Dealmates pivots its way into a stronger footing

• Late entrant to group buying space leaves a jaded business model for flash sales opportunity
• Enjoying 25-30% margins in 2012 with product focus rather than services focus

WHILE speed to market is still considered a huge advantage in the online world, there are occasions when being late to the game can mean that you also see some warning signs early on while your competitors chase the prized market leadership position.
 
The dynamics that made that market attractive in the first place may also change because of the fickle nature of online crowds, and this can wrong-foot even market leaders.
 
This is what is happening in the world of group buying, claims Erman Akinci, chief executive officer of Dealmates.com which until recently was a hungry late entrant chasing the leaders in that space in Malaysia -- Groupon Malaysia and Mydeal.com.my.
 
Dealmates is a joint venture between MindValley and the Catcha Group, with some capital injection coming from Intel Capital, the venture capital arm of US-based technology giant Intel Corp.
 
As a latecomer to the group buying game, launching in January 2011, it went about trying to make up for lost time by spending the first six to nine months on narrowing the gap between the two market leaders. But then around the middle of 2011, Akinci, who is of Turkish descent, says Dealmates noticed that the group buying craze had begun to cool noticeably.
 
“As a result, our conversion rates were dropping dramatically and cost of acquisition was shooting through the roof,” he says. “We also realized that the traditional marketing approach in this game was not going to work as there was no way we could outspend the market leaders as the amount needed was going to be just ridiculous.”
 
Indeed, Dealmates was spending between RM60,000 and RM70,000 a month on its sales teams to bring in the merchant deals -- he estimates an average of 150 deals a month.
 
This was around August, 2011 and for the first time, Akinci and his team (pic) started questioning the group buying model. By this time Intel Capital had come in with its injection of cash and some of that money had been spent. Still, Dealmates pulled back to re-evaluate its model.
 
The brainstorming in the fourth quarter of last year coincided with a trip to the United States for Intel Capital’s yearly conference where it gathers all its investee companies together.
 
While there, Akinci got together with other group buying investees of Intel and during their brainstorm, he discovered to his surprise that even the players who were leaders in their markets were experiencing, “a massive drop in the average revenue per deal” which indicated to him that this was a wider trend than just what he was experiencing in Malaysia.
 
“This was a very uneasy revelation for us and indicated that people were losing interest in the business model, jaded by the promise of deals we were offering,” he says.
 
Some of Dealmates’ competitors responded by adding more deals to show growth, Akinci claims. But this was not profitable growth and the other downside was that the sales team had to be increased to drive more deals though the door. “It does not help scale the business,” says Akinci.
 
As the Dealmates folk started looking around, they realized that one overlooked part of the daily deals space was flash sales, the so-called “cousin of group buying” as Akinci describes it.
 
It may have been overlooked but it sure was no poor cousin because the first three months of this year, when it moved some sales resources to focus on getting physical products for members versus services like food deals, resulted in 50% of revenues coming from the efforts of a mere 20% of the sales team.
 
This is inherently because it simply takes fewer sales people to lock in multiple units of physical sales versus the acquisition of various food or hotel deals -- which require more sales people.
 
“We thought that this could be the solution and quickly shifted all our sales resources from services to the product side and introduced new verticals as quickly as we could,” says Akinci.
 
The financial results are even better with Akinci claiming that sales went from around RM300,000 (US$98,430) a month by end-2011 to RM1.5 million (US$492,170) a month by July 2012, with average margins of between 25% and 30% currently. Under the group buying model of 2011, average margins were 15% to 20%.
 
“Financially we are in a much more comfortable position today versus early last year when a lot of the money we had in hand was survival money. Now, we have broken even and still have a lot of cash left in the bank,” he says.
 
If Dealmates end up making a success of its pivot into a flash sales site, the lesson it will have left for others is on the importance of sniffing for market shifts early enough to make a quick transition of the business model to capture the new opportunity.
 
Akinci observes that Dealmates is probably the first to shift out of group buying dominated by services offerings, into product offerings. This gives it a lead time over its group buying former competitors should they decide to shift business model too.
 
Yet the current space is not entirely its for the taking. One competitor Akinci says is Mysale.my, owned and operated by Australia’s leading flash sales company Ozsale Pty Ltd, which set up operations in Malaysia in the first half of 2012.