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Nieman Journalism Lab
Pushing to the future of journalism — A project of the Nieman Foundation at Harvard

Deal brokering: Perhaps America’s next top (news business) model?

[Our friend Michael Skoler wrote this post for Mizzou's Reynolds Journalism Institute, where he's currently a fellow. It's on deal brokering — sites like Groupon or Woot that connect sellers to buyers by offering time-limited deals. He thinks it could be a big part of news organizations' financial future, and we thought you'd be interested in seeing it. —Josh]

How does this sound? A million-dollar revenue stream that requires only a salesperson or two, some web support and off-the-shelf e-commerce and newsletter tools? It caught my eye. And I’m suggesting you steal the idea for your local news operation fast before national competitors own the market.

The idea is deal brokering. You use your knowledge of the local scene, your brand and your contacts to negotiate group deals with local businesses from bars to restaurants to dry cleaners. The businesses offer big one-time discounts to attract new customers, your audience gets access to great deals, and you broker the deal on your site and get a substantial cut of the money. It’s already happening around the country.

Online startups like Groupon and Living Social offer one local deal a day, which is conveniently pushed to you through e-mail or cell phone.

Each deal is usually 50 percent off or more, good for just one day, and specific to your city. I’ve seen deals on organic food, massages, hair styling, dry cleaning, acupuncture, dental checkups, online book printing, gym memberships, belly dancing classes, and much more. Yet the most common deals, and probably the best sellers, are restaurant, bar and entertainment gift certificates. I have yet to see a deal repeated.

The beauty of the model is its simplicity. It is easy and fun to see one deal a day, presented with humor or sparkle. I dislike lists of deals provided by groups like Travelzoo.com or Restaurant.com that require combing through offers to see if any are relevant. And the new deal services make it easy to buy the day’s deal and share it with friends. They also provide incentives to get people to share the deals through their social networks.

Here’s how a single deal with a local restaurant works from the customer’s perspective. After registering for a daily email or text message, one day I see a $65 gift certificate for a restaurant I’ve been hearing about — price is $30. I click it, buy it with Paypal or a credit card and receive a certificate with a unique deal code. I go to the restaurant, show my gift certificate on paper or cell phone, and have a great meal (since food always tastes better at a 50%-plus discount.) I can only use the certificate once, so I order a little more than its value and pay tax, tip and the amount over $65.

Now, here’s the value from the restaurant owner’s perspective. I pay nothing upfront for marketing to thousands of people in my area. I receive half the money collected by the deal-brokering organization. Typically, I can count on maybe 25-30 percent of the people who buy the certificates to never show up. The money I receive should cover my actual costs for food and drink for the 70-75 percent who redeem the certificates. Any spending over $65 gives me income at my regular prices. My restaurant is busy, word-of-mouth buzz rises, my serving staff get tips on the full bill and some of those new customers come back again at full prices.

Now, here’s how it looks from your news organization’s perspective as the deal broker. I have a valuable new service to offer that can bring people to my site and get them registered for a daily e-mail list. I have a valuable new service to offer businesses in my area — risk-free marketing. On top of that, I get half of the money that comes in on each deal (a percent that can be negotiated up or down.) As we’ll see in a minute, that money can be huge. Plus, I build loyalty and traffic for my site, as folks spread word on the deals through their social networks. And my costs are reasonable – one salesperson or two to manage the program and some IT support for the email newsletter app and ecommerce page on my site. My fulfillment involves sending a receipt with a unique deal code to each buying customer (a feature of e-commerce tools) and sending a list of names and deal codes to the restaurant so the owner can check off codes as they are used. (Don’t want those codes used twice!)

And what’s the income? A restaurant in Minneapolis, Minnesota offered the deal described above through Groupon and 860 people bought it. The deal earned a total of $25,800. The restaurant got $12,900, Groupon got $12,900 and the deal buyers potentially saved over $30,000. According to Mark Desky, vice president of marketing for Groupon, deals have ranged in cost from $3 for quick food restaurants to $450 to rent an exotic car for a day. He says one deal for tickets to the Chicago Auto Show attracted 15,000 buyers.

The businesses that I spoke with loved this deal experience. They received actual money, rather than being asked to provide free gift certificates in exchange for ad spots or radio mentions of their businesses. They immediately see the results of the promotion. And they say some customers are coming back again.

If your news organization can average a deal like the restaurant example above every weekday excluding holidays, you can earn over $2.5 million annually ($12,900 x 200 days). For a small organization in a small market, maybe you average 86 sales a day (one tenth of the volume) or $258,000 annually before expenses. And, of course, you get the added benefit of building your online community and extending your relationships with local businesses.

I’ve described one system. But you can be a deal broker in many ways. Ask your audience what they want to buy and then go out and cut a volume deal with a computer seller, a broadband provider, an airline, a theater, grocery stores, events… anything. You get closer to your audience and learn what they want, which is helpful in selling other advertising. Or ask local businesses if they bought too many goods and want help clearing the inventory fast. For local startup news organizations, even occasional sales like this might add desperately needed cash and a new revenue stream.

There are many online or mobile coupon services, from Yowza to Coupon Sherpa. But deal-brokering is different. It is about community and buzz and that means strong local news organizations potentially have an advantage over national startups. They know their audience and their market, have relationships with local businesses, know which businesses are high-quality and buzz-inducing, and can promote the deals and the brokering service on their media platforms, whether in print, radio or online.

