Groupon and Living Social have achieved enormous success, generating tens of millions of subscribers and valuations in the billions. But Seattle entrepreneur Jon Washburn thinks these new daily deal titans are vulnerable. The reason? It’s just incredibly tough to scale the local advertising operations to coordinate and manage deals from the corner dry cleaner or local sushi shop.
Washburn, the co-founder of the new Seattle startup Daily Ticket, believes he has an answer to that dilemma: Franchises.
“Instead of having a command-and-control type business model, it is more like a hub-and-spoke where each market operates independently,” said Washburn. He added that Daily Ticket franchise owners, who pay $25,000 franchise fee to buy into the network, have a vested interest in making sure that local merchants are well served.
“You are not going to do something where you go to a spa and sell them 5,000 deals and then the spa is booked out for two years, and nobody is happy,” Washburn tells GeekWire.
Some local merchants have encountered that sort of pain with the big daily deal sites. A recent study from Rice University showed that 32 percent of businesses lost money on Groupon promotions.
In order to combat those problems, Daily Ticket is positioning its owners as strong members of the local communities that they serve. Dubbed “local ambassadors,” the franchise owners will host community events like weekend picnics or BBQs.
At the end of the day, however, Washburn said that the success of the business will be driven by the quality of the daily deals. In his view, a good deal will naturally spread, helped in part by some of the some of the social media magic that the company plans to integrate into its promotions.
Groupon and Living Social are doing the same thing. But Washburn says that “nobody has really been able to create a really strong sticky brand yet.” One of the problems facing the bigger players is that it’s tough for them to establish loyalty among members. A user of Groupon or Living Social, for example, may buy a deal and then never go back to the local merchant, he says.
The franchise model may help Daily Ticket rise above the clutter, allowing the company to penetrate markets that are too small or overlooked by Groupon or Living Social. The personal interaction with a local representative also could help seal bonds.
Washburn does have some experience with franchises.
As the co-founder and CEO of the online real estate community ActiveRain, Washburn has interacted with thousands of real estate agents over the years. Real estate, of course, is built around the franchise concept, with individual agents operating their own businesses under the larger umbrella organization.
The 32-year-old former real estate agent thinks the model is perfectly suited for daily deals.
“The ideal franchise owner is somebody similar to a real estate agent, just by chance,” said Washburn. “It is somebody who is independent. Works from home. A good sales person and knows how to do hyperlocal marketing.”
With the real estate industry in the tank, Washburn certainly has no shortage of qualified candidates to choose from. And he’s hoping to cherry pick the best talent from his network of contacts.
How do the economics work?
Half of the revenue generated from an online offer goes to the merchant, with the other half going to Daily Ticket. Of the 50 percent collected by Daily Ticket, 60 percent goes to the local franchise owner.
That means if a franchise owner sold a $30 deal for a local restaurant, Daily Ticket would collect $15 and then pay out $9 to the franchise owner.
Daily Ticket opened its first market earlier this month, establishing an operation in North Dallas. But Washburn, who co-founded the company last year with former ActiveRain executive Lauren Bernstein, has national aspirations.
He’s taking it slow, however.
“This is a business that potentially — the success could tank it” he said. “Because we have such a strong demand to open up the franchisees, that if we opened up 20 markets all of sudden, then that actually could be a bigger burden than going one market at a time.”
There’s plenty of room to expand. Bernstein says Groupon and Daily Ticket are only in about 200 of the 30,000 cities in the U.S. “There’s a huge opportunity to focus on these smaller markets where they may not be any competition,” she says.
Washburn declined to say how many franchise operations that they’ve sold to date, but he said they are encouraged by the uptake. In fact, things are going so well with people buying into the concept that he’s not sure if he’ll have to raise money.
Just in case, Washburn said he has lined up angel investors to back Daily Ticket.
John Cook is co-founder of GeekWire, a Seattle tech news site. Follow on Twitter: @geekwirenews.