Why Yelp Will Triumph in the Groupon & LivingSocial Wars

Groupon and LivingSocial have been getting all the attention lately, but where is the love for Yelp?

Yelp’s core challenge has always been monetization. However, with the construct of the “local deal” now firmly accepted by consumers and local-businesses alike, I feel Yelp has a cleared an immense hurdle and is the best positioned for long-term growth and profitability in this space. The value of Yelp has always been undeniable. For business owners, a Yelp rating can make or break them. For Yelpers, Yelp is hands-down the best resource for discovering new restaurants, bars, and local businesses.

I’ve always resisted signing up for group-buy sites because I despise America’s tasteless consumer culture. However, I finally gave in to the the irresistible LivingSocial $10 Amazon deal. To be fair, I also signed up for Groupon so I could compare the two and see what all the hype was about.

Long story short, I was utterly disappointed, so here is my bear case on Groupon, Living Social, and all the copycats that follow in their footsteps:

1) HORRENDOUS (lack of) targeting.

After getting signing up for Groupon/LivingSocial, they have been sending me ridiculously poorly targeted offers—nail salons, yoga, day spas… WTF!! Targeting is a BIG DEAL!! Targeting is the reason why Google Adwords is a multi-billion dollar cash cow, and lack of targeting is the reason why the Groupon model is fundamentally flawed. I got so sick of getting crap offers everyday that I quickly unsubscribed. They need to figure out how to collect more data about each user (Groupon doesn’t even know my name!) to segment their email list more effectively.

This is where Yelp comes in. Yelp knows a ton of info about each user—their email, gender, pictures, stuff they like, stuff they don’t like, a brief questionnaire about each user, their friends, and most importantly, their lifestyle (do they goto drink alcohol & goto bars, are they vegetarian, do they have a pet, do they goto spas, do they own a car) etc. The bottom line—a Yelper’s reviews reveal a treasure trove of information about themselves. The possibilities here are immense. For example, If I own a sushi bar, I can send offers ONLY to Yelpers who have reviewed other sushi bar. This increases the likelihood of reaching people like sushi to begin with, meaning returning business $$$.

Facebook places could also make a play here to take on Groupon’s market share. Facebook’s user data is not as commercially relevant as Yelp’s, but they’ve got the advantage of having a bigger user-base than all the deal-sites combined.

2) No Brand Loyalty

Groupon is the top dog for now, but LivingSocial’s wildly successful $10 Amazon deal proves that there is no brand loyalty in deal sites. Sahar @ Conceptualist.com says it best: “The name “Groupon” has no loyalty in it. People will buy deals anywhere and everywhere. Would you spend more because it is on Groupon? Would you not buy elsewhere because it isn’t Groupon? didn’t think so.”

Doesn’t matter if Groupon is the top dog today. In the next few years, the site that has the best targeting and best offers will be where all the money goes.

3) Cannibalizing Revenue from Current Loyal Customers

If I run an offer on Groupon to promote my business, how do I make sure that only NEW customers get a discount? Well, you can’t. And that’s just one of many reasons why 40% of businesses will not run a Groupon offer again.

Just thinking out loud here, but I think it would be strategic for Yelp to launch some kind of a “stealth offer” platform, where business owners can email offers to potential NEW customers without running a public campaign. The cohort would be MUCH MUCH smaller (isn’t that what targeting is all about?), but the possibility of returning business and a sustainable, long-term advertising-campaign is so much greater.

4) Offer Blindness

This speaks for itself. If Groupon and LivingSocial and their growing number copycats are continually blasting people with poorly targeted emails everyday, users will eventually  become annoyed and unsubscribe. Relevancy is what makes ads work, and this should be no exception.

My predictions on group-deal websites going forward:

1) Once Groupon completes it international expansion and growth rates start to peak, Groupon’s board of directors will seek a liquidity event in the form of an IPO or acquisition so that their VC investors can cash out. After all, those investors who sank $1B into Groupon didn’t do it out of the kindness of their heart–they expect a fat ROI!

2) Group deal sites with better targeting technology and access to user data, such as Yelp, Google, and perhaps Facebook places, will learn to match advertisers more effectively to customers. Local businesses will learn how to advertise more efficiently and we will see long-term, sustainable growth on these platforms.

3) The pricing model will continue to be tweaked. Since Groupon was the first mover, they’ve had the privilege of charging merchants huge 30% to 50% commissions. Competition and overall market forces will chip away at these fat margins, and we will also probably see more innovative pricing strategies… Perhaps Google will implement a “Quality Score” for their offers, charging businesses with better customer reviews lower ad rates than businesses with sketchy reviews.

Conclusion

Yelp isn’t without its faults. Their execution has been sloppy and un-innovative and there’s a lot of backlash from angry merchants. However, their organic traffic, database of reviews, and immensely loyal user base entrenches them in a very defensible market position. And at the end of the day, the value of Groupon and its copycats lies solely in their email lists and slick sales teams. Groupon has raised over $1B in funding, LivingSocial has raised $232M, while Yelp comes in last at $56M—my point here isn’t that funding prowess = success. My point is that Yelp is undervalued relative to it’s peers, and has only one direction to go—UP!!