• by Paul Jones , October 1, 2012

Do what I did after learning about Cause Rocket. Take the palm of your right hand and put it 2 inches (about 5 centimeters) above and to the northeast of your right eyebrow. Then with a gentle push, pop yourself right there on the head. 

At the same time utter the word, “D’oh!”

I pulled a Home Simpson when I saw Cause Rocket, a Silicon Valley startup that has a deal-of-the-day business model like Groupon, Living Social, or Google Offers, only without the margin-killing discounting or the brand-destroying offers of its better-established competitors.

But, importantly, with the addition of cause marketing.

We all know the stories and business models of these deal-of-the-day websites. Groupon was founded as The Point, a kind of social initiatives website. It quickly pivoted to become the Alpha deal-of-the-day website.

Groupon’s business model relies on a large sales force that fans out across the country (and now the globe), approaching mainly smaller merchants and service providers in local markets to offer them a kind of Faustian bargain. Groupon will advertise to its subscriber base a killer price for, say, $60 worth of meat for just $30. (This was the first Groupon that I availed myself of when it entered my market).

Groupon and the butcher likely split the $30 evenly, leaving both parties with $15 each. The deal isn’t activated until a predetermined number of people put down their credit card numbers. LivingSocial, Google Offers and the myriad other competitors offer small variations on the Groupon business model. For instance, Google Offers doesn’t have a local sales force the way Groupon does.

You don’t have to think too hard about the challenges these kinds of deals pose for local businesses. My butcher got a tremendous boost in terms of traffic. He was betting that once people were in his shop, they’d buy stuff outside the terms of the deal or otherwise become repeat customers, because, in fact, every Groupon redemption actually cost him money.

That is, because of his cost structure and the way the deal was structured the Groupon promotion was a classic loss-leader. Such pricing-based promotions have been around since time immemorial.

Now Groupon and LivingSocial will say in response that I'm framing this the wrong way. Every business has customer acquisition costs and $15 per customer is probably not bad for butcher shops. Moreover, Groupon and LivingSocial are performance-based. That is, you only pay for a customer when you get a customer. My butcher friend couldn’t get the same deal from our local newspaper or radio and TV stations.

But as with all loss-leader promotions, it’s only a good business move if, in fact, the promotion turns a Groupon buyer into an ongoing customer. Otherwise, $15 is just the tip of the customer acquisition cost iceberg.

But just as Groupon and LivingSocial are innovations that disrupt the old business models of local newspapers, and radio and TV stations by being cheaper and more effective, so too does Cause Rocket disrupt the business models of the old deal-of-the-day websites. 

Here’s how Cause Rocket is different.

Suppose you are in the quick-change oil service business, and your basic service is $30. At Cause Rocket, you set up a page and determine your offer. Let’s say that you decide on 40% going to the local food bank, although you can pick any charity. Forty percent of $30 is $12.

When someone signs up for your offer, Cause Rocket takes $30 from the customer’s credit card and deposits $12 to the charity’s account. Cause Rocket takes 3.75% for its fee and 3.75% for credit car processing with the rest going to the merchant. In this example that would be $2.25 for Cause Rocket and the credit card fees, and $15.75 for the oil change service.

As with Groupon et al., there are no upfront fees for doing any of this, which is a huge advantage for small merchants and service providers who've been burned when advertising in local newspapers or radio and TV.

The difference is that Cause Rocket changes the split … and disrupts the old deal-of-the-day models … by relying on charities to serve as de facto affiliates, recruiting new merchants and service providers.

If there’s a weakness in Cause Rocket’s business model, it might be here: The charities that are good at cause marketing is a relatively small list, perhaps 500 nationwide. Even so, I’ve long expected that there’s a Pareto principle at work among these cause marketers; probably the top 20% of those 500 cause marketing charities account for perhaps 80% of the dollar value of all cause marketing. And those 100 charities are much better at working with big companies than small ones, where Groupon and LivingSocial and, presumably, Cause Rocket will live.

The only notable exception that comes to mind are the charities like the American Cancer Society or the American Diabetes Association, that have a headquarters and then some number of regional or even local offices. Those kinds of charities tend to do a lot of event production and spend a lot of time in front of small businesses. Cause Rocket would be perfect for those kind of charities.

To me, Cause Rocket meets Harvard Business School Prof. Clayton Christensen’s definition of disruptive innovation: it creates a new market and a new value network, with cause-marketing playing a major role in that.