Scoutmob tries to outdeal Groupon
“When people look at this space they see it as a zero-sum game,” said Payne, who has heard all the naysayers since launching his Atlanta-based company last year. “They see it as Groupon’s raised a billion dollars in private capital and some (other) companies have raised one, or ten or twenty (million)… how can they compete?”
Payne said the group-buying, or “local,” space is large enough to accommodate newcomers such as Scoutmob, DailyCandy, Gilt City, SCVNGR, GroupPrice and others. He added that Scoutmob is part of this “next wave” of deal sites that are following in Groupon’s oversized footsteps and changing the business model to better suit their clients.
“I think what’s happening is that Groupon started allowing local merchants to really monetize and drive traffic in a measurable way and that was a baby step into something much larger,” said Payne, whose service uses Groupon-type deals, but makes them free to consumers and charges business owners $2 per converted customer, compared to the 50-percent cut taken by Groupon (on a typical $25-for-$50-worth-of-food coupon, Groupon pockets $12.50).
Scoutmob works primarily as a free mobile app on an iPhone or Android device. Users scan deals by city (currently available in Atlanta, New York and San Francisco) or neighborhood and then redeem the virtual coupon when they arrive at the business, just as they would do at a bar using Foursquare. An invoice is issued to the business for every confirmed check-in.
Its 500,000 users pale in comparison with Groupon’s 70 million or with Living Social’s 26 million, but Payne said Scoutmob is at least doubling its user base every six months and projects hitting 1.5 million by year end.
To reinforce that goal, Scoutmob announced today it has secured its first funding round of $1.5 million from venture capital firm New Atlantic Ventures. The money will be used to triple Scoutmob’s 25-person staff and bring the discounting service to 10 more cities: Austin, Boston, Chicago, Los Angeles, Seattle, Portland, Washington, Dallas, Denver and Nashville.
“Obviously this is a very busy space in the market with a lot of copycats,” said Thanasis Delistathis, co-founder and managing partner of New Atlantic Ventures, adding his firm does about 5-6 deals each year. “We’re of the opinion that over time, the margins in the Groupon-Living Social model will have to come down because they aren’t sustainable.”
Chicago-based Groupon, which raised $950 million in January and has been reportedly valued at $25 billion, generated more than $760 million in 2010 revenue. Living Social, based in Washington D.C., recently raised $400 million, has been reportedly valued at $3 billion and expects to make $1 billion in gross revenue in 2011.
Scoutmob is the offshoot of another Atlanta-based company Payne started in 2008 that built customized WiFi accounts for local businesses, just like they have at airports and hotels. At the time Groupon had just started to catch on and sales reps for the company were hitting up the same merchants Payne was working with.
“We started to get a look behind the scenes of what the costs were for Groupon and what was actually occurring,” said Payne, who calculated Groupon was making about $30,000 per day in Atlanta, which he believes is the same figure they currently make per city each day. “We thought, whoa, $30,000 worth of revenue, that’s not a sustainable model. It’s going to last a long time because Groupon has such a lead and they’re so well-funded, but over time all that has to occur is that another business has to prove measurability – that they drove people into a business – and they’re going to start eating away at Groupon’s margins.”
Scoutmob’s success will hinge on how happy it makes the small businesses that use its technology.
Mark Kelly, co-owner of New York restaurant Tree, has tried more than a dozen daily deal sites and has been impressed by both the kind of clientele Scoutmob brings in and its low cost.
“In my experience the people on Scoutmob spent more than the people who came to us through Groupon,” said Kelly, 32, who launched the East Village bistro with his cousin at the start of the recession four years ago. He added they’ve used Scoutmob twice in the last six months and both deals combined will potentially bring in more than 2,000 customers.
“I know how hard times are out there, but we’re doing okay and Scoutmob definitely helped with that.”