The Business Insider report that local merchants can purchase a Google Adwords ad at 1/10 the price on Patch.com’s rate card, and still get Patch.com placement isn’t a revelation. It confirms the reality of excess premium inventory that plagues traditional media display advertising, and the ease of gaming the media buy system to get the lower rack rate. The trick is to purchase a Google Adwords ad, target the zip code of the desired Patch.com site, and specify Patch.com site as a “managed placement” in the Display Network.

According to the Patch salesman in the BI article, his client qualified for a $2 CPM rack rate that beat the salesman’s $20 book rate.

The worst part is my client is getting ads at a $2 CPM and getting impressions. I saw his dashboard. The whole point of Patch was that it was local but Google just has you put in your zip codes and then your ads launch.

My client did the math and they paid $20 for a cpm when I sold it.

I don’t know how Google gets Patch ads cheaper than I do but I can’t do this any more. It isn’t fair to the clients that pay the whole amount from me.

The divide between book rate and rack rate threatens publisher credibility at a time when local businesses are demanding two types of advertiser accountability. First, they want relevancy that their ads are being displayed only to their target customer bases, not shotgun to the annoyance of the general public. Second, they want to pay only for results. CPM based display advertising, like commercials and banner ads, focuses on traffic quantity over traffic quality and delivers neither the targeted relevancy and nor a guaranteed performance based pricing schema beyond “minimum pageviews”.

Google Adwords, Twitter’s new Promoted Tweets product for SMBs, Facebook ads, and even Groupon, all deliver relevant geo-targeted consumers on a pay per performance basis. These social media ad networks will pressure traditional local publishers to match their offerings on price and accountability. The inherent dilemma is local publishers need to connect to these established social networks for the consumer profiling required to deliver relevant advertising. How do publishers staunch the flow of local ad dollars to these ad networks when they can’t offer the same kind of Facebook profile matching services?

The media companies are building their own marketing services groups to show their clients how to advertise, and use social media. The Hearst Corporation, the owner of media properties including the San Francisco Chronicle / SFGate.com, developed Local Edge, a Hearst Media Services company, to provide a comprehensive portfolio of local business marketing services ranging from Search Engine Marketing to premium directory listings. Local Edge has succeeded in signing on the media marketing arms of other publishers, like DMNMedia tied to the Dallas Morning News.

Beyond big media’s foray into developing a new marketing services layer, a new generation of startups will help local publishers compete by adding value to the ad placement supply chain. Patch.com and a number of media companies, have partnered with PaperG to facilitate the ad creation process in real time so their sales teams can accelerate closing the deal with local merchants. Many publishers work with white label deals publishers to deliver daily deals to their readers. We see new social media marketing agencies like Hearsay Social and Main Street Hub competing with big media to supply local business services. In sum, these solutions make it easier for small business to participate in a new world of social marketing that extends beyond the banner ad.

The dark side of the Daily Deals phenomenon manifests in three main problems vendors have with Groupon:

• Groupon can overwhelm small merchants when it sells too many coupons. How can a Chicago nail salon accommodate 5,100 new coupon holders?
• Groupon depresses profit margins. Obviously deep discount coupons are marketing loss leaders for local retailers. On a corporate scale, it’s quite possible that the big Groupon deals like the nationwide $25 for $50 worth of Gap gear might significantly hit Gap’s earnings. Never mind that the loss might be a wash with lower marketing costs, in the end the consumer perception of retail prices dropped 50%.
• Retailers bemoan the rise of Groupon and the deal sites because they inculcate a culture of “don’t buy retail”. Everything can be negotiated. Brands become diluted as they become perceived as deep discounters and new customers tend to be non-loyal price shoppers.

Here are ten more Groupon problems by Kevin Eklund.

Solution

Retailers have no solution to the new “don’t buy retail” culture because the cat is out of the bag. Although certain types of business can maintain a service proposition – medical, legal, professional – that can’t be commoditized, retailers are now in face to face conflict with their most cherished mantra- ” never compete on price”.

