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The Uniquely Difficult Market No Startup Has Been Able to Crack (and Plenty Have Tried)

No one likes waiting in line to pay their bar tab–least of all entrepreneurs.

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BY Catherine Perloff - 08 Aug 2018

The Uniquely Difficult Market No Startup Has Been Able to Crack (and Plenty Have Tried)

PHOTO CREDIT: Getty Images

In the world of bar tech, the floor is littered with peanut shells--and ordering apps.

In recent years, scores of entrepreneurs have founded so-called tab management apps, which offer to erase the friction bar-goers often experience when ordering a drink. Long wait times can be excruciating, and then there's the ordeal of closing out your tab, which can often mean waiting in line again. In effect, these startups want to eliminate your need to ever belly up to the bar again.

The idea sounds compelling--particularly as giants in the space, the Squares and PayPals of the world, don't offer the service. Still, the market has been difficult to penetrate. Just consider the number of bar apps that have tried--and mostly failed--to make a dent. There's Flowtab, Tappr, BarEye (soon to relaunch as on-me), TabbedOut, Coaster, BarBud, Radtab and Noble, just to name a few.

These companies' struggles aren't for a lack of consumer desire for a solution. Graduate student research out of UC Berkeley's Sutardja Center for Entrepreneurship and Technology in 2016 found that 81 percent of survey respondents said they would be likely or very likely to use a tab management mobile app. Yet, these same researchers found such apps had only penetrated about 2 percent of bars and restaurants in the six years prior.

The reasons for the disconnect are varied--and particularly instructive for anyone looking to start up in a market that's as disparate as the bar scene itself.

Know Thy Customer

Like many startup founders, entrepreneurs peddling mobile ordering apps face a chicken-and-egg situation: You can't get venues without first collecting masses of end-users and vice versa.

Jack Cunningham is co-founder of BarBud, which recently launched in Minneapolis. He says if his app has the venues, it can attract users from the bars' existing customer base. "We do think of ourselves as B-to-B and the consumer side comes second hand," he says.

However, J.C. Diaz, president of the American Nightlife Association, a nightlife industry trade group in Washington D.C., says it's the other way around. "If you don't have the eyeballs, how can you sell something?" says Diaz.

Of course, courting customers without having much distribution can be tricky. San Francisco's Flowtab found this out the hard way when founders, Kyle Hill and Mike Townsend, tried to attract customers by offering up free drinks, parties, and Lyft promotions. After raising $50,000 from an angel investor and winning a local startup competition, Hill and Townsend thought they had struck it big. But after a year of trying to get people to sign up, the founders ran out of money and had to shutter.

Hill said that tab management apps need to be available at a huge number of bars before they're attractive to consumers. "We needed half the bars in California to be viable," says Hill.

Do No Harm

Then there's the fact that every bar operates differently. Market research firm IBISWorld found that the bar industry has no major players and is projected to become only more fragmented. BarBud's Cunningham noted that it forces entrepreneurs to devote more time to understanding each venue's unique way of doing things, as bar owners will only adopt technology that does not disrupt existing logistics.

So your first rule of thumb is to avoid requiring too much additional training for servers, who may be skeptical that an app can be better salespeople than they are, says Stephen Maly, director of guest relationships at In Good Company, a New York City restaurant and bar group. "Any change is always scary. It takes time to buy into," he says.

Diaz, from the American Nightlife Association, adds that most critically, the app must integrate with the bar's existing point-of-sales, or POS, system. "When you think of how many POS systems are out there, you have to create an app for each POS," Diaz says. "From a developer's standpoint that would be another huge barrier to entry."

But it's not impossible. Ernesto Rodriguez, the CEO of N-plex, the maker of on-me--the forthcoming reincarnation of BarEye, which first launched in 2010--says he has overcome this problem by partnering with several mainstream systems. The company also employs Omnivore, a platform through which apps can sync up with various restaurant POS systems. Similarly, Varun Pathak, CEO and co-founder of Boston's Noble, has hired a full-time POS engineer.

While these entrepreneurs have found workarounds that may make their apps attractive to bar owners and consumers, some payments analysts remain unmoved. There's a reason why digital payment giants aren't rushing to offer their own tab management platforms, says Scott Kessler, CFRA's director of equity research. It makes sense to invest in mobile ordering to speed up wait times for coffee, something you drink on the go (Square partnered with Starbucks from 2012 to 2016), but not a beer that you'll nurse at the bar for hours.

Kessler, who covers Square and PayPal at the New York City-based equity research firm, is skeptical that small businesses could make the concept work. "This sounds like a feature at best, definitely not a company," he adds.

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