It’s trendy to bash Groupons these days, but they still deserve credit for solving a local merchant discount problem that none of their predecessors could figure out. Now, they are tackling an old nemesis of mine; reservation-based discounts.
Groupon’s “Reserve”, launched on July 1st, offers discounts off restaurant checks without requiring customer pre-payment or vouchers. Hey, that sounds familiar.
Reservation-based discounting puts Groupons a step closer to the ultimate challenge they must face if Groupons is going to succeed: proving to merchants that they really provide incremental customers.
When we launch DinnerBroker in 2000, we tried to solve this incremental diner value prop to merchants before we tackled the consumer value prop. We were the first company to offer online off peak discounts at restaurants and increasing the discount amount the more off-peak it was (for example; Monday at 5PM versus Thursday at 6PM). An increase in off-peak dining without a decrease in peak hour dining proved incremental value. It was “dynamic pricing for restaurants”, a cool concept that, it turns out, needed about thirteen more years to percolate.
Groupons solved the value prop to consumers first, and this turned out to be a better strategy. Arguably, most merchants they worked with early on proceeded without any clear measurement of the long-term financial impact of the program. It was a FOMO (fear of missing out) frenzy from merchants based on consumer email penetration.
DinnerBroker retreated from online restaurant discounts in 2006. We licensed the business to American Express, and focused our attention on the emerging food blogger market and our Foodbuzz initiative. It was a decision based to some degree on frustration, but thankfully it ended up in a successful 4-year run and an eventual sale to Federated Media in 2010. I will always wonder what would have happened if we had stuck it out in the restaurant discount market and copied the nuances of Groupons’ strategy.
DinnerBroker’s flirtation with discounts and reasons for remorse pale in comparison to some bigger players who were even better positioned to do restaurant discounts. Here’s the post-mortem on what I think went wrong:
- In 2006 they were a public company worth about $250M with over 2,000 restaurants offering discounts nationally.
- They got distracted with Hotels. A different market.
- They had the discount model slightly wrong (20%) with far too many auto-enrolled free-riders who did not even know they were receiving discounts
- They had too much distressed inventory and a sales force compensated for getting more.
- In 2006 they had over 1,000 restaurants offering 50% off for dining certificates. The closest thing to Groupons, and maybe the company that should have the most remorse. They even had the up-front purchase and the discount amount right.
- They never figured out distribution. They had a great deal with eBay early on and a great advantage in SEO with their url, but they did not figure out the city-specific email.
For all their success, I still feel like OpenTable blew it with discounts. As a potential business partner, I lobbied hard for them to use our discount platform, but they were laser focused on the US reservation market at that time, even thought the discount market was ten times bigger. I still think OT’s future is in discounts.
If you were trying to raise money in 2006, you would have been asked to answer the question, “why wouldn’t Google do this without you”. It turns out that Google could have done ANYTHING better than you, since they had and still have a monopoly on search. But in reality, they could not do EVERYTHING; they had to choose. The fact that they had to buy Zagat is comical considering how many people told me “Google was going to kill Zagat”. Google’s monopoly in search extended to local search and should give them an unfair advantage in local merchant marketing. They still may be a buyer in this market.
In 2006, DinnerBroker had 500 restaurants offering 20% discounts for off-peak time slots.
- We tried to launch in too many markets (50) instead of focusing on early adopting markets only (SF and NYC).
- Discounts of 20% were not deep enough. We surveyed customers, and they told us 50%, but we didn’t listen. We assumed restaurants would never go that deep instead of trying to solve the problem as stated (how to get restaurants to do 50%)
- We tried to lever existing marketing channels (Yahoo, Citysearch, Google, Visa) instead of investing in our own marketing channel…even with Daily Candy staring us in the face.
What Groupon Did Right!
1) Number of restaurants per market: conventional wisdom said that critical mass was 20 restaurants in 20 major cities. I can’t tell you how many times Google, Yahoo et al told me that. The right answer, it turns out, was one PER DAY per city.
2) Depth of discounts. 50% discounts. That’s a lot deeper than everyone else with the exception of restaurant.com
3) Value prop to restaurants: Tipping point model, you don’t pay if we don’t hit threshold. Find one restaurant per day desperate for volume, and promise them performance.
4) Mobile: Mobile was always the right distribution point for restaurant inventory., it just was not ready in 2000. We saw early on with Dinnerbroker that the desktop was NOT the right platform. Users would research and make reservations for travel via the desktop, but not reserve tables. The only company building successful online traffic for restaurants was Opentable. And I would argue that their traffic was being diverted from the restaurants’ own websites and telephone answering machines.
6) Viral: Everyone knew about the success of Daily Candy, and everyone said they wanted to be the “Daily Candy for Restaurants” , but only Groupons put together a meaningful daily email with an ‘exploding offer’.
1) one offer per city
2) deep discount
3) viral motivation to tell a friend.
4) Buy now or it goes away
In honesty, Dinnerbroker and the rest missed big on this. We thought that sending a daily email out with several restaurants to choose from at 20% discount would work. In retrospect, consumers had no compelling reason to act immediately OR spread the word. I NEVER considered trying to sell 1 restaurant 100 times per day, I was stuck on trying to sell 100 restaurants 1 per day each. Oops.
So that is how a lot of companies with a lot more inventory and a lot more restaurant and distribution relationships than Groupon did not succeed like Groupon. And I do view Groupon as an enormous success. Its pre-IPO revenue growth was rumored to be the fastest in Silicon Valley history.
Today Groupons has a market cap of around $6B which is 25% off its peak but still 4x time OpenTable’s. The performance since its IPO is more a function of poor tactical execution by management in failure to deliver more valuable offers to consumers on a daily basis, or to provide better CRM to merchants. I really think they should focus on those two things.
Merchants can only offer deep discounts if it increases the lifetime value of the customer for merchants. That formula is very different for a yoga studio (with no variable cost and high potential for repeat business) than for restaurant (over 30% variable cost and lower repeat frequency). Its different for fine dining versus casual dining and its different for a tourist versus a local, etc…
At DinnerBroker, a lot of time and measurement resources where put into proving that customers were incremental, and that was before “Big Data”. See this White Paper on Revenue Management. Groupons will eventually have to prove it, too. And if they can, its not too late for this to be a great company and a respected (not ridiculed) consumer brand.