Aggregators can exist for both content and also products/services and there’s thousands of examples of them across every category:  Google News (news content), OpenTable (restaurants), Expedia (airlines and hotels), Lendingtree (loans), SeamlessWeb (restaurant delivery), Digg (web content), Servicemagic (service contractors), Zocdoc (doctors), Admob (mobile ad units), AdWhirl (mobile ad networks), Pontiflex (marketing leads), GymTicket (gyms).

Convenience is often the key value these aggregators offer: a one-stop stop for customers to find what they’re looking for without going to ten different places.  The ability to compare items is also important. 

In almost every case there’s a interesting tension between these ‘aggregators’ and their ‘constituents.’  Let’s consider Google News.  Google news is increasingly the starting point for people looking for news on the internet. Newspapers hate that Google News is scraping their content and eroding their brand value — but at the same time, Google News drives a significant proportion of their web traffic.  They’d be stupid not to want that. As a member of an aggregator, they’re ensuring they get web traffic.  Unfortunately they’re helping build the Google News brand rather than their own.

Are they shooting themselves in the foot?

This issue arose in my post about Opentable.  One commenter wrote restaurants participating in OT, build the OpenTable brand rather than the restaurant’s own brand. It’s true!  But what can done?

Once established, the aggregator has the upper hand. All the individual entities/constituents act in their own self-interest and therefore will remain part of the network.  No single constituent can defect without suffering harm.  And widespread rebellion / mutiny is unlikely — it’s unlikely that all the restaurants are going to band together and start their own version of OpenTable.  It’s a tragedy of the commons, and the aggregators benefit handsomely from the resulting lock-in network effect.

As an established aggregator, risk can come from only a few places:

1) Competition in the form of another aggregator

2) One or more constituents decide to sidestep you.

#1 is hard to avoid.  #2 is rare, but extremely interesting when it does happen.  One example of this is Southwest Airlines, which isn’t listed on any of the travel booking sites.  Similarly, Admob refused to serve ads through AdWhirl, an ad network aggregator (and when that didn’t work they bought ‘em!)

Occasionally the constituents themselves will ally:  One example is Hulu, a joint venture between NBC, FOX and ABC, which aggregates all their content into a single place.

And once in a blue moon a constituent will creatively embrace aggregation in their attempt to fight the aggregators.  For example, Progressive Auto Insurance proudly shows you the prices of their competitors alongside their own prices.  Fascinating strategy.

The more fractured and crowded the marketplace, the less likely a mutiny or rebellion.  Are the thousands of restaurants on Seamlessweb suddenly going to unite to form their own online ordering system and destroy Seamlessweb?  Not likely.  Are the dozen or so large newspapers going to unite to rally against google news and demand to be de-listed or compensated better?  Absolutely.

As the number of constituents increases, the dependency on any one constituent decreases.  And as an aggregator grows its brand, it becomes extremely difficult for a constituent to break away.  Doing so requires an extremely strong brand and unique offering (like Southwest Airlines) and an alternative sales/delivery channel.

This is most important in the context of a offline company: Consider that Brick and Mortar stores like Walmart are essentially product aggregators.  Shoppers go to Walmart because they know it has a wide selection at great prices.  Suppliers don’t want to miss out on the huge volume that the Walmart sales channel delivers.  The more Walmart grows, the more crucial they become to their suppliers’ businesses.  And the more suppliers they gain, the more crucial they become to consumers.  At the end of the day, Walmart has incredible pricing leverage over its constituent suppliers. There simply aren’t many alternative channels.  Suppliers are trapped.

I’m going to end the post here because it’s already way too long.  But please leave your thoughts and help me push this topic further.  Thank you!

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(This is the first in a two part post. Part one contains a profile of a startup.  Part two contains numbers and analysis related to that startup.)

Mobile Spinach is a small and ambitious Bay Area startup focused on the mobile coupon space.  The company is still at a very early stage — seed funded and looking for funding.  Earlier this month I had the pleasure of talking with co-founder Anthony Vitti.  We had a great discussion about the difficulties of effective marketing for local businesses, and Anthony laid out his vision for Mobile Spinach and the opportunity he sees.

