Groupon, Facebook, Google Woo Small Businesses for Local Ad Deals –

SAN FRANCISCO—To win in the fast-growing digital-advertising market, Web companies such as Facebook Inc., Google Inc. and Groupon Inc. are increasingly battling over mom-and-pop businesses such as SF Chinatown Ghost Tours.

Over the past year, Cynthia Yee, proprietor of the San Francisco walking-tour company, has been overwhelmed with calls from websites including Groupon, LivingSocial Inc. and kgbdeals, which provides discount-coupon deals sold on Facebook. All ask her to participate in their deal-of-the-day offers, in which sites typically sell vouchers for 50% or more off goods and services at local businesses.

Stu Woo/The Wall Street Journal

Cynthia Yee says daily-deal offers have brought an influx of customers to her San Francisco walking tours.



Over oatmeal one recent morning, the 65-year-old Ms. Yee was explaining how salespeople from those websites were calling nonstop when her cellphone rang. “Hello?” she said. She jotted down a phone number. “That was another one,” she said after hanging up.

The blitz has worked. In the past 18 months, Ms. Yee said she has run promotions on at least seven different deal-of-the-day websites. That included three on Groupon, which in its most recent sale sold 1,700 vouchers for her narrated tours of Chinatown for $12, half off the regular price of $24. Ms. Yee paid no upfront money, though Groupon took a $6 cut from each sale. She earned about $25,000 from all the daily deals combined.

Ms. Yee, who has run the weekend tours for seven years, said she used to consider it lucky when 10 people showed up. Now there are as many as 90, so she hired two additional guides to help her.

For years, the $130 billion U.S. local-advertising market has largely eluded Internet companies. Now the daily-deal business model has given Web firms a new shot at the marketing dollars of the nail salon and coffee shop around the corner. The scramble to tap businesses like Ms. Yee’s is a hallmark of Silicon Valley’s new Web boom, with high-tech sites like Facebook, Groupon and others duking it out for these low-tech merchants.

In their pitches, Internet companies tout their ability to make deals work for the businesses. “We wanted them to know that we offer some of the fairest and quickest payment terms in the business,” said Dana Palmer, a sales manager for kgbdeals who was present for the phone call with Ms. Yee. The firm sold 400 Chinatown tours two months ago after putting the deal on Facebook and its own site.

“There has been no clearer way to guarantee customers” than deals, said Emily White, Facebook’s director of local initiatives, which began offering daily deals in April.

Hundreds of daily-deal imitators have sprung up since Groupon, which filed for an initial public offering earlier this month, and LivingSocial started popularizing the model three years ago. They include online giants such as Facebook, Google and Inc., as well as Yelp Inc. and OpenTable Inc. Newspapers such as the Houston Chronicle and Miami Herald have also gotten into the business.

Consumers are now spending more time researching products online before they buy them in stores. This gives tech companies new opportunities to take a cut of the brick-and-mortar action. “The deal format is an easy one for consumers and merchants to understand and drive traffic,” said Stephanie Tilenius, vice president of commerce and payments at Google, which earlier this month started testing daily deals in Portland, Ore.

Whether the daily-deal model is sustainable remains unclear. Chicago-based Groupon said in its IPO filing that it had a loss of $413 million on revenue of $713 million in 2010 as the company aggressively ramped up hiring.

Margins for daily-deal sites could also shrink because of increased competition. Groupon has traditionally taken 50% of the revenue from the deals it sells on its site, but it might have to take less as Facebook, Google and others ramp up their services, said David Sinsky, data product manager for Yipit, a website that aggregates daily deals.

Patrick Albus, chief executive of kgbdeals U.S., said his company’s average margins haven’t declined. “Fair revenue splits are definitely sustainable for the kgbdeals business model, and many of our repeat merchants agree with us,” he said.

Analysts caution that there are also few incentives for businesses or customers to use one daily-deal service over another. If the same deal is offered on several sites, consumers have little incentive to choose one site for another. Many of the deals sites say their greatest asset is their brand name and their ability to control the quality of their offers.

Rodney Fong, president of San Francisco’s Wax Museum at Fisherman’s Wharf, for one, is a convert to the daily-deals model. Just three years ago, he said the museum spent a quarter of its marketing budget on newspaper ads. Now it spends almost nothing on print ads, shifting its focus to daily-deal sites. “I’m sold on it,” Mr. Fong said. He said he didn’t yet have data on how the deals affected attendance, but said they have been successful enough that the museum is looking to pursue more such offers.

At SF Chinatown Ghost Tours, Ms. Yee is beginning to turn down some of the sales pitches from daily-deals promoters. “They were getting out of hand,” she says.