The combination of the recession’s low consumer demand and depressed retail margins will force retailers to change the coupon game in the following ways:

• The budget for couponing will grow at the expense of other marketing and advertising channels. Coupons are performance based and their instant campaign feedback is easier to assess and more accountable than figuring out the ROI and CPM for a banner ad campaign.
• Many local retailers will stop going with massive Groupon campaigns in favor of more controlled couponing campaigns by local coupon systems. This will allow the retailer to test various campaign ideas without the risk of oversell. The key factor for the retailer is in assessing how a service performs in delivering coupons to their target local audience, and a local service may be more efficient and less costly.
• Coupon campaigns will look to scale. The big national campaigns, and even regional campaigns are far more profitable and easier to manage for Groupon. Brand retailers like the Gap will be able to negotiate these attractive deals and play Groupon, LivingSocial and other systems off each other.
• Retailers will demand lower pricing than the standard 40-50% of coupon face value that Groupon charges. From a retailer point of view, a coupon delivered to the same local customer with a couponing service that charges a 30% fee is better than one that charges 50%. Although the service may have smaller coupon distribution, they can run deals more often.
• Discounted offers must be validated with good crowdsourced reputation, or they will be perceived suspiciously as a cry for new business. Retailers will understand that maintaining coupon campaigns will require consistently good Yelp reviews because buying coupons is a site unseen decision.

UPDATE: 9/16/10: This article is intended to address some of the criticism that accompanies the Daily Deals movement that Groupon sparked. Readers of this blog would know that I support this movement. It is revolutionizing local marketing by creating a performance based metric for advertisers. I believe Groupon is the front runner in developing a real time localized transactional system that will eventually cover hotel rooms, concert tickets and airplane seats by addressing the need for selling off perishable goods and services at the last minute.

That said, based on comment on my Facebook page, I do think the Groupon / Gap deal was a huge success because it put Groupon on the map, and tipped consumer sentiment to the obvious value proposition of online coupon advertising. Yes, the Daily Deals movement does depress retail margins, but it’s inevitable. Intermediation is what the Internet does best.

Groupon‘s nationwide rollout of $25 for $50 worth of Gap merchandise got a lot of mainstream media airplay and sold 441,000 Groupons, netting $11 million. The net effect is the mainstream buzz that introduces Groupon to America. The “daily deal” is becoming institutionalized as the advertising medium most compatible with the Great Recession.

Here is what the Groupon + Gap deal will spark:

• More national deals. Think Office Depot, Best Buy, Home Depot, or Apple Stores where the sale of higher ticket items over $100 can justify a $25 for $50 deal. Groupon and other coupon players can layer on national deals on a limited basis so they don’t alienate their local business client base.
• National and regional retail chains now have a medium for brand revival. Can a loss leader Groupon strategy create enough traffic to generate supplementary sales, or even stave off seasonal financial problems from the one time coupon receipts?
• Shopping malls and local business associations can now systematically round robin “daily deals” among their stores in order to deliver foot traffic.
• The spawning of national deals that don’t require redemption at the physical retail level. Think infomercial products, Dell PCs and other electronics, and odd lot inventory.

Groupon has shown they are more than just a local restaurant play, and it’s frankly more market efficient to produce one national Gap campaign to complement the hundreds/thousands of local campaigns they do daily as their bread and butter.

One fallout about the Gap campaign is the prospect that everybody will be wearing the same Gap clothes this fall!

Techcrunch posted this video interview in which Twitter product manager Shiva Rajaraman discusses how Twitter using its @earlybird couponing channel can work with brands to offer perishable deals on the fly (something we discussed last week):

At first blush, Twitter faces three hurdles:

1. @earlybird is positioned as another Groupon/LivingSocial/BuywithMe/etc., and couponing is becoming commoditized. So far, @earlybird hasn’t differentiated itself to be anything other than a Groupon clone.
2. Brands can leverage Twitter (the platform) itself to develop perishable deal opportunities; companies or ad agencies don’t need to contract with Twitter for additional advertising leverage, they can contract more efficiently with the appropriate media channel. Twitter remains the platform but isn’t necessarily the ad distribution media. For example, real time perishable deals, like same day hotel rooms or air travel, or concert tickets, are generally localized opportunities. It makes more sense to work with hyperlocal media channels and their Twitter feeds to offer these kinds of deals to a market.
3. Following up on 2), Twitter and @earlybird are essentially national channels. @earlybird will be best positioned to offer deals for global, not local coverage. Although Rajaraman offers examples on how brands can potentially create on the fly campaigns, it’s hard to imagine any ad agency or corporation being able to sign off quickly on an instant national deals. Again, on the fly deals work best on a local level.

Couponing exploded the first half of 2010, driven in part by Groupon’s big VC investment. Coupons.com reported almost double the revenues from the first half of 2010 over previous year. PromotionalCodes.org.uk published a forecast on mobile applications and couponing (click twice on graphic to enlarge) that predicts consumer spending on mobile coupon will grow from $90 million in 2009 to $6.5 billion in 2014.

