Zixxo Follow Up: Funding Thus Far, a Coupon's Nature, Penetrating Local
I had a few more questions for Mike Hogan following my posting of the Zixxo interview.

Mike, I'm still not convinced that your affiliate and API strategy is going to drive penetration rapidly, but I guess if Zixxo figures out a partnership model for Merchant Circle, and others serving local business folk we'll see significant penetration for you.

My hold up in thinking you'll see a growth spike lies essentially in the fact that people still use the print yellow pages so much. I don't have solid data, just Sterling's anecdote about print yellow page usage in a Microsoft reception area.

I think you're in a slow-burn space, which is not a bad thing at all, and I'm confident that you *will* see growth.

You would certainly see a spike however if any of your upcoming partnerships happen to be with companies whose names start with a G or a Y.

Anyways, I hope my upcoming interview with a Yellow Pages exec will give me and my SEL readers a better idea of those folks who still reach for print when seeking phone numbers.

Here are Hogan's answers, and Mike thanks again for your quick response!

How have you paid yourself and your team for the last three years?
We've been earning sweat equity… not much cash, lots of sweat. Three of our developers work other jobs, so we have largely paid them in equity. Despite their other jobs, they put in 40+ hours a week each. The remaining team has worked some outside consulting to keep the revenue flowing, actually trickling.

What is the nature of a coupon?
A coupon is a promotional offer that a business provides to customers in order to encourage behavior that is favorable to the business. The key to success is to determine (a) Your business objective, what you want to achieve; (b) What you can offer that sufficiently "rewards" the customer.

What is it transactionally?
In terms of the transaction, the business offers the customer some value to encourage certain behavior and the customer trades that behavior for the value in question.

When does it work?
A coupon works when there is a fair trade between the value offered and the behavior that is rewarded. For example, if the average customer purchases $50 worth of product from me, and my gross margin is 50%, I might offer $10 off of purchases of $100 or more. Essentially I am trading a discount in return for larger purchases. But my business benefits because I pay $10 to get $25 in additional profits (50% of the additional $50). So my business grows its profits by $15 per coupon using customer, and each customer gets a $10 discount. In addition to growing my profits, I may attract more customers who want to take advantage of the deal.

When does it not work?
Coupons don't work if they don't clearly convey to the consumer the behavior you wish to encourage. For example, an early Internet company negotiated discounts from vendors and then discounted the savings, unbeknownst to the consumer, at the credit card company. In essence the business paid a discount that was "invisible" to the user. Because it was invisible, it didn't drive any consumer behavior. Needless to say, it didn't work. In fact, it prompted me to write this article "Coupons: More than just a discount."

Who should have coupons who don't use them now?
Everyone! The key is figuring out what behavior you want to encourage and what you are willing to offer in exchange for that behavior.

What are coupon creation best practices?
(1) Use ZiXXo

(2) Make a fair offer of value in exchange for favorable behavior

(3) Define an end date (eternal coupons can really haunt you)

(4) Determine whether the deal is a one-time offer only or you want them to get the same deal every time. We offer "limited use" coupons to encourage 1-time behavior (for example some restaurants offer a 1-time only coupon to get people to try their food. The second time, they must pay full price.)

(5) Put as much information into ZiXXo as possible (selling points, locations, hours of operation, payments accepted, even menus). You want to sell value, not simply price.

Users can search by coupon ratings - how will you prevent sellers from voting for themselves?
We won't. In order to rate coupons—and get the limited use coupons—the user must be registered and logged in. We do email validation for registration. So we assume that sellers will rate themselves highly, once, but with large numbers of users, that will balance itself out.

How do you incent ratings and votes by users?
We're still thinking about this.

I've seen success with social systems like Yelp, Judy's Book, and others. These folks reward users with social recognition from their peers for reviewing vendors.

In reality, we're not sure how much people will use our native ratings, because our goal is to syndicate the coupons to sites like Yelp, Judy's Book and everywhere else. So the actual consumers may never see or use our ratings, they may use their native ratings and reviews.

Hopefully, some day someone will provide a ratings system that spans all of these sites and ours.

How can an API/affiliate strategy really give you the penetration you need in the local market place?
Our API/affiliate model encourages everyone to operate in their own self-interests.

Let me give you an example: A yellow pages company sells a quarter page ad for let's say $1,000 per month. The merchant has no idea whether it works though. How can they track its success?

The yellow pages company then sells the same merchant a premium listing in an online yellow pages for $50 per month. Now they can show how many clicks and page views that merchant gets. But what is a click or a page view to the local plumber?

Now, assume that same yellow pages company encourages local sales people to include a ZiXXo coupon for a complete advertising solution. Now every day that local plumber gets customers redeeming coupons. The merchant now gets a daily affirmation that their advertising is working! Those 50¢ coupons reinforce $1,050 in monthly advertising spend with that yellow pages vendor.

In reality, those coupons may be found and printed from Yahoo, AOL, MSN, or any number of other sites, but to the plumber, that yellow pages advertising works. As a result, offline and online advertising companies should be eager to lock-up local businesses for coupons through ZiXXo to reinforce their other advertising.

This is just one example, but by enabling enlightened self-interest, our API/Affiliate strategy can be huge.

Garrett French - MarketSmart Interactive | permalink | +marktd |