Despite all the recent bad press for Groupon, LivingSocial, and the “daily deals” category generally, consumer interest in deals has not waned. But interest from merchants (and those involved with restaurants whose deals have been shown to work well) is another story.
The short-lived popularity of daily deals among restaurant owners may be linked in part to the timing of their arrival. Deals bloomed during the recession two to three years ago, when businesses were more desperate to attract customers by any means necessary. Now that the economy is improving, restaurant owners can be more discerning, and they are moving away from the traditional daily-deal model to demand more targeted services.
In 2013 we will see the marketing landscape dominated by three types of marketing services addressing more specific merchant goals: snipers, niche pure plays, and the cycle-conscious.
Snipers: Targeting based on buying behavior.
Imagine if a restaurant could specifically target prospective customers who live less than two miles away, spend more than $200 a month dining out, and always spend at least $50 a check. “Sniper” local marketing services are turning this scenario into a reality.
As is the case with any advertising technique, better targeting enables marketing services to extract more value from advertisers. If a service can guarantee consistently relevant consumers who are especially likely to become regular customers, a business will pay far more for the ability to reach them. Targeting is more important for local businesses than for other advertisers, as their potential loyal customers are a very specific group of people within a small geographic area.
Companies like Cartera and Cardlytics partner with financial institutions that have massive client bases and can target offers based on an incredible amount of historical purchase information. This is something that American Express has made possible for years but only through direct-mail advertising. These new super-targeted offer systems enable highly trackable card-linked deals aimed at seamlessly driving very specific customers to local businesses. The challenge that these services face will be in delivering offers when consumers are thinking about shopping or dining.
Niche Pure Play: Targeting based on brand identity.
When Groupon was growing rapidly, many believed that significant network effects favored a single winner that would own all or most of the market. Groupon’s inability to source consistently relevant deals is proof that there are significant dis-economies of scale. (Who doesn’t complain about irrelevant Groupon deals?) The first-generation deal services will be replaced by dozens of pure-play direct-to-consumer brands targeting specific groups of consumers or merchants.
Gilt City and Bloomspot focus on brand-conscious consumers in major urban areas; this enables them to deliver relevant merchants of consistent quality. Although they sell many types of deals (from medical to restaurant-oriented ones), the tier of offers promoted is much more consistent than is the case with Groupon or LivingSocial.
Strong consumer purchase intent will always favor the niche pure-play deals sites over large publishers with overlapping niche audiences. Publishers testing the e-commerce waters will struggle to move enough inventory to be significant. Niche pure-play sites may have smaller audiences, but their readership is far more likely to make a buying decision.
Cycle Conscious: Targeting in response to weak cycles.
Off-peak traffic is very significant for restaurants, hotels, airlines, and other capacity-constrained businesses with perishable inventory. Most of these businesses will need to cover only their variable costs when buying marketing for off-peak traffic.
Restaurant marketing services like Savored (offering 30% discounts) and Opentable POP (granting consumers 1,000 points that are worth a $10 gift card) reward customers for making off-peak reservations; they are two of the most powerful seat-filling services. Opentable POP also charges far more per visit than any pure-play deal service. Restaurants pay $7.50 a person for such a reservation; this is frequently two or three times the commission that similar restaurants would pay Groupon.
The 2013 local marketing landscape
There will be significant challenges for these kinds of targeted marketing services in the coming year. These companies will no longer be able to offer less targeted services to the same flood of customers. In lieu of volume, they need to educate merchants about the value of targeting.
For merchants to effectively use Savored, they have to be able to predict when business will be slower. To use Cartera or Cardlytics, merchants have to know who they want to reach. It seems counterintuitive that card-linked offer companies would have trouble proving their value. But without the flood of Groupon vouchers, they need merchants to be more engaged with dashboards and analytics reporting to prove their value. The winners of 2013 will be the services that can offer more targeted promotions while educating local merchants about the power of these tools.
Eli Chait is the founder and CEO of Copilot Labs, a San Francisco-based company that analyzes restaurant POS data to provide operators helpful recommendations for how to run more effective marketing promotions. Chait has a degree in business administration from the University of California, Berkeley and worked as an associate at venture capital firm Alsop Louie Partners.