Mobile Spinach’s offering for consumers is a compelling one: “Get exclusive deals and mobile phone alerts from our Tastemakers who hit the streets to find you the best deals when, where, and how you want them.” Think local trend-blog meets social-shopping meets mobile-couponing: Thrillist meets ThisNext meets Cellfire.  Whereas existing coupon services like Cellfire and 8Coupons focus on product discounts (Save 25c on toilet paper!!), Mobile Spinach focuses on deals from local lifestyle businesses: Shopping, Night life, Events, Travel, Dining and Food, Arts and Music, Gyms and Spas.  One of their co-founders runs a contemporary San Francisco lifestyle brand called Artificial Flavor, so they’ve got experience with fashion trends.

With Mobile Spinach, you receive deals only from the Tastemakers you’ve chosen to follow.  These folks are the site’s power users — aggressive well-connected individuals who introduce their favorite local businesses to Mobile Spinach’s service and get special deals for their followers.

Mobile SMS couponing requires a light touch.  Consumers don’t want to be interrupted with advertising that’s not relevant to them.  Mobile Spinach understands this very well: “Less is more” says Anthony.  Relevancy and customization are crucial to Mobile Spinach’s vision of an empowered consumer who is able to “dial down” the service as needed.  Besides using Tastemakers as filters (so consumers only receive deals that match their taste), Anthony suggested that consumers will be able to make further customizations like electing to receive coupons ‘only on Tuesday nights’ and ‘only from nearby restaurants.’

For these local businesses, Mobile Spinach helps them engage local consumers and market themselves effectively.  According to Mobile Spinach, there are very few ways for small to medium business owners to get noticed — traditional media, SEO, and SEM all have high costs and questionable efficacy.  With Mobile Spinach, 500-1000 SMS messages are typically sent for a campaign and the company reports double-digit response rates.  The company also reports getting double digit CPM rates for their mobile advertisements.

For Mobile Spinach, tastemakers act as sort of a crowdsourced marketing effort as they spread the word about the service to their friends.  More importantly, they bring local businesses onboard to advertise with Mobile Spinach — and receive a 20-30% commission.  These tastemakers, combined with a traditional in house salesforce, are designed to make the service scalable.  Anthony envisions having 20 tastemakers in each of 30 cities across the country once the service expands to full size.

Mobile Spinach has a nice vision for a social-recommendation local couponing business.  Furthermore, Mobile Spinach shows sensitivity and insight into the typical issues plaguing SMS advertising.  But can they make the numbers work?

Well, let’s do some back of the envelope calculations…

(continue to part two)

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Online restaurant reservations company OpenTable filed for an IPO on Friday, revealing their finances for the world to see.  The SEC filing contains all the financial figures you would expect: revenue, expenses breakdown, details of the public offering, and also operational data. 

Brett Emerson wrote a fantastic blog post a few months ago (Behind the Curtain: Open Table) which gives a thorough evaluation of OpenTable from a restaurateur’s point of view.  Emerson is in the process of opening Contigo, a new restaurant in San Francisco and he lays out the pros and cons of OpenTable and shares his cost and volume expectations from the service.  Viewed from a restaurant’s pespective, the operational data in OpenTable’s finances gives an amazing amount of insight into the OpenTable system, especially when some analysis and number crunching is applied.

OpenTable Web Traffic and User Behavior

OpenTable makes their money from restaurants that pay a one-time installation fee for reservation software/hardware, a monthly subscription fee, and a fee for each restaurant guest seated through the service.

It’s public knowledge that OpenTable charges $0.25/diner booked via the restaurant’s website and $1/diner booked directly through opentable.com (the higher charge reflects opentable.com’s value as a customer referral tool).  The SEC filing tells us that these fees resulted in $17M of reservation revenue from 25M diners.  Pulling out my trusty TI-83 and solving this linear equation  ( 1*a+ .25*b = $17M  and  a + b = 25M diners) leads to the conclusion that 57% of diners book via opentable.com, and the remaining 43% book via the restaurant website. This tells us about the value of OpenTable as a marketing tool: being part of the OpenTable network yields roughly twice as many online reservations as a stand-alone solution.

