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

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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.