Tag Archives: co:Yelp

Is The Daily Deal Backlash Overblown?

15 Sep

According to the business maxim, you can always tell who the leader is in a given market: it’s the one with all the arrows sticking out of its back.

While this axiom is applicable across the business landscape it is particularly relevant in the startup world given that most leaders in an emerging market end up taking as much incoming fire from me-too startups coming up from the rear as they do from incumbents threatened by the continued advance on their territory.

I raise this point because I’ve been surprised in recent weeks at the backlash in the media and across the venture landscape against daily deal sites, most notably Groupon and LivingSocial.

To be sure, the daily deals business has become ferociously competitive. There are now dozens of venture-backed businesses pursuing some configuration of the daily deal/social buying/demand aggregation business model. To this number add the emerging group of established web companies now brand extending into the deals business–Facebook, Yelp, Travelzoo, OpenTable, Amazon, and Google, to name but a few.

The birth of any new industry is rarely elegant, planned or pretty. With little argument, whenever one is dealing with the kind of torrid growth that both Groupon and LivingSocial have experienced one will find plenty of areas to criticize. However, I think some of this criticism is misguided. To call a marketplace with hundreds of competitors vying for consumer dollars emerging might be an oversimplification, but emerging it very much is. Let’s not forget that like the early days of social networking, the winning model in this space has not yet been fully realized. Constant iteration is underway, all being attempted at the breakneck pace one would expect in a marketplace still decidedly in its land grab phase. This means things are going to break — loudly and often. This is not altogether bad.

The daily deals space is the kind of web phenomenon we have seen before: Explosive growth, high user engagement, huge cash flow implications for the companies, lofty valuations, investors elbowing their way into funding rounds, and lots of media attention to fuel the frenzy.

In this environment, Groupon and LivingSocial have broken out as the market’s de-facto leaders and built robust businesses. Revenue growth has been nothing short of spectacular. In turn, the companies have responded by raising sizable funding rounds to further consolidate their positions and extend their reach into new markets. Investors and employees have every reason to be proud of these accomplishments. So far, so good.

This, however, is far from saying that their status as perennial leaders is a fait accompli or that they cannot be felled by either other participants or by their own strategic missteps. Indeed, it is still early days. This is perhaps why I find the latest hand-wringing over Groupon’s recent stumbles in the media somewhat disconcerting.

Massive customer churn is to be expected. Explosive growth, particularly as relates to web companies, raises the notion of the shiny new object theory. This notion should inform us that exponential growth and buzz brings huge consumer curiosity which, in turn, brings an influx of users that will try the product/service once and never return. Is this a reflection of a company that has provided a poor user experience? Or, is this simply the realization that 30-40% y/y revenue growth is likely unsustainable and that large swings in customer churn will be in evidence for a long time to come? I am in this latter school of thought.

The “churn” issue so often cited by critics is not simply a matter of consumers being fickle but one of SMBs and merchants as well. They are still trying to figure out how to work with deal sites and whether such marketing campaigns are right for their specific businesses. This will take time.

The Spaghetti Test. Additionally, daily deal sites are incented to build vast Rolodexes and cover wide areas of terrain to extend their brands. This means lots of offers are being written across broad categories of SMBs where the suitability of the daily deal model is still not thoroughly understood and where there is little historical frame of reference. While most managers are loath to admit it, the Spaghetti Test of  ‘throw it against the wall and see if it sticks’ inevitably drives a lot of iteration around determining which offers resonate and which do not. This results in a lot of mediocre offers that don’t perform well which can leave merchants and consumers with a poor experience.

Work to be done. Critics are right to point out that there is still a lot of work to be done in elevating the daily deals business to deliver on the full promise of its massive potential–both for consumers and for businesses. Merchants need better post-deal monitoring and CRM-like tools to help with yield management and provide better tracking and analysis. Merchants also want more control and flexibility over how offers are created, sold and redeemed so they can maximize profits while minimizing the impact on their organization when the “crush” of redemptions comes. [Fortunately, startups are already innovating around these themes to fill precisely these voids.]

Consumers, for their part, are demanding better offer targeting, more consistency in pricing and redemptions, and less intrusive appeals in order to fight against emerging deal fatigue now evident across the space. Personalization software needs to catch up so that users can better tag offers of interest and opt-out of those that are annoying or redundant (Cupcakes? Again?)  Also, Hyperlocal and Location-Based-Targeting need to demonstrate that they are more than just elegant theories.  Too many service-oriented SMBs (i.e. hair salons, etc) have gotten burned in money-losing offers for premium services to out-of-town customers with whom there is no opportunity to develop a long-term customer relationship. That kind of mismatch is being corrected but hyperlocal offer targeting has a ways to go.