Per-Restaurant Data

Excluding one-time installation revenues, total North American revenues for the first nine months of ’08 were $37.5M across 8,090 member restaurants, so the average restaurant pays OpenTable $515 each month (N.B. 8,090 restaurants is the midpoint figure across the reporting period: OpenTable began 2008 with 7,391 restaurants and grew to 8,788 restaurants.  I assume linear growth).  Broken down, this $515 consists of $281 in monthly subscriptions charges and $234 in monthly reservation booking fees.

For the reporting period, one-time installation revenues were $1.7M and there were 1,397 new restaurants.  Each new restaurant therefore pays an average of $1,240 in installation fees (this assumes no churn, that all growth is from new customers).

Does OpenTable deliver?

OpenTable seated 25M diners across 8,090 restaurants in the reporting period which means for the average restaurant, OpenTable fills 345 seats monthly or 14 daily (assuming the restaurant is open six days a week).

One of Emerson’s main concerns is the high cost of reservation fees:

Let’s assume most of the other two thirds of the restaurant’s guests book through Open Table. If successful, a 60-seat restaurant like Contigo could easily pay $1,000-1,500 a month to Open Table in cover charges.

Let’s examine this concern in detail.  Contigo has 60 seats.  Assuming tables can be flipped twice, 120 diners can be served each night.  We know OpenTable on average fills 14 seats a day, so OpenTable would be filling about 12% of the restaurant.  Earlier it was calculated that the average restaurant pays $234 in reservation fees.  Emerson’s figures (66% fill rate, $1000+ monthly fee) therefore probably overestimates OpenTable’s ability to fill tables.

International Figures

OpenTable has mainly concentrated their international efforts in Germany, Japan and the United Kingdom and so far international business represents a mere 5% of total revenues.  For the reporting period, an average of 696 restaurants were signed up, producing $1.7M in subscription revenue, $282K in reservation revenue, and a mere $76K in installation revenue.

Dividing the installation revenues across the 451 added restaurants shows an average installation fee of $155 which is significantly lower than the $1,240 that domestic restaurants pay.  This likely signifies that OpenTable heavily subsidizes equipment and installation costs in an attempt to gain traction overseas.

The monthly subscription charge that each restaurant pays is comparable ($270 internationally versus $281 domestically), but as you might expect given the early stage of international adoption, monthly reservation charges are significantly lower ($45 versus $234) and fewer diners are seated through the service (60 diners per month versus 345 diners.)

When both subscription and reservation charges are factored in, it’s revealed that although the average international restaurant spends less with OpenTable per month ($315 versus $515), they pay substantially more for each customer ($5.29 versus $1.49).

OpenTable has emerged as the leader in the US market, surviving the first dot-com bubble, gaining traction with restaurants, and beating out the competition (DinnerBroker.com, Foodline.com, Ireserve.com, iSeatz.com, and RestaurantRow.com and others).  It should be noted that OpenTable operates very profitably within the US — $6.7M profit on $39M revenue, a 17% margin.

Is another victory in the cards?  It’s certainly going to be a tough fight.  OpenTable lacks the first-mover advantage and faces intense competition.  There’s also a strong network effect working against them.  Already OpenTable has conceded Spain and France, closing their offices which had only recently opened in 2007.  OpenTable appears to be pouring every dollar they can into their international expansion and heavily subsidizing equipment costs which is the reason why the company as a whole appears to be unprofitable (and I suspect is the reason for filing for an IPO — to raise more money for their international push).  Looking at their international business, OpenTable posted losses of $6.5M on $2M revenue in the first nine months of 2008.  OpenTable, I wish you luck!

Market Sizing and Market Saturation

OpenTable includes some interesting estimates about the size of their market:

We believe based on our internal estimates that there are approximately 30,000 reservation-taking restaurants in North America that seat approximately 600 million diners through reservations annually.

