canvas, Order SM has been able to lay out all the components of the business and visually illustrate where value is created.  We have adopted much from the book Business Model Generation: A Handbook For Visionaries, Game Changers and Challengers, including using the canvas to extrapolate various business models within Order SM.  (This book is a MUST for any early stage startup.  Don’t be so cocky as to think you know exactly what your business models are when you design and launch your product.  Do yourself a favor and use this book)

Below are the various sections of the canvas, with associated questions we are evaluating as we move forward developing our business model(s).  I have laid it out to help you get a better mental perspective as you start to approach your business model canvas.  Adapted from the book, I hope this is enough to nudge you in purchasing it – it’s awesome!

Customer Segments

The customer segments building block defines the different groups of people or organizations an enterprise aims to reach and serve.  Without paying (and profitable) customers, a business cannot survive for long.

For whom are we creating value?  What are our most important customers?

Value Propositions

The value propositions building block describes the bundle of products and services that create value for a specific customer segment.  The value proposition is the reason why customers will turn to one company over the other.  It solves a customer problem or satisfies a customer need.

What value do we deliver to the customer?  Which one of our customers problems are we helping to solve?  Which customer needs are we satisfying?

Channels

The channels building block describes how a company communicates with and reaches its customer segments to deliver a value proposition.  Communication, distribution and sales channels comprise a companies interface with customers.

Through which channels do our customer segments want to be reached?  How are we reaching them now?  How are our channels integrated?  Which ones work best?  Which ones are most cost efficient?

Customer Relationships

The customer relationships building block describes the types of relationships a company establishes with specific customer segments.  A company should clarify the type of relationship it wants to establish with each customer segment.

What type of relationships does each of our customer segments expect us to establish and maintain with them?  Which ones have we established?  How costly are they?  How are they integrated with the rest of our business model?

Revenue Streams

The revenue streams building block represents the cash a company generates from each customer segment.  If customers comprise the heart of the business, revenue streams are it’s arteries.

For what value are our customers really willing to pay?  For what do they currently pay?  How are they currently paying?  How would they prefer to pay?  How much does each revenue stream contribute to overall revenues?

Key Resources

The key resources building block describes the most important assets required to make a business model work.  These key resources allow an enterprise to create and offer a value proposition, reach markets, maintain relationships with customer segments and earn revenues.

What key resources do our value propositions require?  Our distribution channels?  Customer relationships?  Revenue streams?

Key Activities

The key activities building block describes the most important things a company must do to make its business model work.  These activities are the most important actions a company must take to operate successfully.

What key activities do our value propositions require?  Our distribution channels?  Customer relationships?  Revenue streams? 

Key Partnerships

The key partnerships building block describes the network of suppliers and partners that make the business model work.  Companies forge partnerships for many reasons, and partnerships are becoming the cornerstone of many business models.

Who are our key partners?  Who are our key suppliers?  Which key resources are we acquiring from partners?  Which key activities do partners perform?

Cost Structure

The cost structure describes all the costs incurred to operate a business model.  These are the most important costs incurred while operating under a particular business model.

What are the most important costs inherent in our business model?  Which key resources are most expensive?  Which key activities are most expensive?

The building blocks above are essential to mapping out your areas of value creation and value extraction.  Paramount to any startup is the ability to identify the main components of their business.  Once visualized, it becomes much easier to identify where value is created, whom is involved, what direction the equation is flowing, which parties are involved, what partners your business depends on, which partners your business must depend on, etc…  You get the point.

I am not sure Groupon actually took these critical steps from the onset to determine proper business model generation, and now they are feeling the affects.  Here’s to you not making the same mistake.

@jnickhughes

 

The Daily Deal Cuts Like a Knife

Update: this post was originally posted on BusinessInsider.com

For years now I have been waiting to read a post like the one I just read on the Daily Deals concept.  Rocky Agrawal has done extensive research on the daily deals phenomenon and succinctly puts it:  The entire daily deals industry must die.