Ultimately, the scale that Groupon and LivingSocial have achieved has likely put them beyond the reach of most competitors. The battles ahead, therefore, will be over how best to go vertical. The winners will be those most savvy at customer segmentation and in finding unique offerings positioned against specific themes and product categories. Predictably, there are numerous companies doing precisely that — tweaking group-buying mechanics and applying them to niche, premium markets and making a successful play in those areas. In another market in another time, this “go vertical” approach may have doomed a company to a market insufficiently large to support its efforts. However, as companies such as Gilt Groupe and One Kings Lane have demonstrated, the daily deals market is large enough that even pursuing a niche approach and a narrow customer segment can prove to be enormously lucrative.

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Some Thoughts On Transparency

28 Feb

Last week I had one of those conversations that kept re-asserting itself in other discussions in the days that followed. The conversation itself was not confrontation nor was the subject matter particularly uncomfortable. Briefly, a colleague and I got into a broad discussion about companies leveraging user-generated content (UGC)–specifically consumer user reviews of and feedback on companies, products and professionals–in particularly novel and innovative ways. While it’s axiomatic that there are significant businesses being built collecting, analyzing and publishing this content (and a great deal of value being derived therefrom), we both struggled with some of the issues coming to light around the impact of this kind of information when propagated without strict quality controls and proper diligence to ensure authenticity and accountability.

With little argument, the notion of delivering “transparency”  — in whatever form – has been at the underpinning of so many web-based business models in recent years. Additionally, with few exceptions, that goal has been a noble and appropriate one. Opacity has been the bane of so many consumers in so many markets that it scarcely makes sense to examine whether or not technology-enabled solutions seeking to open markets to greater and fairer competition have delivered long-lasting value to consumers.  Let’s stipulate that they have and just move on. 

Where things get sticky for me–and, I would imagine, for a growing number of investors and market participants — is the notion accepted almost as religion in some quarters that transparency is always and everywhere a market good. Heretical as it may sound, I think it is time that many in the venture and start-up community have an adult conversation about where and how full transparency is appropriate and about whether enough companies are living up to the weighty responsibilities that come with publishing information that can profoundly damage the reputations of businesses, professionals and/or their products or services.

Regular readers of Adventure Capitalist may recall that I have raised these issues in some form before, particularly in a piece on the state of online reputations. In that post, I drew some examples from the current legal (at least at that time) problems facing Yelp and similar sites from aggrieved small businesses. While I give Yelp and other sites credit for continually refining how reviews are collected, filtered and published, it is clear to me that we are a long way from being able to glean the true benefit of anonymous user reviews and feedback without exposing people and businesses to the risks that reckless and unfair user comments can pose. I remain deeply committed to the notion that platforms that enable users to call out by name and rate/review businesses while those users remain comfortably concealed behind the cloak of anonymity creates a sweeping invitation for mischief.

In the months since that original post on online reputations, I have received an alarming number of reports–both confirmed and anecdotal–about consumers engaging in troubling practices akin to extortion whereby demands are made for deep discounts and freebies that those consumers are not entitled to from local businesses. The not-so-thinly veiled threat is that the consumer(s) will trash the online reputation of those businesses if the demands are not met.

Again, I firmly believe that the majority of users and contributors to online review/reputation sites act responsibly. That said, more work has to be done by companies that reside at the intersection of online reviews and reputation so that all participants are held to the highest standard of ethics and accountability. 

My hope is that this post will spur a discussion. I don’t purport to have an elegant solution to the problem inherent in user-generated reviews and feedback but I am becoming increasingly mindful of the backlash brewing in the small business community against online reputation and review platforms. I am also seeing some of the limits of transparency in specific marketplaces when the end result of that openness is not greater efficiencies and fairness in a given market but, rather, the same kind of unfair leverage, collusion and monopolistic power that transparency was meant to eradicate.

Is the bloom off the User Generated Content rose?

21 Dec

Like many in the venture community much of my December date book centers around internal meetings and planning sessions for the coming new year. I’ve found that a number of these meetings ended with us having a fairly freewheeling discussion about User Generated Content (UGC), its implications for consumer internet companies in particular, and its place in the development of a number of companies we are specifically involved with. These internal discussions were punctuated somewhat by news items over the past week about the on-again, off-again talks between Yelp and Google. Today’s PEHub piece provided the latest dispatch in the saga.

While I wouldn’t want to speculate as to what issues would cause the Google/Yelp talks to snag, my own view is that a re-appraisal of UGC is underway among many early stage investors in consumer internet companies. UGC has proven to be far more complex and difficult to properly harness than many in the start-up community probably considered when initially drafting strategies for their companies that were highly dependent on UGC.

The ‘noise’ factor in UGC remains unabated. The somewhat Utopian vision — promoted by some when YouTube, UStream and others were in their infancy — that there would emerge a uniform way to manage, cleanse and tag UGC to control for noise never materialized. Our foray into Location-Based Services (LBS) a few years back, chronicled in a prior post about a GPS-enabled tour development and delivery platform company, was a good primer for us on the enormous potential and pitfalls of User Generated Content. LBS and UGC seemed a natural marriage to us then and is certainly a “hot” play now given the recent Gowalla and Foursquare funding announcements.