Considering that OpenTable has signed up close to 10,000 restaurants, they have captured roughly 1/3 of the possible restaurant market — pretty impressive!

Extrapolating through the end of 2008, OpenTable seated 33.5M diners which means that 6% of all restaurant reservations are made through OpenTable — also really impressive!

Quantifying OpenTable’s Marketing Power

Advertising a restaurant in an effective manner is a difficult task.  Press, buzz, and word of mouth recommendations are great, but these aren’t something a restaurant can control.  Besides buying ads on Citysearch or Yelp, there’s not much to be done online (although Russ & Daughters did recently join Twitter!).  Unfortunately launching a search marketing campaign around the keyword “restaurant” doesn’t work too well.  OpenTable clearly realizes the tough position that restaurants are in:

Cost-effective marketing opportunities are limited. Typically, restaurants promote themselves through magazines and newspapers as well as online dining guides and directories. However, restaurants generally do not have the ability to track the number of people who ultimately dine in response to their advertisements, nor are the costs of these advertisements tied to the number of diners they attract. Therefore, restaurants usually are unable to measure or compare the effectiveness of these marketing channels.

Is OpenTable’s $1/diner fee fair?  Emerson suggests that it’s too high:

When a diner pays $40 to eat at Contigo, that dollar [fee per diner] equals about 2.5% of the cost of the meal. That’s significant in an industry where the average profit margin is less than 5%.

Interesting point.  But if you bought a $300 newspaper advertisement which caused 300 new customers to walk into your restaurant, wouldn’t you consider that a phenomenal return on your advertising spend?

The average restaurant spends $515 with OpenTable and gets 345 diners each month, so when all is said and done the true cost of the service is closer to $1.50/diner.  But keep in mind that 43% of the OpenTable bookings come through the website of the restaurant — these 148 diners have already decided to eat at the restaurant!  These customers exist regardless of whether the restaurant is subscribed to OpenTable.  The real value that OpenTable delivers, therefore, is the 197 NEW customers generated due to the marketing exposure on opentable.com.  Restaurants are really paying $515 to gain 197 new customers, which comes to $2.61 per customer.

Concluding his blog post, Emerson writes:

In my mind, the question of whether or not to sign up for Open Table boils down to whether or not I feel Contigo needs to take advantage of Open Table’s substantial marketing power.

The question restaurant owners should therefore ask themselves is this: Is acquiring customers at $2.61 per head a worthwhile investment?  And is there another method that can acquire customers for less?

Well there you have it!  A fascinating look at the business of online restaurant referrals and the insights derived from very basic operational data.

I’ll leave you now with this amusing quote from the SEC Filing about OpenTable’s competition: “Currently, our primary competitors in North America are the pen-and-paper reservation book used by most restaurants and the phone used by diners.”

As always, readers, I’d love to hear your comments and thoughts!

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These are just a few of the many companies in the crowded field of web apps for personal finance management (PFM).  These consumer sites all perform the same basic service: aggregating data from disparate financial accounts (savings, checking, credit cards, loans etc), helping users monitor their financial status, and making suggestions for improvement.  Although the services have different focuses and specialties, they generally share the same business model.

Business Model

Unlike the typical consumer app attempting to sell banner ads for penny CPMs, these finance sites have a tried and true business model: lead generation.  The PFMs suggest financial improvements such as signing up for a higher yield savings account, a credit card with a lower APR, or a cheaper phone service.

When users take the site’s suggestions and sign up for an offer, PFMs have generated a lead for that financial company and a referral fee is paid in return.  Referral fees in the finance space are especially high, typically upwards of $50/referral.

Conversion Rates

How many people sign up for these offers?  Previously I assumed maybe 1%, and I thought I was being generous.  After all, does anyone really need ANOTHER credit card?!

But at December’s Web2NewYork Meetup, Thrive.com shared some truly remarkable statistics about their conversion rate: about 15% percent of users have taken an offer.  Within their top demographic category, that figure jumps to 25%.

