When you think of tech-driven disruption, you usually think of cutting the middleman with technology, like how online airline sales killed the travel agent. Today, a new breed of apps and services are popping up to add a middle layer, all in the name of simplifying access and helping small businesses gain new customers.
The trend started with Groupon several years ago, where, in order to increase the sales and foot traffic of small business, Groupon offered its users special deals at these businesses. Users loved the savings but businesses struggled to make it work for them. “Success” brought them traffic, but not revenue. Gradually, businesses began to be smarter about what deals they would include in a Groupon and users became wary of restrictions. Eventually Groupon frenzy died down. As Harvard Business Review pointed out: “ Groupon’s spectacular rise and fall is a story of a business model that misaligned the incentives of Groupon and one of its key constituencies.”
Reading about a new service that helps fitness fanatics find new places to work out I couldn’t help but be reminded of Groupon’s rise and fall. ClassPass is a new service that for a monthly fee of $99 users can attend an unlimited number of workouts in a certain area. Yet, while the number of workouts is unlimited, the service isn’t really without limits. Class sizes are limited and gyms have stopped offering certain classes on ClassPass because they fill up without ClassPass’s members. It’s “better” in terms of profit and customer satisfaction for the gym to fill up classes with its own members. These are members who are loyal to the gym and who pay more for each class than the gym receives from ClassPass for that space. So gyms take their most popular classes off the ClassPass reservation app.
Does this sound familiar? Open Table also has this problem. Reserving a table with Open Table is easy and convenient for diners. Open Table promises restaurants not just online reservations, but also additional diners and better marketing. Yet Open Table has been criticized for charging restaurants what they perceive as “too much” to book a table (around $5 to book a table for two.) So, what do popular restaurants do? Take their most popular seating times off Open Table. Why should restaurants that have patrons clamouring for a table pay to seat those patrons? They won’t and the best proof of that is the booking system that Alinea’s owners developed based on their needs and their customer needs. Alinea is now selling these systems to other restaurants with similar needs (i.e. with hard-to-get reservations.) It’s a better solution for them and their customers.
A few weeks ago I wrote about an appointment booking app called “My Time,” which aims to be a centralized booking place for beauty, medical, pet, home, and fitness appointments. It aims to be the “Open Table” of everything except restaurant reservations. Its challenge is to get businesses to work with it so that consumers will make it their booking app of choice. But again, businesses will remove the more popular times and most requested professionals from the app if they can book these times without the app for free. Consumers will abandon the app if it doesn’t provide them access to the businesses they patronize. It’s a vicious circle.
Going back to HBR’s analysis of Groupon: it’s all about misaligned incentives. The booking apps should take into account the entire ecosystem and not just consumers. Consumers are happy with ease of use and “friction-less” booking (i.e one user ID for many businesses) and this is something these services do well. Yet businesses are only happy when they are more profitable with the service than they were without it. Please both and you have a winner.