Later tonight, OpenTable plans to announce its IPO. The San Francisco-based restaurant reservations system, headed by former eBay and PayPal executive Jeff Jordan, filed for a $40 million initial public offering in February, which then made it only the third venture nationwide to file for an IPO this year.
So how did the company manage 21% growth in revenue since last year and position itself to IPO in such a beleagured market? By forgoing advertising for a subscriptions model and some formidable marketing muscle.
People may not eat out as much during a recession and restaurants may be subsequently suffering, but when diners do make reservations online, they are doing so on OpenTable.com. Or at least more than half of them are.
57% of diners make reservations via opentable.com and the remaining 43% book via the restaurant website, which means that OpenTable provides valuable marketing opportunities to restaurant owners.
Rather than provide its service free and offer restaurants advertising opportunities on the site, OpenTable charges restaurants a one-time starter fee to use their service, a monthly subscription fee, and a per use fee of $0.25 for each reservation created on the site.
When OpenTable announced its IPO intent in February, tech analyst Jonathan Wegener estimated the cost/earnings of the site for restaurants and found that it's the marketing potential that makes a subscription worth it:
The real value that OpenTable delivers, therefore, is the 197 NEW customers generated due to the marketing exposure on opentable.com. Restaurants are really paying $515 to gain 197 new customers, which comes to $2.61 per customer.
Compared to the money that restaurants might spend advertising in print or elsewhere, $2.61 spent to acquire a new customer isn't bad at all. It's in the restaurants' interest to be seen on the site, even if there are paying to be there. And by figuring out the value they are providing to both restaurants and their customers, OpenTable has manged to create a sustainable business model without advertising. A route especially useful when the advertising market is in freefall.