Mint.com reports similar figures: “Users are clicking on presented opportunities 12-15% of the time.” But wait, it gets better!  Thrive said their users often sign up for multiple offers — on average about two.

Wow. I was blown away.

Back of the Envelope Calculations

Financial offers pay $50 per conversion, 15% of users convert, and users sign up for two offers on average. PFMs therefore make $100 from 15% of its users, which means that Mint.com and Thrive.com make $15 per user.

The challenge, then, is clear: rapidly grow the business while keeping the Customer Acquisition Cost (CAC) below $15.  I’m guessing that mainstream press has probably been the most important (and cost-effective) method to gain new users.  I would also wager that customers who find the PFM services via press (and also word-of-mouth referrals) are the most trusting and therefore the best converting users.

The PFMs also use other marketing channels to find customers, such as search engine marketing.  Thrive’s ex-CMO, for example was able to bring “SEM acquisition cost down from eCPA of over $20 to under $3.”  Of course each marketing channel produces users with differing engagement levels and conversion rates, and that needs to be taken into consideration when trying to calculate the ROI of each channel.

A screenshot of Mint.com recommending a new credit card. (credit: crunchbase.com)

Measuring Success

Mint is the runaway leader with 650,000 registered users.  By my estimation, Mint should have collected close to $10 million revenue in the company’s lifetime (using the figure of $15/user).

Impressive, but not enough.  The company received $18 million in VC funding so clearly expectations are set even higher.  I would expect to see some additional monetization strategies in the future: a premium service?

Thrive, which launched in October 2008, has a much smaller user base.  The company was hesitant to share specific numbers during their presentation, but hinted that they have a low double-digit number of users.  If we conservatively assume 10,000 users, the company has earned about $150,000.

Recurring Revenue

A question for my readers: once a user has taken the recommendations (and the PFM has earned their referral fees) is that the end of the opportunity?  Is this a one-time earning event for the PFM?  Or is there a way for the services to make recurring revenue?

Is there enough rotation among financial service offers that the users’ accounts are never completely optimized and users jump from bank account to bank account following the best rates?  How do the PFM companies think about calculating the lifetime value of a customer?

Aaron @ Mint, Avinash @ Thrive, etc — would love to hear feedback on my analysis and also hear what marketing channels are working well for you.

——————————————–

UPDATE: In February 2009, Thrive was acquired by Tree.com for an undisclosed amount.  Congratulations guys!

Tree.com (Nasdaq:TREE) is the company behind LendingTree and RealEstate.com and was formerly owned by IAC.   Having the financial support and web exposure/brand of a large company like Tree.com should help Thrive grow quickly and compete effectively with its larger competitors.

UPDATE #2:  In March, Silicon Alley Insider did an eerily similar analysis on Mint.com and used some updated figures.  Worth a read.

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Yodle is also interesting because it’s the classic instance of a startup founded by a young person and transitioned over to ‘real’ management.  Founded as NatPal in 2005 by Nathaniel Stevens (then an undergraduate student at Wharton), Yodle took off.  He was replaced as CEO in 2007 by Court Cunningham, an experienced Harvard MBA and former SVP at DoubleClick.

The company is growing fast: 300%, 400%, 500%, or even 700% depending on which press release you decide to believe.  With $15M in funding, the company is in a race against its competitors to expand quickly across the nation.  They’re hiring aggressively and overwhelming Craigslist with job posts. They already have a presence in 18 major US cities and “will grow the team from 180 to 800 in 18 months.”

What Exactly Does Yodle Do?

Yodle helps small local businesses (think hair salons, florists, car mechanics, and optometrists) advertise effectively online.  Online advertising is too complex and time consuming for the average small business owner to deal with..or so goes the thinking.  By combining an expertise of SEO, SEM, and website design, Yodle seeks to generate leads, driving new customers to small business.

