Tag Archives: Location-Based Advertising

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.

Gowalla, Foursquare and the Location-Based Services boomlet

9 Dec

TechCrunch reported today on the new $8.4mm Series B round for Gowalla led by our friends at Greylock Partners. This announcement comes on the heels of recent news that Gowalla competitor Foursquare pulled in $1.4mm shortly after its much-publicized appearance at the SXSW conference.

Regular readers of this space may recall earlier pieces in Adventure Capitalist on the broad Location-Based Services (LBS) space and my bullishness on the emerging sector. In 2006, my firm, Citron Capital, was involved in a promising LBS venture, Open Planet, backed by the team that founded GoCar Tours, that was focused on the travel and tourism segment. The company developed a robust tour creation and delivery platform that enabled consumers to enjoy customized tours on their GPS-enabled cellphones virtually anywhere in the world, guided by GPS waypoints linked to the content. The experience was similar to that of a very robust navigation system in a top-line vehicle. The key difference was that instead of receiving mundane driving directions or locations of nearby bank ATMs or gas stations, the consumer would get the kind of rich content you’d expect from a good travel guide like Frommer’s or Fodor’s tailored to the route the consumer chose, and based upon preferences selected by the user. Because the content was delivered via GPS-enabled phone, the “tour” could be experienced in any number of ways – on foot, in a vehicle, on a bicycle, etc. The user would select the length of the tour, the route, their interests and preferences, and the software would create the tour, pulling together bits of content from a massive database of content linked to GPS-waypoints, and deliver it to the user’s cellphone. The preferences were so fine-tuned that a husband and wife could feasibly walk down the same streets in Paris and listen to entirely different tours. He would get content that interested him (sports, Renaissance literature, military history), while she received content related to her interests (say, music, sculpture, culinary, etc.)

The announcements on Gowalla and Foursquare and the attention they have received only serve to underscore how hot the LBS space has become. We wish them well and look forward to additional entrants to a sector that has long been bandied about as a “next big thing.” Unlike a lot of “next big things,” however, LBS actually looks like it’s poised to live up to its enormous potential.

Getting religion on Location-Based Advertising

7 Feb

What was only spoken about in hushed whispers but a few short years ago has suddenly taken on the dimension of a full-on evangelical rant–and none too soon. I’ve been accused — fairly, at times — of drinking a little bit too much of the Location-Based Services Kool-Aid in recent posts as I waxed poetic about the impact of the intersection of GPS and that of content, advertising and a variety of pushed, targeted services. So be it. If one is too afraid of being wrong (or, more often in this technology venture business of ours, of being early), then one can never be right.

What has been heartening to see in recent months, however, has been the ‘thought migration’ in the punditry about Location-Based Services’ rich, well-dressed cousin — Location-Based Advertising. GigaOM‘s Om Malik has a nice piece on it that bears review. As serendipity would have it, in my return commute from the office this afternoon I heard another piece on this topic on NPR, and a good discussion of the Loopt/CBS Mobile relationship in particular. If that is not indicative that this field is going mainstream, then I do not know what is. As a side note, it is probably also an indicator that if your GPS-meets-content meets advertising business model start-up has not raised capital yet, you’re probably too late.

 Stay tuned. This is starting to get interesting.

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