This piece by Devore is fascinating and correct. Having looked at buying the Judy’s Book asset twice, I think they really were a great team with a solid execution, and it still did not work. The fundamental issues of high cost to acquire customers, high customer churn, low monthly revenue per paying merchant were the fundamental assumptions in our thinking from MerchantCircle from day one.
Our view was, no sales cost and a freemium model to make the low revenue and high churn less relevant. Our very first venture discussion laid out, three reasons local sucks based on 50 meetings with people who had tried it in wave one of the internet from sidewalk.com, citysearch and a bunch of other companies.
Merchants won’t pat much each month, they paid a few thousand a year to a monopoly high margin business in the yellow pages companies.
They are expensive to sell to, every small business owner is the king of their kingdom and wants to be sold to like they are the CEO of IBM.
They churn. Even if you have a perfect product, they go out of business. They go out of business a lot.
We said let’s attack these head on, build a free community for merchants with a zero cost of acquisition and see what happened.
On the other hand, if I look at Groupon, they took the exact opposite model, very high revenue and margin from Merchants and very high sales cost and super high churn and it worked out pretty well.
This is one of the most insightful comments in Chris’s piece. What we called the local density problem at MerchantCircle.
In local, it doesn’t matter how many uniques, views or registered customers you have across your entire product. Unless you can deliver new customers with pinpoint accuracy — down to the category + neighborhood level — you don’t have a business.
In a lot of ways, Groupon’s success also challenged on of these three fundamental issues of high cost to acquire customers, high customer churn, low monthly revenue per paying merchant. They said, forget churn. Let’s go after businesses with a very large transaction, spend the money on sales and forget churn. In fact, they in some ways are built for the fact that 25% of businesses fail quickly…then new ones come along and they want a bunch of new customers to fill capacity….and the new ones need Groupon. Groupon spends a lot on sales, gets a lot of money, and ignores churn…
On a side note, I have had 20, no 50 new internet companies come to me looking for some secret for user acquisition…here it is, here our secret:
pick a metric that matters in your business model and spend every waking moment thinking about experiments to tackle that metric
For MerchantCircle, our focus on Merchant Acquisition at zero cost. We felt like if we did this, the challenges of local could be overcome and a merchant network was an asset we could protect. So we woke up every morning working through as one of my team would say, 67 Dumb Ideas Ben had. They were mostly dumb, except for a few that an incredible team with focus made not dumb.
Distribution is not all that matters, but it is all that matters.