Although the segment was a short one, Gary did try to position Dealfind and the deal space to both the hosts and the audience. However, I do not believe that Gary had the time to say and describe everything he really wanted to. Gary always has pertinent things to say and this format did not really lend itself well to the topic at hand.
One of the points the hosts tried to make was “what are the barriers to entry into this market”; stating that the market is too easy to get into and too much competition. Gary went on to explain some of the barriers in this market that can protect companies like Dealfind from competitors. I would like to add the following:
- Gary mentioned “Scale”. Indeed, there are only a few top players in this industry that have the customer service, the sales operations, the marketing budget and the merchant inventory to really keep going. All others are just surviving. In Canada, the top players are Dealfind, Wagjag, Teambuy, Tuango, DealoftheDay, and Travelzoo. That’s it. Sure there are up and comers like Living Deal, Swarmjam, Jaunt, Buytopia and Social Shopper, but they are not at the level of the top sites. Then there are all the other sites, over 125 of them. It is easy to get into this business just like it is easy to open a retail store. But make no mistake, getting big enough, scaling to the level of Dealfind takes lot’s of money, investment, luck and people. Dealfind has over 270 people on staff supporting customers and merchants. Sites that have 3-5 people simply cannot compete with the level of service or scale that these large sites can provide.
- Customer acquisition: we work with many groups across the country trying to build their daily deal business. There are three cost centers that are obstacles to their growth if they do not have the necessary investment; getting subscribers is one. Nowadays it costs an average of $3-$5 dollars a subscriber…if you know what you are doing. If you want an additional 50,000 subscribers, that’s atleast $150-200,000 worth of CPA marketing. That gets real expensive and only very few deal companies can afford this. Barrier to entry no, but most definitely barrier to scale.
- Merchant inventory: the second cost center is acquiring merchants. In order to acquire quality merchants to run deals, deal sites need to hire sales reps. Hire 4 reps, say base of $35k + commissions, that’s atleast $150,000 in costs at minimum. Is there a sales manager? Is there inside sales or a marketing person or two? Barrier to scale? Most definitely
- Operational costs: Do you need an operations person? How about customer service reps, an office, computers, phones, etc. Entrepreneurs are used to managing operations with low budgets but if a daily deal site wants to grow to a leader position, then significant investment must be poured into the company. Again, barrier to scale, you bet.
- Technology: This is not a business where technology plays a crucial role. At a certain scale, daily deal sites become none other than ecommerce online stores…with great deals every day. As such, technologies that runs daily deal sites are as ubiquitous as ecommerce platforms. It is not the technology that provides the unique advantage for deal sites, rather it is in their execution, their deal selection and their scale.
Here is a related point:
Although there are significant barriers to scale, not every daily deal site needs to compete with Dealfind, Wagjag, Groupon, Teambuy in Canada in order to be successful. Here is my favourite example. Take a very local daily deal site called Surrey.com. They only provide daily deals for Surrey, British Colombia. They are very well known in that city/town, merchants know them, subscribers know them, the media knows them. Surrey.com is operated by a very small team and success for them does not have to mean scaling to $10 million per month. Rather, the owners of that service could have a very nice career if they personally make enough money to not have to go work at another company. Sometimes, making $100k for yourself is just fine…for the time being. Sites like Surrey.com will continue to survive across the country because they are run lean, by a small team and their expectations or illusions of grandeur do not exist.
There are other cost and operational issues that provide obstacles in scaling a daily deal business. However, the above shows a good selection as to why this business, like the online retail industry, is difficult to compete in if you do not have the proper investments in place. There are very few barriers to entry in opening an online store also. I can open one AND have inventory to sell AND have some customers by the end of the day today. That does not mean I will be challenging Amazon at all. I would only become a real challenger if I accumulated enough subscribers, enough inventory, enough sales and built an effective operational team. And that takes both lots of time and certainly lots of money; Something that about 80% of daily deal companies do not have.