I vehemently agree with his perspective; it finally calls out aspects of the model people have been turning a blind eye towards for way too long.  Please do yourself a favor and read it.   Although much has been written lately regarding Groupon and it’s historical rise (one in which I have no question been fascinated with), we should not forget: a good business might not be good for business.  Here are some thoughts I had back in 2008 when we first heard of Groupon and still hold today.

Discounts are for crappy businesses

BMW is a luxury car.  The Metropolitan in Seattle is a nice restaurant.  Gucci and Prada command extremely high prices for their merchandise.  Although these companies are more well known brands, I think you get the point.  They don’t have to discount their products because they don’t need to.  By building a business through offering a quality product or service (and running it soundly) they don’t need to resort to scrapping the bottom of the ocean just to sell something.

But when a business is having trouble getting people through the door they will look for any way to reverse the trend.  Some hire people to wear the sandwich board, hold the arrow and dance around on the corner for minimum wage.  Others will offer 2-fers.   And now many are realizing the power Groupon has in getting get their name in front of thousands in one day.  All this marketing does not change the fact that something is wrong with their business.  If there wasn’t anything wrong, they wouldn’t need more customers and wouldn’t be running a Groupon.  Rocky describes the core fundamentals of coupons and group discounts have been around for many years.  Only difference now is the medium used for distribution.

Discounting is like crack for business

Once a business chooses to offer their products or services for a discount – say 50% off – they have effectively started abusing a drug.  The daily deal is impulsive for consumers, as in, some experience a high when they open their daily deal email each day.  “OMG, what will it be?”   And local businesses get a excited when they see a large influx of customers (the high).  Once this initial influx dies down two things happen.  First (and most likely), their business volume will go directly back to the customer visit level previously experienced prior to offering a Groupon (the comedown).  And second, they now have told the world the “real” value of their products or services.  It would be foolish for a customer to pay full price for something once they know it will be offered for half the price.  So businesses are forced to continually slash their prices and offer more mass discount deals to maintain customer interest.  It becomes an ugly downward spiral (addiction).  This brings me to my next point…

How is 50% -75% off a sustainable economic model?

knivesGroupon (and the like) are effectively (re)training the local consumer to expect ALL products and services to be offered at a steep discount.  We are creating a consumer addicted to the mass discount.  This is not sustainable and downright scary for the local economy.

I should know, my previous business offered Health and Fitness services on a local level.  My income could be thought of on an hourly rate for the service I provided.  Given I charged $100 per hour, take away 30% for facility rent, and 20% for taxes I am left with at most $50 per hour of compensation.  If I chose to offer a daily deal discount and reduced my professional rate to $50… well I think you get the picture.  And what do you think I would have told my existing clients “oh, them…?  they bought the Groupon so they paid half as much as you for the same service.”  I would have lost all my full paying clients.

My point is profit margins are generally very low in the local economy- restaurants, health services, retail stores, coffee shops, etc… it’s not uncommon to be dealing with single digit percent profit margins.  It’s like each daily deal is a knife stab to the gut of a business.  There is no way this economic picture is sustainable and Rocky does an excellent job of describing what is going on: millions of people and thousands of business owners are being taken advantage of.  It will have to stop.

A real business is built upon Loyalty

Pareto’s law, or something known as the 80/20 rule is at the foundation of any business, any size.  To paraphrase, it says “80 percent of a businesses revenue will come from 20 percent of its customers.”  Simply put, it is loyal customers who keep a business running.  The hard fact is this phenomenon will never change and is the basis of why I started Loyaltize.  Notice how much the words Loyal and Loyalty are popping up nowadays.  I believe tremendous value will be created in the local space built around customer loyalty.

