Merchant Services Is The Next Opportunity in Daily Deals

The display advertising market is composed of specialty layers between advertisers and publishers. The industry began with advertisers running ads directly on websites, then ad networks formed that acted as a middleman. Now ad exchanges are becoming more prevelant, with value added services emerging for both supply and demand. The graphic on the right illustrates the highly specialized layers of the display ad stack.*

The Daily Deal space is forming along the same lines: publishers (Groupon, LivingSocial, and hundreds more) contract directly with advertisers (local businesses). This is starting to evolve to some degree on the publisher side:

• White-label services like Group Commerce and Powered by Tippr provide technology and sales solutions for media companies looking to offer Daily Deals. We wrote a more thorough analysis of white-label players earlier.
• Open standards are being proposed, like Tippr’s Open Deal Format (ODF), paving the way for exchanges of offer contracts between sales forces and publishers.
• Exchanges are forming, such as DealOn’s OfferEx and to some extent Lucid Lab’s Offer Foundry, which allow publishers to choose from offers sourced from a variety of local sales forces.
• Creative services assist daily deal sites in packaging their offers. MediaPiston, for example, is a crowdsourcing platform for ecommerce sites to manage complex content projects, including offer copy creation for at least one major daily deal provider.
• Aggregators like Yipit have formed to allow the audience to discover new deal services and for deal services to enhance distribution of their offers.

What a merchant services product looks like

The painpoints for small- to medium-sized businesses (SMBs) marketing through the daily deal space include:

Offer structuring. SMBs need a resource for structuring offers in a profitable and popular manner. Ideally this resource is allegient to the business owner, and not solely a daily deal salesperson. Poorly structured, but popular offers can be financially risky.

Fulfillment. The deluge of new customers can be overwhelming from a customer service and fulfillment standpoint as well.

Price / negotiating power. If SMBs could negotiate as a group, they could  demand reduced commissions (vs upward of 50% demanded now). Those services with high geographic penetration and category concentration will have more power.

Self-serve. The product could allow a merchant to structure their own deals, and manage excess inventory in real-time.

Turning deal users to repeat customers by employing best practices such as repeat discounts, capturing contact info, and promoting easy upsells. Publisher and advertiser incentives can be misaligned here. A Daily Deal service wants to be a “city guide,” responsible for as much local consumption as possible. On the other hand, a merchant wants to convert the user to a repeat customer and capture their local spending in the future.

The ideal merchant services product would suggest best practices for offer structuring based on past data, provide distribution of offers through a network of Daily Deal publishers, provide fulfillment and customer service solutions for the offer, and allow the SMB to benefit from lower commissions through collective negotiating leverage.

The product could be priced on percentage basis, similar to the daily deal services themselves. Given the lucrative distribution channel, such a product may generate enough revenue to surmount the high costs of acquiring SMB customers.

Well positioned large companies

Salesforces like MerchantCircle, Yodle, and Reach Local.
Why they could: tremendous scale with merchants
Why they might not: focus on CPC, Pay Per Call

Ad platforms like Facebook and Google
Why they could: tremendous consumer scale, existing self-serve experience by merchants
Why they might not: unlikely to work with existing deal sites, unlikely to charge merchants / justify large offline salesforce

Restaurant.com
Why they could: scale with merchants, focused on similar business model
Why they might not: would represent significant shift, likely focused on current consumer scale

Groupon
Why they could: tremendous scale, already provides various merchant services, rolling out self-serve platform
Why they might not: cannot credibly represent business interest as a daily deal site, highly unlikely to work with other deal sites

Startups who might get there first**

Closely is a self-serve offer platform for local merchants. The company is run by MapQuest founder Perry Evans.

GenBook is automating appointment scheduling for merchants running Daily Deals. The company raised $2.2 million in venture financing in 2006.

Postling manages social media for small businesses. The company could roll out an offer feature, which would then be distributed to daily deal publishers. Postling is run by former Amazon and Etsy engineers and raised a round of funding in the spring.

SinglePlatform is quietly becoming the social media solution for thousands of restaurants and bars across the country. Their category density in certain markets will allow them to negotiate extremely well on behalf of their clients. The company recently raised a round from DFJ Gotham, RRE and First Round Capital.

What’s also very likely is that Daily Deal entrepreneurs struggling to gain consumer scale will pivot into providing merchant services. They are developing domain expertise and merchant relationships. Shifting to merchant services providers will allow them benefit from the consumer scale generated by larger sites and media companies about to enter.

*    Slide was authored by Terence Kawaja. A big thanks to Paul Knegten, a very smart ad strategist who suggested the Terence Kawaja analogy and has taught me a great deal since.
**  There are likely dozens more. Comment below and I’ll update the post accordingly.

Heard anything else interesting? Comment below or call us out on Twitter:@yipit. Otherwise, we’ll get back to building Yipit, which gathers and filters daily deals based on your tastes.