Back of the Envelope | Jonathan Wegener's Technology/Marketing Blog » shopping

Framework For Thought: Aggregators

Jonathan — Fri, 23 Oct 2009 04:18:36 +0000

This post about competitive dynamics has been stewing in my mind for months now and it’s still a work in progress. At its heart is a framework for thinking about a common type of tech company: the aggregator. The aggregator takes disparate items, gathers them, and presents them as a unified front.

Aggregators can exist for both content, products, or services and there are thousands of examples 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).

There’s often one key value that these aggregators offer: convenience. They provide a one-stop shop for customers to find what they’re looking for without going to dozens of different places. The ability to sort and compare items is also an important feature present in most aggregators.

In almost every case there’s an 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 that restaurants participating in OpenTable build the OpenTable brand rather than the restaurant’s own brand. It’s very true, but what can be done when the aggregator has gained a critical mass?

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 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 — dozens of flight and hotel planners compete for attention of the same travelers. #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 which was an ad network aggregator (and when that didn’t work AdMob 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 tens of thousands of restaurants on Seamlessweb suddenly going to unite to form their own online ordering system and destroy Seamlessweb? Not likely. But 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 negotiation power in the form of 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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Part one: Startup Spotlight: Mobile Spinach

Jonathan — Mon, 22 Jun 2009 21:59:24 +0000

(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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Store Shopping Is Dead.

Jonathan — Thu, 25 Sep 2008 19:22:44 +0000

Offline shopping is dead. Amazon.com killed it.

I’m a diehard Amazon fan, as friends can attest. The lovefest started in late 2005 with a free trial of the (then) brand new Amazon Prime service (tip via slickdeals.net). Whereas previously only orders exceeding $25 received free UPS Ground shipping, becoming an Amazon Prime costumer gave free two day shipping with no minimum order. I was impressed. But Amazon was primarily a bookstore..and I didn’t really order books that often.

When my toothpaste started running low, I turned to Amazon and was pleasantly surprised to find that had it! Two days later, 7.8 ounces of Colgate Total 12 Hour Multi-Protection Toothpaste, Plus Whitening Gel arrived at my door.

Total cost? $3.59.

Amazon had me hooked. In the months that followed, Amazon became my go-to-source for everything: books, electronics, medicines, soaps, shaving cartridges, shirts, pants, and even Muffin Makers (or rather a singular Muffin Maker. Or maybe Muffins Maker?).

One of my stranger Amazon.com purchases

Amazon’s prices are competitive. The huge selection which can be promptly delivered to my door with one-click of a mouse makes the Amazon.com user experience an unbeatable one. And their $4 next-day shipping option has also come in handy (keep in mind that $4 is the cost of a shopping expedition via a round trip NYC subway ride).

When I needed a new shower lining last month, I knew I had two choices:

1) Make a trip to Target: Walk 20 minutes to the store, wade through heavy crowds, navigate a cryptic and unfamiliar store layout, pray that they even have shower linings in stock, and then wait in a long checkout line, walk home.

2) Go to Amazon.com, search, quickly scan user-reviews, and then place an order with a single click.

I’ll stick with Amazon.

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