Groupon is essentially trying to swim against the natural economic current by allowing businesses to offer discounts to thousands of new customers.  Surprisingly, they sell local businesses on using their service by saying “we will help you gain more loyal customers” at the same time they promote to consumers “Groupon is a way to discover new businesses in your local community.”   Unfortunately these are contradictory statements and the truth is Groupon attracts deal seekers, not loyal customers who are willing to pay full price for a quality service.

If we are not careful, we are going to ruin our own local communities

I believe this mass group discounting cannot go on much longer.  But if I am wrong and it does we will effectively kill off what we currently consider our local communities.  Maybe it is a good time to reflect on what exactly is the “local community”.  My definition is all the local proprietors who run most of the operations you frequent throughout your normal life.  Actually, they are these things:

•    Represent 99.7 percent of all employer firms.
•    Employ half of all private sector employees.
•    Pay 44 percent of total U.S. private payroll.
•    Generated 65 percent of net new jobs over the past 17 years.
•    Create more than half of the nonfarm private GDP.
•    Hire 43 percent of high tech workers ( scientists, engineers, programmers, and others).
•    Are 52 percent home-based and 2 percent franchises.
•    Made up 97.5 percent of all identified exporters in FY 2008.
•    Produce 13 times more patents per employee than large patenting firms.

Once we all (as consumers) only seek deals on the cheap and expect to buy dinner online for $10 instead of the regular price of $25, the local community will cease to exist.  Most local businesses will not be able to operate at such levels.

Years ago, many feared Walmart and fast food was the end of local culture as we knew it. I argue Groupon, LivingSocial and all Daily Deal operators will do much more harm to all our own unique local communities than Walmart did.  Go ahead, ask any local restauranteur, barista, Health professional, or masseuse what they think about giving away their products for more than half the price.  I hope we can move on from 75% off deals and find a sustainable local advertising model before it’s too late.

Image courtesy of flickr user Parl

Breaking: Who’s in control of Groupon Now?

Groupon files an S-1 for an Initial Public Offering today.   Huge details revealed on Business Insider.  The question now becomes: Who’s in control of Groupon?

Lightbank partner Eric Lefkofsky owns 21% of the company’s voting shares. Founder and CEO Andrew Mason owns 7.7%.

I am not sure if this is good or bad for the “web” but it sure is HUGE.

I Hear the Future

And it’s a Daily Deal Nearby!

Loopt has partnered with Groupon to push their users notifications about nearby daily deals.  Currently, I am not sure how I feel about my phone buzzing every minute as I walk down the street to notify me about deals, regardless if I am interested or not.  This might change, but that is how I feel right now.  What do you think?

Mobile Commerce Will Be HUGE

Mobile commerce is starting to show its legs.  Groupon just announced it will be seeing half of revenue coming from mobile devices sometime in the next two years.  This coincides with what Mary Meeker has been saying for so many years – the mobile web will be HUGE.  Look at the chart below, you can see it is predicted global mobile users will overtake desktop users within the next 5 years.  Think about that for a second.

According to Mary Meeker:

“the world is currently in the midst of the fifth major technology cycle of the past half a century. The previous four were the mainframe era of the 1950s and 60s, the mini-computer era of the 1970s and the desktop Internet era of the 80s. The current cycle is the era of the mobile Internet, she says — predicting that within the next five years “more users will connect to the Internet over mobile devices than desktop PCs.”

This shift has major implications for consumers as well a businesses.  Shopkick, a mobile app initially created for in-store shopping experiences, now allows users to create a custom area for their favorite retailers.  Remember how you throw away most of the advertisements and mailers you receive each day.  This is the opposite.  It’s all the best deals right in front of your face.

If you are a local business, your customers are theoretically always connected to you and your products or services.  Think: how can you add value to them on a daily basis.  If you are a consumer, odds are you carry a device in which pretty much anything (or anyone) in the world is just a few taps away.  Think: what new place/thing can I discover in my city today.

As a consumer, in what ways do you use your mobile to interact with your local community?  And what do you wish you could do?  In today’s world, you might just get what you ask for…