We’ve grown up to view online business reviews and recommendations as something that gets accumulated into organized sources of browsable content. TripAdvisor and Yelp represent two highly successful cases-in-point of the power of critical mass to reviews.

The dominating model of shopping behavior goes something like this…

search > initial select > search again for opinion to test your decision > transact

As noted in Search Engine Watch, “the search continues because search engines aren’t the consumer’s most trusted source of advice”. As we all know, we’re spending more and more time socially connected.  This creates a new whole stepping off point for shopping behavior. In theory, the potential exists to invert the experience and infuse trust and recommendations into the front end of shopping.

when your friends are always live

So, as the new generation of  live + social + local approaches – will it make these models increasingly obsolete?  It’s creeping up on us – perhaps the most visible example today is seeing your friends instantly react to your Facebook posts from their desktop and mobile positions. Clearly, your social graph is a live organism, becoming more and more ready to add value to your shopping experience every day.

But, do we really believe NextWeb’s headline? “Facebook Acquires NextStop, It’s Lights out for Yelp“. The message is basically that once Facebook turns up it’s Question application for organized Q&A, it will begin accumulating opinion at a breakneck pace, and facilitate personalized opinion content and live Q&A with your social graph.  Combining this initiative with the team who created Nextstop, and you begin to get a picture of how Facebook aims to collect and apply a richer model of relevant opinion content.

inside or out?

Facebook’s bold Open Graph move, to invert itself and be embedded into any web site or service, implies that it’s a neutral party in the question of “where will the consumer prefer to engage”.  To their credit, Yelp boldly stepped forward, with a Microsoftesque “embrace and extend”  approach with this new dev utility.  Yelp is clearly aiming to extend the lead it has with a large base of consumers and their organized opinions. It’s model will allow you to integrate your own social graph and sift and interact with your friends viewpoints, whenever you want.  Best of both worlds is the theory.

Facebook will ratchet up its owned and operated product approach to live question services. As NextWeb implies, Facebook will probably aim to convince consumers to not bother “stepping outside” to the Yelp consumer experience, employing low resistance user experience techniques together with some new tricks (virtual currency, etc.).   Since opinion content is most valuable for a few months to a couple of years (depending on the category) an advantage today can systematically fade with time.

The evolution of both of Yelp and Facebook  on the parallel inside vs. outside paths will indeed be worth watching closely, as a bellwether for the evolution of socially-engaged local shopping.  And, it will presumably shed a leading light onto Facebook’s “neutrality” position and business model.

A few people have been asking about my thoughts on GroupOn.  This post presents some general observations on their business model and the impact on local promotion marketing.  Soon, I’ll take a look at how we view and apply this learning in our business model at Closely.

As a consumer, and as an entrepreneur, I love GroupOn.  They have build real velocity into a large market need and space, executing exceptionally well on a quality business model.   I also am impressed how they have backed their brand strategy with real attention to customer service.  For those not familiar with GroupOn, explore here.

perfect timing

In 2008, consumers began a mega-shift to conservative behavior with their discretionary income.  GroupOn’s proposition hit at the right time, aiming straight into the heart in this shift – offering urban consumers a new way to treat themselves again.  Creating a model of daily deep discount savings to interesting local restaurants, salons and activities, they struck a chord. Delighted by the great new bargain venue, consumers connected themselves together into a large and powerful consumer social list.

GroupOn connects this consumer desire together with lead-starved local businesses who are anxious to pump up their volumes, but cringe at the risks inherent in traditional media spending.  Their business-side innovation comes in the form of a compelling performance-based model, where a business pays out of the proceeds of customer purchases.

social light

Industry analysts point to GroupOn as a next gen social media company.  To me, GroupOn feels more like a contemporary version of a traditional media model.  Let me explain.  Social media is certainly the foundation upon which GroupOn engages their vibrant consumer base.  However, to the participating merchant this is a performance based media buy.  Advertisers buy a distribution slot to GroupOn’s list, which is opaquely retained by GroupOn.  The business gets leads and it’s up to the business to convert those leads into customers and onto their own social lists.  This is a classic third party lead generation proposition.

the group that became an audience

On a related theme, I also don’t consider GroupOn to be about group buying, at least not anymore.  At the outset consumers were socially engaged to share deals with friends in order to hit a purchase threshold before everyone got to share in the deep discount.  Those days are long gone, GroupOn now has a mass local audience in most major metros, removing all group volume “risk”.