In fact, Living Social partners with The Washington Post, placing its deals on the paper’s online “Going Out Guide.” Living Social CEO Tim O’Shaughnessy says his company is interested in local news media partnerships. And he argues that companies like his have an advantage in deal brokering, since Living Social produces some of the most popular Facebook applications and knows how to serve online communities. O’Shaughnessy says deal brokering involves customer service — something he feels is thin for local news outlets. (Folks interested in exploring partnership should contact Jake Maas.)

Groupon says it has a patent pending on its model. But patents must be for products or processes that are unique and it’s hard to see how Groupon can claim to have invented group buying or online sales of discounted products and services. While executives at both Groupon and Living Social agree the model seems straightforward to copy, they point out there is an advantage to being the first to build a deal community in a town. Businesses and buyers like to participate when they see many people in the network. And both companies offer incentives to people to sign up others in their social networks.

Groupon is already in 40 cities; Living Social is in 9. Both are moving fast to enter others. You could offer one advantage to businesses by paying them faster — Groupon pays in three chunks over 60 days. Living Social says it pays within 10 days.

Instead of watching startups take over yet more of the advertising that now goes to news organizations, let’s move fast to seize this opportunity. I would love to hear your thoughts on what it would take to implement this for your news site and what other forms of deal brokering might excite your audience.

                                   
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  • Short sighted

    No mention of the class action lawsuit filed against this company for allegedly violating Illinois gift certificate law? No mention of its partnerships with companies like Brite Smile? It’s almost like the folks at Harvard didn’t do any original research and just took spoonfed PR writeups.

  • http://tgdavidson.com Tom Davidson

    What’s “Short sighted” is reflexively dismissing a really interesting potential revenue method.

    That sort of “that’ll never work because…” thinking is one of the reasons newspapers have largely lost the innovation race. (Besides, of course, the desperate desire to cling to monopoly ad models, of course.)

    Michael, your precis is quite thorough. I’ll add only this for news organizations considering these ideas: Don’t bother developing the software yourself. It’s readily available from any number of vendors. Some will want modest licensing fees (a few thousand dollars a year); others will run the program for no cash up from, just a few percentage points of each sale.

    It’s still not a slam dunk, mostly because programs like this need aggressive sales reps, and most at newspapers are (sadly) mere order-takers. But you’re right in highlighting social-buying programs as something to try now before the national players seize the space.

    Oh, and @Short sighted: Remember that any idiot with a lawyer can file a lawsuit. And if you ever cashed a paycheck from a journalism organization, I guarantee you that part of that money came from people you would also find disreputable. (See also “car dealers.”)

    -tgd

  • Michael Skoler

    Tom, Thanks much for suggesting that news organizations can license software at reasonable prices. If you have some co’s to suggest, that would be great. Clearly, we need to make it as easy as possible for local media to try deal brokering. I’m exploring whether any programmers might be willing to write and open source an application for this. I’m also happy to provide advice on marketing the service, drawing on my MBA and experience as a business consultant.

  • http://albertsun.info albert

    Unfortunately, the most appealing part of this model is that attaching it to a local news organization adds nothing to it. The newsroom will just drag it down and it can be much more financially successful by just ignoring local news.

  • http://erik.wordpress.com Erik

    @Tom Davidson – are you referring to platform providers for newsletter and ecommerce software, or are there providers that specifically do this kind of groupon functionality? If the latter, could you provide names of a couple? thanks!

  • http://dnextra.info Teddy Carr

    Hi I too would be interested in hearing about software. There is one called bloopio by a couple of harvard kids, they look like they should be at the skateboard park instead of the boardroom.

    But the internet marketers are hitting this idea big time. So there is money in it.

    Niche marketing is a big thing and I can see small companies will be able to generate big time traffic just like the big guys putting up a loss leader to get the people in the door.

    I thought the article was informative but it did tease a bit by talking about software and then not following through.

    The sale of software is changing every day and that in itself needs a big story. Small specifit ‘scripts’ are now a normal part of the internet. See the wordpress explosion. They too have a deal of the day type plug in available now.

    So thanks for writing on this subject and I wish you would write some more articles and investigate the software and script phenomenon.

    thanks
    teddy

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  • Tom Davidson

    All – It’s tough to recommend any specific software or tech group because needs vary. This goes beyond the usual big media “we need bulletproof tech!” (which means mature tech company, and more expense) versus “we can fly with a startup!” (which often means faster/cheaper).

    For instance: Can merchants do their validation and redemption only by PC? Do they need real, live human phone support? Can phone IVR work instead?

    Or a biggie: Do you need the tech firm to provide the credit-card processing software, or are you set up to handle the CC transactions yourself?

    And what’s your anticipated sales volume? (Small for a local blognet, potentially thousands of deals a day for a major daily or TV group.) Can you afford the cash up front for a licensing deal (which allows you to keep more of the deal in the long run), or do you want your tech partner to assume some of the risk (and a bigger chunk of the reward) by doing it all on a percentage-for-service model?

    All these (and more!) make it tough to recommend any one-size-fits-all solution. There’s a whole range of providers, and you should check ‘em all out. Start with Analog Analytics, Tumblr, Dealicio. But do a thorough Google search, too – it’s been about three months since I did a thorough look at the space, and I guarantee more very able competitors have emerged.

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