The acquisition side of the fight is currently represented by the daily deal giants.  Groupon and Living Social have proven that they can push a huge amount of discounted customers through a local merchant’s door.

This is a big deal!  For those of us in the web business, we’ve always been able to “buy” customers/traffic from from google.  With a few bucks and some creative keywords, you can get a huge pipeline of traffic flowing towards your online business.  This has never before been available to a local merchant!

In the other corner you’ve got tools that seem more suited for retention.  Foursquare and Yelp are leading the pack, with SCVNGR, Gowalla, and services like TopGuest chasing behind.  These services close the loop with the consumer after an initial purchase.  They know where the consumer has been (in theory), and they know when the consumer returns to a particular location.  This means they can reward the consumer for repeat visits through either discounts, or virtual prizes like foursquare mayorships.

Yes, these lines are not totally clear. GroupOn could be helping with some retention. Mailing a groupon like discount to your existing customers (if you’re tracking them) is a great way to reward them for their loyalty.  Foursquare, on the other hand, is also driving customer acquisition, even if they’re not claiming credit for it (monetizing) as aggressively  as GroupOn.  If you look at the different types of campaigns they offer their merchants, you can see a lot of these help drive new customers via “swarms” and “flashes”:

Ultimately, the value is in the acquisition.  Like I mentioned before, the local world previously did not have access to an on-demand source of customers.  There was no local adwords with access to huge sources of traffic.  GroupOn is growing at an insane rate because companies know they can rely on groupon to drive feet through their door (more on this in a subsequent post), and this is valuable enough to give up a big portion of sales.

Retention on the other hand, will be most valuable when used to prove out the ROI for acquisition, not on its own.  Yes, there will be successful businesses built solely on the retention piece, but they won’t be as big as the ones focused on acquisition.  As with any source of traffic, its only useful if it converts and you can get paying customers from it.  Groupon will not be able to continue at this pace if it can’t help merchants prove that the traffic is converting into regular loyal customers.

All the excitement is about cracking “local”, or cracking the secret to the local advertising market.  There are millions of small business merchants out there that are really passionate about what their businesses, and they want to tell the world. Up until now they were doing things like handing out flyers, taking out ads in local publications, and paying to be in the yellow pages. Some of the more tech savvy buyers have even tried things like google adwords, or claiming their business on yelp, but this is only the tip of the ice berg. The vast majority of local business have not made the jump to online marketing, and here-in lies the opportunity. The world is racing towards providing an advertising or promotion solution to the mass market of small business merchants.  Group Buying is just the first channel to break through and scale.

Self Service (technology) vs Managed Service

Now that we have an idea of what the objective is, lets take a look at the first of two major races within the worl of local; moving towards self service. In one corner you have GroupOn, the local advertising titan. Via a resource intensive / sales heavy strategy they went out into the market and literally pulled local merchants into the online advertising world. GroupOn structured the campaigns, wrote the copy, designed the creative, and most importantly amassed a huge distribution list via a very simple channel, email.  They acted as an agency for their own ad platform.

In the other corner, you’ve got Foursquare, the tech world’s darling LBS service, and one of the best product teams on the planet. They’re going directly for the self service route by building easy to use tools for local merchants . This is a very web / new media approach to the problem, one where “sleezy” sales ( disclaimer, I’m a sales person, so no offense implied) people are avoided, and the simplicity of the product is all that is needed for success.

So how will this race play out? As you can see in the traditional advertising world, agencies (the service layer in the middle) have only gotten stronger, so we will never get to a 100% self service model. On the self service side, there are a variety of tools like ad sense, hubspot, and clickable that have arguably built higher margin businesses going straight to a willing consumer base.

The real key in how this translates into the local space is the merchant, yes the customer. They are the most important piece of the equation, and they are not ready to become internet marketing gurus. In the thousands of phone calls / hundreds of hours spent on the phone with local merchants while at Scoop St, I can tell you these business owners have other priorities.  They’ve got customers of their own, which are a huge hassle, and they have to manage a staff of employees on-site.  Merchants REALLY want to promote their businesses, its a natural instinct for a business owner, but they don’t have time for complicated technical solutions.  To make matters worse, its still unclear to them what the return is on these marketing schemes (will discuss in a follow on post).

Knowing more about the local merchant, its going to take years until they are comfortable enough to use a self service platform, my guess is at least 5 years before it reaches scale.  In the meantime, the companies who have the efficient account managers and sales people on hand to help atract merchants will continue to take the lead.  Groupon and Living Social will continue to grow, and if they’re smart they’ll try to educate merchants to use self-serve platforms.  This services layer will be key!  Value will be created by companies that can build and scale these teams, even if its 3rd party agency like teams that run campaigns for merchants across all platforms.

Months of grueling technical difficulties and pitching investors has culminated in an alpha version of the product. Launch time is near! Doing everything from coding to HR, the founder is spread thin, but somehow needs to find time to get this shiny new product in front of customers.  Isn’t that what “bizdev” and sales guys do?

Thus begins the search for a first sales person. Depending on the amount of capital raised the first sales hire could be a business minded hustler straight out of undergrad or an experience VP of Sales with a big “rolodex” and matching base salary. Regardless, we’ll call them SP1 (sales person 1), and SP1 is hungry.

Armed with the founders pitch deck (one slightly modified from the original investor pitch deck ), SP1 begins to hunt. The excitement permeates across the whole organization as the first customers come rolling in, never mind the early adopter discounts and all the conditional feature requests. You gotta start somewhere right?

Maybe the momentum keeps going for a while, but someone will eventually (this could take years) notices a certain lack of pace (i.e. NO hockey stick), and attention turns towards the sales person.  Did they hire the right person?  Maybe they were too in-experienced, maybe they had too much experience and had previously been relying multi million dollar marketing campaigns to close deas?

Meanwhile, SP1 is acutely aware of the problem, because they spend the most time with the customers.  They’ve probably even started making product suggestions to make more sales.  Trust me, you can’t be in SP1′s position and not know there is a problem, its acute when you’re in front of customers all day.  They start to doubt themselves, but push through by doubling and trippling their efforts.  SP1 starts taking support calls at 2am on a Saturday night, and does days of training to help customers understand the product, but nothing works.

Tension builds between the founder and SP1.  We live in a results driven society, and clearly SP1 is not delivering.  SP1 is wondering what they could possibly doing more to sell this product? Does anyone even want this thing?  Why are things not working?  We built a product, we think its amazing, we launched it,  we hired sales people, we even did marketing?

These startups all ask the same questions, and this is really just the first in a series of many points of friction.  As it turns out this whole song and dance has a name, The Startup Death Spiral.  A man much smarter, and with much more experience than me has been writing about it for years.

This post was just to introduce the concept, and open the door to sharing experiences about this friction.  In subsequent posts I’ll talk about how to better use sales in an organization, and how to make changes when you start seeing the death spiral!