Nick Kozak for the Toronto Star
Case Studies

New Brunswick’s Spinzo redefines Toronto group buying from Saint John, but merchants are wary

Vital Stats
CEO:
Emmanuel Elmajian
Address:
337 Rothesay Avenue, Saint John, New Brunswick, E2J 2C3
Contact:
1-800-798-2595
Website:
www.spinzo.com
Field:
Online group buying
Years active:
Less than 1

In mid-2011, at the height of the group buying boom, over 100 companies — including big guns Groupon, WagJag and LivingSocial — flooded the Canadian market with deep discounts on everything from solar panels to Botox treatments.

But the high-flying sector crash-landed when too many ill-prepared merchants were unable to handle the sudden onslaught of business, leaving a multitude of furious customers in the trend’s wake.

Today, group buying has a tarnished image and its offerings are difficult to sell to merchants and customers alike.

This gloomy history only encouraged Emmanuel Elmajian, a 28-year-old systems design engineer and a former Google employee, to launch Spinzo — a merchant-centric take on the group buying phenomenon — in October 2012.

He sees the chaos as a prime opportunity to redefine group buying. But Elmajian will have to overcome established competition, a saturated marketplace, and the wariness of both consumers and merchants first.

“To break through we have to let people know that we’ve fixed the group buying sector, the way that Google fixed search and Facebook fixed social media,” says Elmajian, who launched with $700,000 in investment capital, including $500,000 from Atlantic region venture and innovation funds and $200,000 from private investors.

The company, operating from Toronto but based in Elmajian’s hometown of Saint John, N.B. — where labour and office costs are relatively low — is so far meeting its main goal of running 12 deals in its first two months of operation. These include dinner at the famous Toronto dine-in-the-dark restaurant O.Noir, a Segway tour of the city’s historic Distillery District, and a discounted old-fashioned barbershop experience.

“We’re starting out slowly,” Elmajian says, noting that each deal has so far sold between five and 60 units. “I’d like to see more sales, but revenues are picking up and we’re right where I suspected we’d be.”

The Spinzo approach improves on first-generation group buying with what Elmajian calls “dynamic pricing”: prices start high and decrease as more people sign on. This gives buyers an incentive to spread the word, encouraging a viral effect.

The model also favours merchants far more than other group buying companies. Some require retailers to give a 50 to 90 per cent discount on their offering while also taking a 50 per cent commission. In contrast, Spinzo gives its dealers full control of pricing and the number of vouchers sold, and takes just 10-15 per cent of sales as commission. It also covers the significant costs of processing credit card transactions.

While other companies often ask featured businesses to provide one-time, blockbuster deals, the Spinzo strategy is meant to create friendly, long-term relationships with merchants who are featured several times a year. This means more exposure and a better chance of scoring repeat customers.

The approach was built around the research Elmajian conducted while writing his business plan. He found through his anecdotal evidence that about 80 per cent of merchants had lost money and did not gain a significant number of repeat customers through group buying, and were unhappy with the experience overall.

“I want merchants to be excited to work with us and to call us when they have a new product or event they want to push or test market,” Elmajian says.

Which is partly why Spinzo is starting so small. The company has only five full-time employees, including two Toronto sales representatives, and Elmajian visits each participating merchant himself to strengthen relationships and cement deals.

According to Theo Peridis, professor of strategic management at the Schulich School of Business, many entrepreneurs are attracted to the group buying business because it’s easy to duplicate and has low entry barriers. This makes for a flooded marketplace.

“If the market doesn’t quickly see the difference, the company will die,” says Peridis. Group buying is also an expensive business, he notes, because merchants rarely sign on for long-term agreements, making each sale a one-off. This means a large sales force is needed to keep money flowing.

While Elmajian is confident the Spinzo approach will catch on, his more urgent concern is being heard above the noise from competitors.

To this end, the company has contracted Toronto marketing and PR firm Punch, whose clients include American Express and Skyline Hotels, to craft its messaging. They’ve so far been concentrating on connecting directly with consumers with giveaways and by sending their colourful mascot, the Lycra-clad, cape-wearing Captain Spinzo, to high-profile Toronto events such as Taste of the Danforth and Kensington Market’s Pedestrian Sundays.

But despite all the effort, Elmajian is anxious.

“We need a bigger mouthpiece,” he says. “We could put $100,000 into a massive campaign, but we’re striving for a situation where people love the concept so much that they refer us to their friends.”

They’re making progress. The company started with 2,000 members recruited from pre-launch promotions, and is now close to 3,000. It’s a far cry from Groupon’s tens of millions of subscribers, but Elmajian is satisfied with his business’ early stage growth.

“Being heard in a space that is so crowded and that is full of negativity is a huge challenge,” he says. “We’ll overcome this, but it’s going to take some time and creativity.”

EXPERT VIEWS

As Interviewed by: Tom Henheffer

There's a big market here — in 2012 $415 million was spent through these sites in Canada — but competition is stiff. There are 140 group buy websites in Canada, plus 40 aggregators similar to Spinzo, half of which are in Toronto. So Spinzo needs to take another look at their business model and ensure they concentrate on the retailer, not the consumer, as their customer. That's what differentiates them from the other websites. Once they do this, the company should focus in and service a narrowly-defined geography. Toronto is very competitive, so maybe they should look to Montreal, Ottawa, or even Mississauga, and align with a very specific target consumer group. Their offering now is just too disparate to attract business. But if they go after a demographic, say 25-year-old university grads who live south of Bloor street, they’ll be able to present the group to retailers trying sell to it and greatly strengthen the sales pitch. This kind of focus will be key to success, because it will enable them to serve merchants far better than any of the competition.

by Peter Conrod - RBC

This business model has some major problems. Many retailers have been burned by group deals, and the industry has received some poor publicity. But since Spinzo lets retailers set their own prices, their business is less group buying and more couponing. That exposes them to additional competition — Costco offers a similar service and already has a large following through its membership program, and there are all the traditional online coupon resources, plus traditional coupon-book businesses. Spinzo has a tough road ahead, but that doesn’t mean this business can’t work. It does have a win-win sales pitch and a sensible value proposition. That gives them a shot, so in the end it’s really just a numbers game. This means the CEO can’t be out selling to every merchant individually. That business model takes to up too much time. He needs to take a risk and hire a legion of salespeople, or a direct marketing firm, to pitch retailers with the expectation of generating enough cash to make a viable business. It’s the only way that Spinzo will have a chance.

by Steve Tissenbaum, Ryerson

This sector has a low barrier to entry, which attracts lots of competition, and it appeals mostly to people looking for a cheap, one-time deal. That makes it tough to create repeat customers and long-term value. Spinzo’s trying to change this by putting more power in the hands of merchants, but it still needs to offer discounts steep enough to actually attract an audience. That’s a tough balancing act, and the key here will be moving upscale. This means finding deals no one else has. But, at the moment, the offering on their website is pretty unexciting. Improving will require scaling back on consumer outreach, spending more time contacting merchants, and working hard to develop long-term relationships with those merchants. This will take a long time, it won’t be cheap, and they’ll have to be careful or it also won’t be scalable. The trick will be keeping the cost and time per acquisition low so Elmajian can grow at a reasonable rate. If he’s successful, and lands deals in which consumers see a real value, then the company has a shot. Otherwise, I don’t think they have much hope.

by Mark Simpson - GBC

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