Offermatic Takes On Groupon With Automated Deals

Like a lot of people, I’ve been taken a little aback by the incredible success of Groupon, the deal-a-day site that Google recently offered $6 billion to buy–only to be rejected last week, for pete’s sake. Estimates of annual sales, all thanks to the 50% cut it takes from deals offered daily by local merchants around the U.S., range from $500 million to an almost unbelievable $2 billion (and indeed that is believable only if it’s gross revenues, of which Groupon gets half or less).

For all that, no small number of people have questioned various aspects of Groupon’s business, from wondering if it’s a fad to asking whether merchants ultimately will find the deals profitable enough to continue. A new deal service launching today from Sunnyvale-based startup Offermatic provides some potential answers to those limitations–while raising some questions of its own.

I can’t really offer a better description of Offermatic than the one Mike Arrington at TechCrunch provided last May, when Offermatic began beta testing: It’s the freak love child of Mint (the online finance tracking service now owned by Intuit), Blippy (a service where you post your purchases to the world), and Groupon. So for example, if you spend $75 at Home Depot one month, you might get a $20-off coupon from Lowe’s–deposited automatically in your credit-card account. More details from Offermatic:

For consumers, Offermatic provides a simple and powerful way to save money automatically through their existing credit or debit card – without the need for coupons, codes, and vouchers.  By signing up for the free service online and linking one or more cards, Offermatic anonymously and securely reviews purchase history and identifies highly targeted and relevant money saving offers from merchants. Offers are between $5 and $100, and rebates are applied directly to the user’s debit or credit card after a purchase is made. No coupons needed.

For merchants, better targeting equals better results. Offermatic is the first company to enable permission-based targeting of consumers based on their actual spending history – the “spending graph.” Rather than broad targeting of promotional offers, merchants can now use precision hyper-targeting, improving conversion rates by 10X – 100X over existing online or offline targeting methods. Offermatic’s tests with top retailers yielded a 14.5% conversion rate on offers made to customers – an exponential improvement over average conversion rate of .5% – 1% via other channels.

Here’s a video of how it works:

The big challenge for consumers, of course, will be whether they trust their credit card number to Offermatic. But they already showed they’d reveal numerous financial accounts to Mint, which sold to Intuit a little over a year ago for $170 million. Offermatic uses Yodlee to manage the back-end financial account integration, same as Mint. Still, the trust factor means it could take awhile to get the critical mass of millions of users–really, tens of millions–that would be attractive to marketers.

If that happens, though–and that’s a big if–Offermatic offers potential advantages to marketers over Groupon or even, for that matter, most Web advertising. Purchase history is about as powerful a clue to future purchases as anything behavior targeting can come up with, and with none of the privacy or regulatory baggage of the latter. What’s more, says CEO Faisal Qureshi, marketers can track how many people who took an offer became customers and how much they came back to spend.

Qureshi says 70 of the top 100 retailers, including Target, Wal-Mart, and Starbucks, are testing Offermatic. Despite Offermatic’s rather grand claim of providing an alternative to advertising, I think none of those companies is going to dispense with its branding ads, which are the majority of their spend, for direct-marketing like Offermatic. But the company offers some interesting advantages if and when they get over the consumer trust barrier.

Like Groupon, Offermatic takes a 50% cut of deals offered–which, as with Groupon, seems high and destined to fall as competition proliferates. Its $750 million seed round early last summer came from Kleiner Perkins, Bessemer and several angel investors. Qureshi hopes to raise a little more seed funding before pursuing a Series A financing in the next quarter.

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