Couponing drives mobile applications by delivering tangible consumer financial benefit together with ease of use  (coupons are storable data that reside on the device, no need to have scissors handy).

Here is where mobile couponing is headed:

1. Grey market coupon marketplaces:

A secondary “Stubhub” market for Groupon coupons is developing with DealsGoRound and CoupRecoup. Since coupons are storable data, not eBay products, coupons can conceivably be delivered from seller to buyer instantly with Paypal approval. In a future scenario, consumers will be able to find a destination restaurant and search through the grey markets for a coupon while waiting for the waiter.

2. Real time coupon advertising systems:

Coupon advertising can be developed for real time distribution, similar in concept to the Japanese build to order manufacturing process. Ski resorts facing lean crowds due to poor skiing conditions will be able to instantly distribute 1/2 price ski lift tickets on the evening of a snowfall to entice impulse skiers onto empty chairlifts. Restaurants with few dinner bookings will be able to distribute coupons throughout the afternoon usable instantly.

The best real time coupon advertising engine will be built as a marketplace like eBay with functionality that allows local businesses to post their deals quickly and monitor them in real time.

3. “Minority Report” Ad Billboards

The movie Minority Report demonstrated customized audio ads targeted directly to passing pedestrians, and in the movie, personalized to the identified person. In June, a company erected 27 digital billboards in Tokyo train stations that can digitally identify the sex and age of the onlooker and serve ads based on the profile.

The 2002-released movie made one Slate reviewer cringe at advertisement bombardment and the implied lack of privacy at the time, but shift to 2010, and societal adoption of personal transparency on the social media starts to make Minority Report ads enticing, particularly if consumers can save money. It’s like finding a $20 bill on the sidewalk.

The future delivery method for pedestrians can be txt, alert via a mobile app, as well as audio or personalized billboard presentation. The startup that can aggregate geolocated coupons and develop effective non-intrusive delivery methods (I don’t want to hear 10 beeps per block) will win.

4. Consumer demand systems

The big problem with search engines is simply their inability to efficiently find the product or service one wants to buy at the best price, particularly on a local level. Try googling “tennis racquet sale in San Francisco“; you’ll see that it’s impossible to find a local sports store with a sale going on. The startup that creates a data system that can access and catalog local business inventory from major chains (or even scrape chains’ online circulars) could deliver instant consumer solutions to shopping needs. For example, a query for a “Prince tour diablo tennis racquet” would return sales data (or coupons) from participating sporting goods chains and make it easier to find the best deal.

5. Real time inventory management on time-sensitive goods

This is the enterprise variation of 2.) Real time coupon ad systems. Time-sensitive, or perishable goods include airplane seats, hotel rooms, ski chair lifts, and concert seats that optimally are filled to 100% capacity. Mobile couponing systems can provide real time inventory management that gradually discounts based on time to expiration. For example, concert tickets would be discounted after the concert starts for impulse buyers. These systems would essentially reward last minute buyers with discounted rates, instead of socking them with highest possible fees. It allows consumers to drive into a city at 10:00pm and find the best hotel room deal.

Why might this work? People now schedule in real time and time flexibility is valuable. If the business systems can cater to consumer real time needs, it will not only foster good will, but it will also efficiently increase occupancy rates. Think about this… wouldn’t you love an application that really offered great last minute deals?

Related articles:

The New DIY Advertising

How Groupon forces Mainstream Media to Adopt the Couponing Ad Model

Local Coupon Aggregation

Brand Advertising doesn’t Fulfill Real Time Consumer Needs

In the 1960′s new media was television, and Madison Avenue evolved to show companies how to leverage the media through advertising. Advertising is now mostly associated with the commercial, a one-way message from company to consumer delivered via various media channels. We’re pleased to see Jeff Jarvis pronouncing this kind of advertising is “fucked”.

The evolution of social media as game changing marketing media is finally being evidenced by companies like Ford and Audi, which are both using Facebook to launch their new Ford Explorer and their Audi A7 today.

Like the Madmen who redefined brand advertising in the 60′s, a new corps of social media marketers is finally evolving within the major ad agencies after years of taunts that they either didn’t get it or more likely, didn’t want to jeopardize their established lucrative hold on corporate advertising budgets. It’s a reactive strategic move to remain relevant.

Social media marketing has proven to be far more amenable to ad hoc DIY solutions than traditional ad campaigns that require more extensive creative and media placement expertise than a Facebook page. More companies will develop their social media campaigns in-house because it’s the interaction between the company and its customers that counts, not as much between the ad agency and the customer.

