In the spring of 2011, Jason Finger was working as an entrepreneur-in-residence at Bessemer Ventures Partners, surveying the budding hyperlocal ecosystem, which he had helped build as the founder of Seamless (then Seamlessweb) during the decade prior.
Fast-forward two years, and Finger is the chief executive at CityGrid, the IAC-backed local media and advertising conglomerate. Since taking the helm last May, Finger has moved the stalwart away from its roots as a local ad network to a closed-loop marketing services company, restructuring the organization and laying off 15% of the company’s 450 person staff in the process.
In May of 2011, Street Fight spoke with Jay Herrati, the former CEO of CityGrid, about the fragmented nature of the local online advertising marketplace and the future of the then-exploding Groupon. Recently, we caught up with Finger, Herrati’s replacement, to discuss some surprises over the past two years and the coming “verticalization” of the hyperlocal industry.
In April of 2011, you were surveying the local commerce and tech landscape, working as an entrepreneur-in-residence at Bessemer. What did you expect to see happen in local then that never came to fruition?
I’ve been involved in the local space since 2000, and one of the things that most companies have underestimated is the value or expense of doing merchant acquisition in local. Two years ago, and even a few years before that, I expected to see a group of companies emerge that would develop local merchant acquisition expertise.
That’s largely not happened, with the caveat that the internet yellow pages companies effectively have the ability to be conduits to the local community. But they’ve leveraged that connection only in an advertising capacity by enabling people to provide advertising tools to local merchants and serve as the mouthpiece, of sorts, for local merchants. They have not functioned as a mechanism whereby people would acquire a relationship directly with a merchant.
In the last two years, we’ve watched as Groupon’s massive sales force corroded its profitability as growth slowed. The long-tail “nut,” so to speak, is still very much intact. Who’s done the SMB segment right recently, and what have we learned from Groupon?
Since merchant acquisition costs are so high, companies need to pick one of two options: either have a model that has no sales force, or build out a sales force with meaningful scale. Scale can obviate some of the challenges because you can amortize costs across a broader number of people. And you can also broaden your portfolio of offerings to the marketplace.
Generally speaking, if you have a small sales force — say, 20 people — they’re not going to be able sell 19 different products. They’re going to specialize in one or two products. Rather, if you have a sales force of ten thousand people, you can have someone who specializes in selling in certain verticals, in specific offerings, et cetera. A company like Yodle has been a good example of that. Both Yodle and ReachLocal have essentially broadened their portfolio of offerings quite substantially, so that they have something that’s relevant for companies across different local categories. That being said, they still exclude some categories because there offerings are not relevant.
We’ve seen some of the big horizontal players — Groupon, Foursquare, Yelp, et cetera — yield somewhat to more focused initiatives. Given this vision of sales, do you see a verticalization happening in hyperlocal?
I really believe that companies over time will become more vertical-centric. The local space is really an amalgam of a variety of different verticals. Folks often apply “local” to mean spas, restaurants, plumbers, you name it. But the reality is that each of those businesses are very different, and each need different tools. So it’s very hard to compete in hyperlocal as a horizontal provider. The better model are those where companies focus on getting immersed in a particular verticals like Seamless or Grubhub, an Opentable or UrbanSpoon, or a Rezbook or Zocdoc.
Uber is another company which I consider as a local commerce provider that’s done this well. These ecosystems are identifying a particular vertical, and then developing highly specialized tools so merchants in those communities can be more effective at monetizing their community, so consumers can access those merchants more effectively and efficiently. And because they’ve become this commerce or communications hub, churn has lessened on both sides. The local marketplace is moving away from being a called “local,” to “pick your vertical.”
For example, companies that have no cost of goods sold (COGS) outside of the proprietor’s time, have certain tools and techniques, which are very different from what companies, which have COGS, need. Look at Groupon: where they are successful is in enabling people to gain greater access to an experience that requires someone’s time. It may be a massage, going on an adventure, et cetera — an experience provider. In those models, providing meaningful discounts to acquire new customers can make a lot of sense. But in categories where you have a high COGS, and if you’re giving things away, it’s very challenging to make high discounts viable. So, under that paradigm, a lawyer would be much more akin to a spa than would a restaurant or retailer.
As people become more comfortable with providing third parties with that passive data stream, the ability for companies to provide unbelievably sophisticated services and targeting technology for those consumers will be transformative for the industry.
The past two years in hyperlocal have seen a marked shift from the bounties of the long-tail to the value of hyperlocal for national brands. Has something gone wrong with efforts to address the SMB market?
One of things that has been a challenge (and going back to the needs of a sales force): local merchants tend to be unsophisticated, so the self-service model hasn’t materialized. And the only way companies have been able to make self-serve work is to provide merchants with tools at no cost. There’s been this massive saturation of offerings that are very similar to one another, and all for free.
Look at the market for cloud-based loyalty or POS systems, where there are hundreds and hundreds of these companies competing over the same market. And everyone’s revenue model is: “Hey, once I get into XYZ vertical and become the dominant player, the opportunities to monetize will be countless.” The reality is that the market will become so fragmented that it will be very hard for one player to reach that scale, and subsequently, nearly impossible for those companies to actually monetize their presence in that vertical.
It’s a pathological mentality. They say: “We’re going to build a cloud-based POS system, but we’re really going to make our money in payment processing. Or, we’re going to do cloud-based payments, but we’ll make our money in data analytics or marketing and loyalty programs.” There may be some entrants that will break out of that, but they’re going to have break out of it from such a crowded field since the barriers to entry are so low.
So how does this play out for the industry as a whole?
Take the cloud POS space: the incumbent players will likely recognize that they need to build cloud-based offerings, but they also realize that pursuing [cloud-based POS] as a strategy will be cannibalistic to their businesses. It’s the classic innovator’s dilemma.
What I think will happen over time is that many of the companies that are in the marketplace will reach minimal scale, consolidate, and then they may have enough critical mass to have an ongoing viable business. And if they don’t, the incumbents will snap them up, and reformat their technology as their cloud-based offerings.
When Street Fight launched in April 2011, 31% of mobile users owned smartphones. Today, smartphone penetration is well over 50%. What does that change — the difference between a minority and a majority of mobile users owning a smartphone — mean for the hyperlocal industry?
The seeds of local commerce have been laid over the course of the last six years. There’s a huge tidal wave of momentum, so there’s just a big macro economic shift happening, and a lot more local commerce and content querying is being done from smartphones. As a result, and as the technology continues to improve, the type of targeting capabilities will improve as well. But there’s a more fundamental shift at hand. Right now, a lot of the interactions, with which my generation has been comfortable, are explicit: I’m comfortable tweeting, checking-in, or writing a review. However, people are increasingly becoming comfortable with these applications passively logging their daily interactions. I may only want to check-in when I go to a new restaurant, but there are people who are willing to have a third-party service access their location without their explicit consent, and provide value against that.
As people become more comfortable with providing third parties with that passive data stream, the ability for companies to provide unbelievably sophisticated services and targeting technology for those consumers will be transformative for the industry. Going forward, what will happen is that you won’t even open the smartphone app — it will just say, “Jason, its 4:30 PM, here are some places you can eat. Here are five recommendations in your area of the exact dish that you like. Here are the ratings. We know that you like Italian food, but we know you had it last night, so here’s a recommendation for Chinese.” That’s where things are going.
Steven Jacobs is deputy editor at Street Fight.