TechCrunch has an article up today on pre-IPO restaurant reservation platform OpenTable which is spawning lots of vociferous user comments in response to journalist Sarah Lacy’s criticism of OpenTable for not “offering a real consumer service (i.e. Yelp)” and suggesting they should use their IPO money to hire some talented UI designers.
Lacy makes a decent strawman for the naivity of some Silicon Valley pop business journalism but I won’t go there. Instead, her “call for business models” makes a good lead-in for me to discuss the subject of online-to-offline acquisition I think will, someday, be the “next big thing” which most Web 2.0 social start-ups will turn to to save their business model.The problem is that most won’t be equipped with the basic pre-requisites. I’ll speak to those in a bit.
But first, let’s look at OpenTable. I found an excellent article on OpenTable by blogger J. Bryan Scott who clearly loves technology is also also getting a proper education in finance. It contains this powerful table within it:
What’s the key metric? It costs a restaurant 69 cents per diner to book reservations on OpenTable. I think this is incredibly cheap for a CPA acquisition campaign!
OpenTable probably isn’t charging more than 20% of the value it creates for members. Aside from the paying customers you’re getting into seats, consider the benefits of free advertising to millions of users on OpenTable, having a useful IT system to supplant pencil & paper and having access to a post-purchase communications channel directly with the customer in a business where most unhappy diners just walk away and never return.
I believe that implementing an online-to-offline acquisition model will become key for many Web 2.0 start-ups struggling with limited online advertising models. The problem is that most Web 2.0 start-ups lack the pre-requisites for building the CPoA (cost-per-offline-acquisition) + Service model:
- You need to focus from Day One on inciting action. It doesn’t matter if the site is entertaining, the question asked by customers is will it bring me customers? This is the difference between Yelp and OpenTable. Yelp is a good, but not as great as focused communities like Eater.com, source of information but it sits at the back of the purchasing food chain which runs from awareness -> interest -> choice set -> intent -> purchase -> customer service.
- You need critical mass in a focused area. Facebook cannot replicate OpenTable’s functionality despite millions more users. The problem is more than just screenspace: there isn’t enough room in members’ minds to see Facebook as the Swiss Army knife of their world. This is why most Facebook Apps failed to get past the You’ve Been Bitted by a Zombie phase: Facebook is for child’s play in author-community investor David Silver’s well-chosen words. This is also why you see Proctor and Gamble owning so many brands of detergant and keeping Tide in the laundry room not the kitchen.
- You need traveling salesmen who hit the streets, get meetings, attend conferences and sign up customers who will use your solution. Salespeople need lists and a well-defined target market unlike technologies. There are no easy armchair solutions like “search engine marketing” for building an online-to-offline CPA model. Illustration of this in action: Facebook made much of poaching a Google executive whom I happen to know to be “Director of Business Development” then made him “Director of Platform” 10 months later.
- You need some clunky proprietary solution like a terminal that breaks, customers complain about and is almost certainly not elegant in its UI design. But that dumb box that’s not hooked up to the Cloud is enough for99% of real world business owners and, most importantly, it’s scarce and troublesome to distribute to 8,000 locations. In other words, there are some barriers to entry that a 22 year old programmer can’t leapfrog.
My view is that this business model is applicable to any industry with millions of potential customers, thousands of competitive retailers, product information available online and impediments to customer customer purchase intent like travel time, scarce inventory (or appointment times) and the passing of momentary impulses.
The trouble with this model is, as Lacy identifies, that you have to serve your customers. It’s just that they’re your paying customers who are a lot more difficult to please than Yelpers. That’s probably the reason why OpenTable charges so little: they’re trying to encourage adoption while ensuring that competitors don’t find the profits attractive enough to compete against them in this early stage.