At the local level, social media – based marketing applications will be more influential because small business didn’t use ad agencies. DIY advertising solutions are being developed by Adility and Wildfire that facilitate businesses in building promotional coupon campaigns. Using these tools, small business can create their own campaigns and solicit their own “media buys” like WildRivers in Irvine is doing with independent Breaking Irvine News:

Related articles:

Brand advertising doesn’t fulfill consumers’ real time needs

Google is talking about interactive video ads at this weekend’s Allen & Co. conference. Today, Twitvid is launching its video advertising platform over Twitter (press release). What’s important to know about video is that there is already an institutional history of the video format in the form of the :30 television spot.

Like television, the social media will act as broadcast media that will distribute the “video spot” over the channels – Facebook, Twitter – that are replacing television eyeballs. Even more promising are the upcoming geolocational marketing opportunities for local merchants who will be able to upload video, coupon deals and other content like menus on mobile applications like Yelp and Foursquare. Those first mover merchants who develop compelling media content will be rewarded with Facebook “likes”, the new currency for customer attraction and search results.

We’re now reaching the stage where the instant video upload for business starts to make sense. Remember the old Seesmic video conversation platform that Loic LeMeur took down last summer 2009 because he concluded video conversation adoption by the public was limited? I agree carrying on a video conversations may still attract a limited audience, but the ease of uploading video from iPhones etc. now makes it much more easier to develop video messages on the fly. For example, it would be easy for a chef to iPhone video the day’s dinner offerings and broadcast/post it via a social media distribution system like Posterous across the restaurant’s Twitter and Facebook feeds each afternoon:

It takes time for consumers to understand and adopt new media. The concept of Twitter was alien to most, until Oprah made Twitter accessible in April, 2009. The use of adhoc video for business messaging is still alien to those who believe video production quality standards are high hurdles, but pioneering businesses will soon figure out that audiences are more interested in the real time message being delivered in “living color”.

Thanks to the growing buzz of local couponers Groupon and its cohorts, consumers are being exposed to and adopting the deep discount coupon opportunities in their neighborhoods. The next step in the evolution of local coupon advertising is aggregating all the coupons and displaying them in lists and on maps. The one stop shop approach compiles daily deals so consumers don’t need to subscribe to each individually via email, Twitter, Facebook, etc. The newest and best example of local coupon aggregation launched last week in TheDealMap, a  service by the Center’d group:

TheDealMap not only aggregates the coupons from the Groupon-type Daily Deal promoters, but allows local retailers to add their own deals. Greg Sterling provides a comprehensive description of TheDealMap’s features.

What’s next for local couponing?

Truly mobile coupon redemption

The new online coupon processing models still use a form of “clipping” that forces purchasers to print out their coupons for redemption. Services must do away with the print model so coupons can be purchased on the spot and redeemed via screen bar code. Groupon and others have been restricting use to start one day after purchase so that their clients don’t receive deep discounts that cannibalize profits. Expect less discounted on-the-spot couponing to emerge that will still get customers in the door.

Multimedia / video couponing

Replicate the infomercial. Anybody that will sit through an infomercial and purchase a product (and many do) will potentially do the same on an online video presentation. Expect local retailers to repurpose marketing campaigns that would have used TV media by applying their TV ad budget to a deep discount online video offer. Media campaigns would be easy to embed in the current couponing systems.

Value-add local advertising models trump banner ads

Local advertising now works in real time too. We’ve discussed the problem with traditional brand banner-style advertising that provide little immediate incentive to a consumer who wants either a direct monetary benefit (discounts are “instant money”) or a quick solution to locating the neighborhood stores where they can buy a product most cheaply.

Pre-internet, local newspapers made the bulk of their revenue advertising sales and classifieds. The demand for local transactional data is no different than 20 years ago. Today, there is immediate value in getting your deal across to a local buying pool in real time because transaction engines like TheDealMap are positioned to become local trading networks. It worked with Craigslist, arguably Local Transaction Engine 1.0.

All the major (and minor) mobile players – Foursquare, Gowalla, Twitter and Facebook – are targeting local couponing strategies. Expect the transaction model based on couponing to morph into new local trading systems for classifieds, delivery services and other daily life necessities.

The spawning of a commercial business model for local media

Local journalistic ventures seeking funding sources can develop affiliate relationships with the coupon aggregators and services themselves. Couponing can provide an immediate quantifiable ROI attractive to local merchants that traditional CPM-based banner advertising misses, particularly when a local venture is just starting up. In fact, any local portal network can add couponing systems to attract consumer audiences monitoring such deals, and to develop affiliate revenue sources.