There is no disputing the company’s ability to aggregate substantial purchase behavior against deep discounts to interesting places.  However, GroupOn’s scale now positions it as a predictable engine for large scale purchase of discounted products/services. It’s a powerful weapon to be used by a business perhaps once a year, maybe 2-3 times at most.

the new local tour bus?

I find it interesting that GroupOn describes itself as a City Guide of sorts – viewing its product to be the impetus for people to get out and explore more new places. The brand is aiming at a somewhat curatorial style of their featured discounts. At the recent Kelsey conference, GroupOn’s CEO innocently snubbed Valpak with a comment to the effect that those kind of deals wouldn’t fit their brand.

Some restaurant and salon operators have voiced concern that GroupOn is creating a troubling behavior pattern with consumers that works against their ability to convert the GroupOn lead into repeat customers. Will they drop in and never come back, as the move on to the next deal? Is the GroupOn consumer more into drive-by consumption than loyalty?  While it’s probably just too early to judge, one thing is certain. The growth in GroupOn’s consumer list, combined with the rapid proliferation of copycat companies will most certainly give the consumer the opportunity to collect a drawer full of deep discount offers.

In some ways, GroupOn feels like the next Yelp, but with a dramatically better business model. It must be pretty annoying to Yelp investors to see their 10X audience generate revenue that is probably no more than 20% of GroupOn’s.  It’s highly predictable that Yelp and MANY local media companies are looking jealously across the GroupOn bow, with an intent to flatter the company with their own form of replication.

too much of a good thing?

From one lens, GroupOn is arguably doing too well.

A brief browse through recent deals show a scale of buying that is a runaway success in lead generation. However, the success formula relies on a deep margin risk to the participating merchant. The merchant appears to be averaging a net of 25-30% of the retail price on the consumer products and services, in low operating margin businesses.

To make the deal math work, the business has three critical ways to make the offer participation a smart decision.

1. Ensure that the average bill paid extends beyond the coupon’s value,

2. Convert the new leads into repeat clientele, and

3. Handle a deluge of reservations without sacrificing cost and/or consumer experience.

GroupOn appears to do a good job in working with their customers to ensure they understand this formula. These parameters, however, do make it more appropriate for some segments than others.

As a personal observation, I’m seeing more deals aiming for lower price points ($10 for $25, versus $20 for $50) which I suspect is a technique to drive achievement of goal #1. Perhaps it also signals a growing frustration with the “tour bus effect” of the GroupOn clientele.

In my experience Issues # 2 and #3 represent the things that many small businesses are ill- equipped to manage. If businesses cannot handle the scaled volumes, or cannot make the math work, GroupOn’s model will be challenged to evolve, perhaps in ways that make them vulnerable, competitively.

is this the google moment for local direct marketing?

There is one other piece of the business case that GroupOn is quick to point out to the merchant.  The size of GroupOn’s email list is now sufficient to deliver business visibility that is comparable to the scale of major placement in a leading local newspaper or zine.  This “budget savings” argument may well carry the worst news for incumbent media players.

If GroupOn (and their clones) continue to perform, the impetus to spend marketing dollars on newspaper, coupon services, and local magazine display could be stunted.

Traditional local retail and direct marketing spending feels like it is on the cusp of being challenged, hard, by a performance-based lead gen model. Sound familiar?

You may know I’ve been working on a new start-up for the past 6 months, pretty much heads down – stealth by default, not design.  Actually we’ve been very active in our market, just totally focused on product, not business cards or websites!

