Friday, March 18, 2011

Rewarding Expertise In The Local Referral Value Chain

If you follow these very loose assumptions, they make this story fun. Ever since the online directories such as Yelp, Insider Pages, and City Search came onto the scene it has been clear that the $11 Billion/Year US Market for local referral is up for grabs by just about everybody BUT yellow pages. With 29.6 Million small businesses in the US, that means that every business has about $4000 that they are going to stop using on yellow pages and start using on something else.
Q: Who will they give it to?
A: People who bring them "Patrons".
The Local Referral Value Chain
There is an ecosystem in which people find out about places they might like, end up going to that place, and then go back to that place often. I call this ecosystem "The Local Referral Value Chain". Customers go to places, most likely because of a referral from a trusted source like a friend or some other authority. In this value chain, businesses try to make themselves available to referrers that are local and trusted because they are more likely to grow their business by converting those one time customers into regular repeat business that love what they do. I call the trusted advisers that people respect and listen to "Experts". I call the holy grail repeat customer, that every business would love to have, "Patrons".

Before the series of tubes we call the internets existed these trusted authorities were food critics in the local newspaper, and they could be relatively successful in targeting locally because everybody read the local newspaper. If a business impressed the local food critic, and got a good review, people would respond! Most people trusted the expertise and objectivity of the food critic as a journalist, and the businesses benefited by the fact that there was a local source for informing customers about new places. Right now picture in your mind Mad Men drinking 3 martini lunches.

Today we have a little different situation, and newspapers are on the decline. In the ever expanding void that has emerged by these media properties, online foodie blogs, e-columnists and internet journalists have seen large growth in readership. Representation of this important role of informing the public about new places in local markets is becoming essential. People love the fun and casual approach many of these writers take, and they have become trusted by the local community.
Q: So where are the foodie blogs, e-columnists and internet journalists represented in the value chain?

A: They are being ignored.
SEO Driven Referral Is The New Yellow Pages
In the olden days of yore, the other way for a customer to find a local business was to walk over to the big yellow book and flip through the pages, and for a very long time every business knew that they must be in the yellow pages so that new customers that may not have an expert referral could still find their business. This essentially was advertisement.

In 1996 Kris Hagerman created the first internet based directory and called it Big Book, which is where I worked as part of the forward thinking BigBook 3D project, GTE Yellow Pages later acquired the company. What few people in the Yellow Pages business understood was that this was the beginning of the end for their ilk because search engines made the entire internet a directory. Directories had to offer more than just a indexed set of advertisements, people needed to add value with their opinions. Yelp became a phenomenon, it was based on creating a more social approach to an online directory, and adding local aspects via geocoding and mapping. Crowd sourced directories with individual sentiment was clearly an improvement on Yellow Pages, but it does little more than extend the concept of a directory with SEO and a crowd sourced sentiment referral system.

Q: What is the difference between the Yellow Pages and Yelp?

A: Google.
SEO driven referrals are great for the internet, just do a Google search and pretty quickly I can find the place I am looking for, get some basic idea about what the business does and how to get there. It is a bigger better Yellow Pages! The problem arises when I try to actually understand the business and determine if its a place I would like to become a "Patron". The volume of reviews creates a signal to noise challenge when trying to figure out the truth. The quality of the review is also commonly questionable, yes real people have shared their opinions but are they people I trust?

Verdict: Reach is broad, but trust is low.

Just Here For The Deals
Deals are great. Who doesn't like getting something at a great price? When deals came onto the internet referral playground they offered businesses an easy way to engage new customers quickly, and with the viral aspects of the web, deals could spread like wild fire. Got an email address? You are ready to receive great deals every day! Add on top on that the extreme horizontal marketing of social deals and a business that had slow Thursdays now has to hire another server to support the new traffic. Wow!

Q. What happens when the deal is over?

A. Nothing.
Getting a deal is great, but once the deal is over what really makes you want to come back? If you only came for the deal in the first place chances are that you did not come for some other reason, like because you love the business or what they do. There is no sense of trust or authority in the deal referrals, so the customer does not really care about more than how much they saved. Deals are great to get people into the business but they do little or nothing to build long term customers that will become "Patrons".

Verdict: Great at engaging customers, poor at converting them into "Patrons". Zero Trust.

Badges, Location and Checking In
At SXSW 2009 Foursquare made a big splash by providing a service that let people check in to the places they go to unlock badges, much like Boy Scout might earn for being a good fire maker, or selling enough cookies. It was fun to compete against your friends to be the "Mayor" of the joint you frequented to play darts and drink beer, and my first beer was free! Neato.

Location based systems (LBS) are an enormous improvement in the value chain proposition. First of all they are automatically locally targeted because their systems rely on the emergent support of GPS on mobile devices that started in 2009. Mobile devices were growing in their ability to provide interactive real time "in the field" connections between businesses and customers, even if that connection is a check in or a "like". With LBS systems I can see where my friends go, so its almost an automatic referral, and game mechanics make exploring the world a game. There are some distinct advantages to the dynamics that LBS systems provide in the The Local Referral Value Chain.
Q. How do the social aspects of LBS build upon expertise?

A. Very Poorly.
Social does not equal expertise. While we trust our friends more than we trust 432 strangers, we don't trust them as much as a person who's primary mission is discovering new places and objectively explaining them to people for their common benefit. Experts provide a valuable service to the community that social and local just cant fulfill alone.

Verdict: Better targeting, improved engagement towards patronage, but trust is still not at expertise levels.

Notice A Pattern?
Every single one of the models I have mentioned in the Local Referral Value Chain do have one thing in common though. They want to replace the position of the expert as the primary referrer in local markets with their own local solution. This is an ambitious goal, and usually these companies have to hire large sales teams in those local markets to "push" their solution as a potential referrer to the thousands of local businesses in each market. Groupon has roughly 2400 employees, Yelp has roughly 3200, with the lion's share based in sales. Local is tough! If these companies want to penetrate they have a real problem of sustainability and sales management.
Q. Is there a way to reach local markets without a giant sales force?

A. Yes. Engage the experts in each market and make them a integral part of the Local Referral Value Chain.
Be The Glue
What if instead of cutting the local experts out of the chain, someone recognized their crucial role? What if said "someone" provided them with a simple platform to integrate referrals directly into their properties while also allowing them the ability to maintain journalistic integrity? Add the local reach of LBS systems with the old school power of trusted sources and you have the best parts of the value chain all in one place! Instead of trying to become the referrer, become a platform that enables the local referrer to do what they do best, tell people about great places in their area.

So it took us little time to get here, but with all good stories its in the telling right? Without getting into the details of exactly what RateCred is building in this very public forum, we are willing to trumpet from the highest mountain top that experts are the new frontier in local. We are building the glue to makes it easy for experts to get a piece of the value chain without sacrificing trust, making it fun for patrons to find out about that expertise, and finally leveraging that expertise locally and then giving businesses a way to reach those patrons and build reputation with loyalty and rewards.

Its a big goal, and we are starting small by working mostly in the Bay Area first, but in the game of The Local Referral Value Chain we think its the winning BBQ sauce. If you are interested in knowing more about what we are building just contact us!


  1. great stuff. It was great to have you here last week and review/ approve your apps for the Adility platform. Excited for you and we are looking forward to seeing more innovation from your end!!