Weaving content into GPS waypoints and then embedding bits of information provided by users to those waypoints made a lot of sense. Our initial thinking was that licensed content — namely, content we’d get from tour book publishers — would provide the necessary backbone so that users would get a uniform, quality experience; over time, however, UGC was expected to dominate. In truth, that hasn’t occurred. The UGC contributions were almost unmanageable. The development team quickly learned that the amount of time required to cleanse it almost negated the benefits of incorporating it. The net result was that the UGC piece has been de-emphasized on the company’s product roadmap. Now, content available through the tour delivery platform will be primarily reliant upon licensed content. To be fair, the source of this content will go downmarket so that, over time, the company will become less dependent on the more expensive content from the travelogue publishers and more reliant upon small, local tour companies going after a more custom, hyperlocal experience.

Still too many competing interests/axes to grind. In addition to the usual spam, quality issues and overall noise with UGC, we were troubled by how common it was to find people using UGC to settle petty scores, rivalries or just to cause mischief.  In recent reporting on the Google/Yelp talks, there is a sobering itemization of the number of lawsuits filed against Yelp from irate merchants and others who feel they were unfairly maligned by anonymous posters on the site. Also a common problem was instances when, say, a restaurant would receive a scathing review only to uncover later through an investigation that the poster was the owner of a competitor restaurant across the street.

Conceptually, I have long been suspicious of sites that provide posters a forum to anonymously bash a restaurant, retail store or service provider without requiring anything from the poster in terms of supporting documentation. Ratings are fine and they have value, to be sure, but abuse has now become rampant on so many UGC-driven review and rating sites. Ask virtually any restaurant manager or small business owner about Yelp or a similar site and it seems they all have a story about an unfair review that they had no way of properly defusing, defending or responding to. One bad review can seriously damage a small business; however, a bad review that is also of questionable merit or is an out-and-out mischaracterization is altogether more disturbing.

Gaming the system. Almost as bad as unfairly maligning a business is the epidemic of hoaxes or “ghost” reviews, usually of the glowing variety, that so often pepper the ratings of certain businesses and skew rating scores to the point that they become meaningless. Stories have become legendary of business owners writing their own rave reviews and, in some cases, forcing their employees to offer their own effusive praise. Yelp and other rating/review sites insist that they are working diligently to address these issues and I have no reason to doubt their sincerity, but clearly this is a big problem.

To be sure, UGC is powerful and will ultimately drive a lot of successful consumer internet businesses going forward. That said, is it no longer the can’t-miss buzzword in an investor pitch. Consumers want unvarnished candid comments and feedback — whether they are restaurant reviews or travel tips — but even more than that they want to have confidence in that information and a consistent experience. With the exception of a few companies that have been able to selectively weave UGC into their business models and maintain that consistent, reliable product, most companies still fall far short of delivering that experience.

Dash: a dud? or a defining device?

3 Jan

OK, enough with the alliteration, but it is certainly intriguing to see how much buzz (and grumblings) I am hearing about the much bally-hooed networked GPS system just launched from Dash Navigation. The idea is a simple one and fairly obvious – decouple the promise of Web 2.0 from the browser and make that data available everywhere the user is in a format that is digestible, relevant and accurate. Dash’s approach is an interesting one: how would you like to get restaurant listings, suggestions and reviews from Yelp, or real estate data from Zillow.com, or mapping from Platial, all while behind the wheel or even while in another city? Dash will pull that information with the ease of your in-car navigation system–coffee shops, gas station locations, post offices, etc — while layering in more robust content (reviews, etc) that most in-car nav systems can only hope for. Add to that real time traffic, weather, etc. and you have a fairly compelling little travel companion.

We have been openly evangelical about the broad Location-Based Services space for some time [see an earlier post here], particularly around the convergence of GPS and various content offerings (both private labeled and user-generated), so perhaps we are an easy sell. That said, we suspect that the folks at Dash and their capable investors at Sequoia Capital and Kleiner Perkins Caufield & Byers might have their work cut for them. This is a crowded space and the sands shift fortnightly around these parts. As has been well reported by GigaOm and Venture Beat (here and here, respectively) Dash is expected to be available with a $600 price tag, plus $10-13 in monthly fees depending on the services the user signs up for. This, in a space rapidly being filled by GPS-enabled phones — with new ones launching almost daily — and by hand-held GPS devices (Tom Tom, Garmin, etc) by manufacturers that know the space well and are not likely to give up their cushy franchises without a nasty fight. While we are excited by the emergence of Dash and believe it both validates this space and ratchets up innovation in this increasingly competitive and exciting area, we will be watching closely to see how consumers will react to the seemingly high price point of the device amid clear competitive offerings that surround them.

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