Mercata Q&A
I get asked a lot of questions about my experience with Mercata. Here are a few of the most popular ones.
Do agree with folks who believe Mercata had a flawed business model?
After Mercata closed, there were a few Monday Morning Quarterbacks who criticized aspects of the business model. Generally, the criticisms came down to the following:
Mercata was too buyer-centric. Sellers don’t like reducing their prices, therefore Mercata could never exceed the savings someone would get at Walmart or Amazon. The answer to this is “it depends on the seller or manufacturer.” It’s true that it was tough for us to negotiate big discounts on high demand products and brands (like Sony at the time) which enforced MAP (minimum advertised pricing). But in 2000, I was a big proponent of focusing the Mercata online store on closeouts and liquidations. Offline companies like Big Lots and online companies like Overstock.com do a great business in this type of merchandise and our dynamic pricing/group buying model would have been perfect for liquidating large quantities of products which needed to be moved quickly. Additionally early successes with our Mercata Marketplace and We-Commerce Network Dynamic Coupons would allow us to offer a diverse group of products and services beyond our basic B2C offering.
Buyers want immediate gratification; they don’t like to have to wait for a few days for the group buy to close. We spoke directly with consumers a lot about this issue. Sure, there is some small segment who needs something right away, so buying that type of item at Mercata wouldn’t make sense. But the majority of customers really liked the “gaming” aspect of Mercata—where prices fell in real time. It added an element of fun and excitement to the buying process—not unlike online auctions.
The concept really isn’t viral. It needed a huge marketing budget to maintain sales. This is completely false. We proved that our PowerBuys were viral by studying the geographic distribution of our buyers over the course of a PowerBuy. Often we could plot zip codes on a map and see exactly how the sale was spreading by word-of-mouth (in many cases, offline word of mouth). And that was many years before iPhones, Facebook, Twitter, and Google+. Today it’s easier (and more popular) than ever to share information with friends and followers. Also, when Mercata launched, there weren’t a lot of cost-effective options for online advertising. At the time, any large-scale online ad campaigns involved multi-million dollar commitments to “portals” like America Online, Yahoo, Excite, and MSN. Google hadn’t hit the scene in a big way yet and search keyword advertising was in its infancy. Today we’d leverage online advertising, social sharing, and content marketing to acquire and retain customers efficiently.
What’s your opinion about Groupon and Living Social?
I was initially excited to hear someone was giving group buying another chance, but as I looked into Groupon’s business model, it became clear that there wasn’t much true group buying going on. The “group” in Groupon is just for show. I’ve never heard of a Groupon coupon not being valid because of too few people buying into the deal.
At the time of this writing, Groupon and its clones are essentially “daily deal” email companies primarily focused on local businesses. Essentially they aspire to fill the void of defunct or ineffectual local advertising media like the Yellow Pages and local newspapers. Their value proposition to the local Thai restaurant is “instead of spending money to advertise in the paper, we’ll get your restaurant in front of thousands of customers. All you need to do is give us half the revenue you receive from the promotion.” On the surface it sounds like a good deal for merchants. Nice exposure. No upfront costs. The promise of repeat customers. Unfortunately many local merchants don’t get the repeat business they expected and some merchants lose money on the deal.
The basic premise of Groupon is to spend a lot of money to acquire email addresses and then to email local deals to this customer base. Some percentage of the list buys the coupon (or technically a “pre-paid voucher”) and Groupon takes a percentage of this sale (between 40%-100% depending on the price of the item being advertised). A sales force recruits the local businesses who make up Groupon’s customer base. The whole thing is not too different from an online Entertainment Book of coupons.
For more info, see these articles:
Bottom line: In their current incarnations, Groupon and its ilk are not group buying companies; they are daily deal companies targeting local merchants who formerly advertised in the Yellow Pages and local newspapers. There is nothing particularly innovative about their business model (as evidenced by the spate of competitors).
What have you done since Mercata?
After Mercata closed, I joined Classmates.com as VP/Marketing where, in 2001, I spearheaded a strategic plan that would recast Classmates into a social network (almost exactly like Facebook—but three years earlier). Unfortunately for Classmates, the company did not implement this plan and is now largely irrelevant. I went on to run marketing for Drugstore.com for a few years where I enjoyed working with (and learning from) boardmembers like Jeff Bezos and chairman Peter Neupert as well as CEO Kal Raman but left the company after those folks moved on. Most recently, I have been running my own company, Bogwood Inc. which provides marketing services to small businesses. I also consult with technology and entertainment clients (such as legendary TV executive Fred Silverman). In my non-marketing world, I am an award-winning independent film director and author.
What’s next for you?
I remain fascinated by group buying, dynamic pricing, and social shopping and continue to study the field. In fact, I’ve recently developed a new business model and company idea for the next evolution in group buying. Interested parties may contact me for more information.
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