Why Your Consumer-Oriented Hyperlocal Startup Is Going to Fail

So you’ve recently built an amazing app that’s going to change peoples’ lives.  It will be something they could have never lived without. When you first thought of the idea, you had the eureka moment when you said, “Why hasn’t anyone thought of this before? I’m totally going to build it!”

Maybe it was a local travel app, a collection of neighborhood news sites, or maybe a local city guide of things to do based on one’s interests. Maybe it’s an app to meet new friends nearby and tell others where you’re at, or maybe it’s a directory of businesses’ services and their pricing.

I’ll bet your business model is as follows: Scale our consumer base with an amazing hyperlocal app and then local businesses will be knocking down our door to advertise to our users.

I’m sorry to say it, but if your hyperlocal, consumer-focused start-up’s business model is driven by local business sales and marketing dollars, it’s most likely going to fail. (Read also: 6 Things I Learned About Local by Failing in Local)

I know this because I have spent the past several years dissecting and analyzing every consumer-focused, hyperlocal app imaginable. In an effort to build my own “awesome” hyperlocal app, UPlanMe, I was not only figuring out our own business model, but I was analyzing all of the potential competitors and their business models’ around us.

After nine months of trying to scale our startup and a lot of failure internally with our own app (as well as the failures of others in the hyperlocal space), I discovered the inherent flaws in almost every hyperlocal, consumer startup out there. It took that education to realize that that apps that will “win” are those that provide valuable hyperlocal marketing tools to the local business, regardless of the number of users on the app. This is subsequently why we changed our startup to focus solely on tools for the local business, and why we have finally begun to gain traction.

Here are the flaws that the hyperlocal, consumer-focused startups that have failed seem to have in common:

1. The app requires curated local content to engage users: Building content is costly and time-consuming. If you don’t engage your users with an abundance of content the moment they open the app, odds are they will never return. This also applies to apps that hope to grow by crowdsourced content. And without a large number of consumers using your app, businesses won’t be using it either. This brings me to my next point:

2. Local businesses won’t use the app unless it has users: This is the old chicken-and-egg theory. Without users, business owners aren’t going to waste a moment of their time promoting and marketing their content to your users.  A full 88% of online marketing efforts are done by the business owner and 43% are spending 6+ hours a week doing so. Don’t forget that they also have to spend countless hours running their own business.

In order for local businesses to use your app, it’s going to need to a) reach a large percentage of their customer demographic, b) save them time on their existing marketing efforts, and c) not duplicate any of their existing efforts.

3. The app’s strategy is to build out city-by-city: What’s more difficult than building one successful startup? Try building 50 successful startups. This is essentially what you are doing when you try to launch city-by-city. Just because your app had success in San Francisco within your own network doesn’t necessarily mean it will have success in New York. If your app can’t launch nationwide from day one, you probably won’t have sufficient capital to build it out nationally, city-by-city. And it follows that the reason it most likely can’t launch nationally on day one is because of the issues raised in #1: “The app requires curated local content.”

4. The app doesn’t “sell” anything to consumers: It may in fact be possible to build a successful app that has components of #1, #2 and #3, but it’s going to need to sell some good product or service right from the beginning. Maybe it’s selling local tours or local experiences and taking a cut of the revenue. If there is a revenue stream coming directly from the consumer then there is a fighting chance. Remember, though, this type of app still needs to solve the chicken-and-egg conundrum. It needs to have valuable goods to offer the consumers from the onset to keep them coming back. And it’s going to need to have consumers at the onset to sell those goods to.

5. The app is going to need a massive local sales force to earn revenue: Let’s look at how large Groupon and Living Social’s sales forces are, and they are still struggling to maintain profitability. If you believe you’re going to need a large sales force for your consumer app, it’s probably already dead in the water.

6. The price point for local businesses is less than $300, annually: When I speak to many local business owners, some say they are approached by 30 to 40 apps every month trying to sell them on some product. Your sales force is going to find that they will have way more losses than wins. In my experience, for every 50 businesses we reach out to, maybe one will be receptive. Don’t forget that your sales force works on base plus commission. That coupled with your own digital marketing efforts means that your app is going to have to earn quite a bit of revenue from each and every customer to be profitable. Many of the players in our space tell me that the figure is somewhere around $300 per year for their own internal break-even. So, you have to step back and say to yourself: Is your product worth $300 to each and every business?

7. The app hasn’t raised several million dollars in financing: I’m sure by now many people reading this article will be listing off examples of successful consumer-based startups in the hyperlocal space. I will bet that most of these companies, however, have raised millions of dollars in financing. Let’s look at the most well-known. Foursquare has raised more than $112 million in outside funding. Prior to their most recent $41 million debt-financing round, it was estimated that Foursquare had only made $2 million in revenue in 2012.

Yelp has raised more than $62 million in funding and it wasn’t cash-flow positive until 2012 — eight years after it launched. Patch, which is backed by AOL, recently shutdown 400 of its non-performing sites and fired more than 350 employees (40% of its workforce). It’s continuing to struggle in the hyperlocal space despite being backed by a $2.5 billion company. The daily deal companies are earning millions in revenues, but they are also struggling to maintain profitability with their massive sales forces.

In my opinion, if you’re looking to tap into the hyperlocal startup space, your start-up will have a far better chance if you’re building a solution for local businesses that helps them regardless if you have a direct consumer-base. The app has to either save them time on their marketing efforts, or solve a direct problem they are having with marketing their business.

While B2B and B2B2C businesses aren’t as sexy, they do have a much stronger business model. Some of the more well-known start-ups that have been successful in the hyper-local space and that are focused on this market are: Yext, SinglePlatform (acquired), Locu (acquired), Eventbrite, MailChimp, Felix (acquired) and Yodle.  I would suggest you study all of these business models before launching your next hyperlocal startup.

Sean Barkulis is co-founder of UPlanMe, a marketing technology platform that helps local business navigate the hyper-fragmented online marketing space. He is also author of “How to Market Your Business Online.” He can be reached via Twitter at @SeanBarkulis.