To achieve this, the company first sets up a doppelganger of the client’s existing website.  For example, the TheBodyKlinik’s main website is www.thebodyklinic.com.  Yodle set up a separate mirror site for the business at www.thebodyklinic.net.  Made from a template designed to optimize conversion rates, the page is also extremely SEO-friendly.  This helps the page rank highly on google search results (although some maintain that duplicating a site’s content will cause both to be dinged by google).  This sometimes also results in two similar client webpages: exhibit a and exhibit b.

Second, the company sets up a separate phone number for tracking purposes: notice that the phone number on the .net site is different than the .com site.  This allows Yodle to gather statistics about incoming calls and monitor the ROI.

Third, Yodle purchases online search ads to drive traffic to the mirror site and hopefully drive phone calls too.  Yodle uses predictive modeling to set expectations for how many calls will be generated by a given level of advertising spend.

Additional Services

Yodle isn’t just another SEM/SEO agency.  The company differentiates itself with innovative tools that help optimize a small business’ interactions with prospective customers.  All calls to the tracking phone number are recorded to help the business owner gauge whether staff are dealing with customers appropriately or whether more training is needed.  Yodle also offers consulting services to help plan in-house promotions and address call center staffing issues.

Competition

Yodle’s competition comes in many forms.  First, there are direct competitors like ReachLocal, Webvisible, Weblistic and MerchantCircle.  Reachlocal has $65M in funding versus Yodle’s $15M and both have focused on quickly building out a large and aggressive salesforce. Webvisible has $17M, and Merchant Circle has $14 million in funding.

Companies like Yelp and CitySearch also compete with Yodle.  These business listing/review sites often dominate the search results (SERP) for a business name, and attempt to sell to small businesses ‘premium listings’ designed to drive more customers.

Additionally, each specific vertical seems to have its own set of specialized lead generation companies or directory listings which help small businesses dominate SERPs.  Doctors, for example, can use the service ZocDoc.com to help bring in new patients.

Company Performance

So how is Yodle performing?  Well, if we trust Yodle’s job listings, they currently serve 4,000 customers.  The average spend from each client is pegged around $900 per month but let’s round that to $1,000.  Therefore, Yodle should be doing $4M in monthly revenue and close to $50M in annual revenue.  Much of this spending flows right through Yodle and into Google AdWords.

Googling “Local Internet Marketing by Yodle,” the phrase that appears at the bottom of every site designed by Yodle returns only 200 businesses…let’s hope there’s a flaw to this method of gauging the number of Yodle clients!  Yodle has most recently turned their focus to franchises, which could be a real cash cow for the company.

Potential Acquirers

Yodle’s heavy reliance on search ads immediately rules out yahoo/google/microsoft due to the conflict of interest (remember, when Google bought Doubleclick, Google sold DoubleClick’s SEM division to Publicis due to that conflict of interest).

The big advertising conglomerates (WPP, Omnicom, Publicis, Interpublic) certainly would be interested in Yodle, but Yodle’s focus on local small business advertising doesn’t match the ad conglomerate’s focus on bigger nationwide clients.

Certainly Idearc would be interested.  Idearc is the publisher of the Yellow Pages, White Pages and also Superpages.com, Switchboard.com and LocalSearch.com.  Yodle is eating their lunch.  The problem?  Idearc is currently only worth $52M and couldn’t afford Yodle.

Additional Questions

1) Yodle serves small local businesses by helping them beat their competition to the top of internet search result pages (both organic and paid results).  But Yodle cannot in good faith serve two local competing businesses in the same geographic area.  So what are the competitive limitations on clients?  Can Yodle only serve a single florist across all of NYC?  Or within a specific NYC neighborhood?

2) What is the culture like of a company which grew from a handful of employees to 180 employees in a very short time?  Is there a corporate culture?  Any semblance of stability?

3) Why does the company have no news?  Doesn’t the company have a PR department!?  Shouldn’t they be complimenting their outbound sales team with a marketing/press team to get articles written about how local businesses are embracing new online technologies?  Yodle should help attract customers by getting the Yodle name into every small newspaper across the country!

Interview with the founder: http://www.youtube.com/watch?v=zfJiv7XetDA

Any comments, insights or additional business analysis would be greatly appreciated!

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