What BuyWithMe (And All Daily Deals Companies) Could Learn From Woot

BuyWithMe, a daily deal site on a mission to live up to its own name, announced massive layoffs this week. The company had over the past two years been among the biggest acquirers of smaller daily deal competitors. The strategy was to bulk up its subscriber lists through these buyouts and then gun for big funding to compete more aggressively with market leader Groupon and runner-up LivingSocial. Groupon has big venture capital and institutional backing (and an IPO road-show said to start next week). LivingSocial has Amazon, which bought a chunk of the company last year. According to the reports, BuyWithMe let go 55% of its work force to reduce cash burn.

Drastic, but not entirely surprising. We here at Street Fight and other media sources have been calling for a big consolidation in the daily deals market for some time now. But consolidation can take two forms. To date, that has been acquisitions. Going forward, there may be more outright closures. I discussed this a bit in a column about how the middle of the daily deal market would hollow out and small-time mom and pops would survive along with the big guys but not much in between. What is perhaps most troubling about the reports from the BuyWithMe layoffs is that even insiders admit that no one knows how to make money with daily deals over the long term.

But in fact, some people do know how to make money with deals. Woot did an amazing job in the daily deals space before getting acquired by Amazon last year. What Woot was trying to pull off, however, was far less complicated than what is being attempted in the local deals space right now. Woot was a very low cost business. It sold one deal each day with one side deal. It stocked nothing. It had no accounts payable — the transaction was entirely pass-through. Woot had no expensive sales teams. Woot did not have huge escalating budgets to pull in subscribers. Woot did not have legions of copy writers. It was a lean, mean profits machine. Amazon bought Woot in the summer of 2010 for $110 in cold, hard cash.

What is perhaps most troubling about the reports from the BuyWithMe layoffs is that even insiders admit that no one knows how to make money with daily deals over the long term.

There are some daily deals shops out there that look more like Woot and less like BuyWithMe. BlackboardEats is one of my faves. They don’t take in user cash upfront. They offer great deals in the form of discounts, which is nice because you don’t have to worry about prices inflated specifically for the daily deal offering as reported by Thumbtack. They only offer food, which I love because I’m a foodie. I am certain they do not have legions of sales people. I am not barraged all over the Internet by their ads. It’s a nice business.

Which brings us back to the crux of the matter. Namely, the lessons of efficient business structures. It is far, far harder to launch a business that relies on a business structure with very high upfront expenses to get to scale. When daily deal sites decided they needed to be in dozens of cities, launching more than one deal each day and launching deals targeted to neighborhoods and specific user needs, they basically bought into an extremely capital intensive ramp structure. Perhaps if Groupon had not gotten competitors it could have run the table with a very small sales force, but that’s water under the bridge.

Groupon and LivingSocial may prevail. And they are doing interesting things and deserve kuods. Their models, as they evolve, will probably work and probably look great. But I love the guys like Woot who build it cheap, lean and profitable, without having to worry about huge marketing spends and juggling accounts payable with incoming cash to make sure working capital is sufficient. BuyWithMe is the cautionary tale of trying to build these empires on the fly.

Alex Salkever’s Personal Fight column appears every Friday on Street Fight.

  1. October 21, 2011

    Great Post Alex.  I think you are right on point.  When big investors got involved, putting $30 million or more to work the expectations made for an unnatural ramp.  Its hard to make money when you pay a bunch of top notch sales people and clever writers what they are worth at $10 and $20 deals.   The Daily Deals business is morphing for many reasons but there is a niche truly local business.  It may not be pretty or easy but it can be a profitable business. 

  2. October 21, 2011

    I’m glad that you brought up Woot, because I believe that it was the model that the Groupon team copied. Woot predates Groupon by years (it was founded in 2004), and it pioneered the “one-deal-a-day with funny copy to sell the product” model. Groupon is basically Woot for local merchants–the key difference being “local”, which is why Groupon and other daily deals sites need so many salespeople and copywriters.

  3. Matt Rutledge
    October 21, 2011

    Thanks Alex! I enjoy your fresh perspective and acknowledgement of Woot’s precedence. You are correct about our focus on profitability and efficiency; I’m a classic bootstrap style entrepreneur and know no other way.  However, the specifics of our success are not just “lean and mean”, the specifics are actually ROI of massive investment in “owning your supply chain” which involves B2B operational process knowledge and relationship skill sets.  You see, Woot does purchase, stock and supply all of our deals. We have accounts payable and we are not often operating with a cash cycle to our advantage as we have a fully operational wholesale distribution division that carries the accounts receivable of the retailers we supply.  

    Efficient, yes. Profitable, yes. Minimalist, not entirely; that’s just what you see.

    also, $110 bucks?  ouch.

    Matt Rutledge
    founder & ceo, woot

  4. Jim
    October 21, 2011

    Halfoffdeals,com is another one of the deal sites that pre-dates groupon and remains profitable without big time investors.

  5. February 2, 2012

    As the number of deals grow the maintenance grow also. Keeping deals fresh and available are not easy without a handful of people to keep track of the deal changes and merchants offers as well as all customers activity. If you’re good in handling those mentioned above then it might be the best business for you.

  6. joeflyde
    April 23, 2012

    Ultimately, there will be two market leaders, we are pretty close to being there now.


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