In a couple of days, we’ll be taking the wraps off.  We’ve been chosen to launch at the DEMO Conference, which is a great venue to jump off the ledge with new products.  I’ve done this once before; it’s a pretty intense and fun launch pad!

the evolution of an old idea

I was fortunate to be around for the formation of Jabber, with a group of visionary friends whose ideas still inspire me – guys like Doc Searls and Tim O’Reilly.  A decade ago they started my mind spinning about the future of the real-time web, where real-time data and geo-presence empower applications, people and crowds.

Over the past few years, I’ve been deeply entrenched in the local search space, as local advertising evolved through the lens of search services.  In the back of my brain, I’ve always been curious about the “other side” of local – direct marketing.  While the whole industry was busy adapting to the Google search ecosystem, promotion marketing seems to have been pretty much ignored, chugging along capturing tens of billions in local marketing spending.

With the emergence of the Twitter ecosystem, Facebook’s rise to ubiquity, and the mobile local world finally showing real formation, I knew it was time to put my energies in a new direction.  With my prior business operating nicely in good hands, I was so ready for a new adventure.

marking our territory

I’ve become a big fan of GroupOn, along with a few million other consumers! GroupOn has done a tremendous job of creating an audience for daily local offers, to which it sells placement slots.  It’s really a traditional direct marketing business, smartly pimped up with time-limited offers, social sharing, and the illusion of group buying. [Earlier on, you had to gather up your friends to win buying power].  To me, the real magic is in deep discount deals to cool places – it delivers a way for consumers to feel great as they save money getting out to interesting places.

I’m also a big fan of Twitter – not for its’ current consumer proposition, but for the budding beauty beneath.  This awkward teenager will continue to blossom into a central role in content distribution and following.  And, of course, Facebook, as commander-in-chief of the social graph, is equally critical in driving live consumer + friends connections.

I’d be remiss to not mention email marketing pioneers, Constant Contact. I’ve watched them since the early Roving Software days, admiring their tenacity in engaging small businesses, winning over 300K users on the value in maintaining constant contact with your customers.

Finally I’d bracket our space with the LBS darling, Foursquare.  I salute their bright discovery of game-based ingredients that triggers consumers to share their location and favorite places.

deep roots, firmly planted

I’ve pulled together a 7-person team, that I’m very lucky to be working alongside.  My two co-founders, Tom Bender and Karyn German both have worked with me before in the Jabber era.  Tom, engineering lead, is a serious math brain who has led engineering teams and architecture in Jabber/Webb, Digital Globe and Tendril Networks.  Karyn fearlessly led Product Management at Jabber followed by a four-year stint leading Product Development and Client Services at Newsgator.  The rest of the team, Jeff Davenport, Scott Davis, Brian Doyle, and Noel Graham all bring deep engineering and design chops rooted in small business marketing, real-time messaging, feed networks, email platforms, mapping and social media. It’s a wicked smart team, with a matching sense of humor, as you might expect!

I am also very excited to have the support of a group of top tier Angel investors and advisors who bring wisdom and insight to the space, led by Kendall Fargo, who remains very active with the company.  Kendall most recently ran Small Business Marketing Tools at Intuit, after their acquisition of his previous start-up, Step Up Commerce.

we’re close.ly

So, to pull this all together, Closely, Inc. is engaged around this problem/opportunity…

How will businesses create, disseminate and engage with local consumers around live offers?  How does a business reward their best customers, their customer’s friends and their neighbors for coming in or buying product when their demand is most valued.  How will consumers follow and and swarm around these specials?

Ultimately, live socially-connected marketing will extend deeply into the tens of billions in direct marketing media spending. It promises to turn direct mail, promotion advertising, and email marketing on their collective heads.

We chose the brand Closely because it captures the shared desires of local consumers and businesses – the desire for a business to be closely followed, and the desire for a consumer to stay close to offers that fit their interests.

Next week we launch our first step into this emerging world of live marketing.

If you’re interested, do follow closely