Serial entrepreneur Harish Bahl, who founded the Smile Interactive Group, which has developed business ventures like StudioSmile, Quasar (bought by WPP), Tyroo (minority stake picked up by Yahoo), Zoomtra & Zumtra. Bahl has since invested, alongwith the Group Deals Global AG in two e-commerce businesses – Fashion And You and Deals And You (which acquired group buying startup Wanamo recently). In a brief conversation with MediaNama, Bahl spoke about the group buying model, scaling, the differentiation and challenges the space faces:

Why did you acquire Wanamo, which was launched only a few months ago?

For a quick headstart. We thought it was a good business, and the founders came along-with the acquisition. There is very little differentiation between the current players in the market. For us, the plans are bigger than what exist in the market right now. Wanamo is doing fairly well: they’ve launched in Delhi, Mumbai and Bangalore, with Mumbai as its main market where they’re doing the highest number of coupons. These are very early days. We’ve got Fashion And You, and now Deals And You. We’re not not trying to clone anyone, and have an independent strategy for the “And You” network. Fashion And You is in lifestyle products, while Deals And You is about lifestyle services.

What’s your take on the group buying model? Will this business scale?

It’s a hyperlocal model, not even city specific. You won’t buy a deal for a haircut in the other side of town. There’s a lot of VC interest in this space, and that has largely to do with the success of groupon globally; they want to put money behind a working model. If you look at it from an India perspective, it’s a model that is very well suited – there is value for merchants and buyers, and a great marketing platform for services segment in the SME space. Finally, this is performance based marketing, and the Internet consumer in India is a deal seeker.

Why will it not have scale? The service industry in India is huge, and every business has its high days and low days, and is on the lookout for marketing vehicles, and avenues to utilize inventory. The question of scale is not in terms of market opportuinity, but in terms of how many players and how will the pie get distributed. Every big city in the world has seen 12 of these coming up in 3 months, but the market leaders have been one or two companies. That is going to be the case here as well.

What about the need for scale for this business. Are there sufficient margins?

It’s a hyperlocal model, and you have to win the territory on a day by day, region by region basis. Anyone can be better on a given day in a particular region. It’s not a business that will go into an autopilot mode, and you have to keep getting the better deal for consumers.

Where will the resources be invested?

The two key areas are your ability to source deals and your social marketing capabilities. The typical media arbitrage model will not work for this kind of business – it may give you initial traction, but it’s not sustainable. The ticket size of the transactions is low, and the opportunity for arbitrage is low. You need that element of viral marketing and social buying to trigger for you. You need to be able to create buzz, and that’s where we thing we have a strong chance. For example, our fan base on Facebook for Fashion And You is almost 200,000 fans.

The bad news is that this model has very low entry barriers. The good news is that it’s a model that is hard to scale. Any smart entrepeneur would say that that the win is about creating long term sustainable business, and we have the kind of management needed – there’s the Group Buying Global team, I’m there, the Wanamo Team, and another set of entrepreneurial management that we’re putting into place there. We also already have the credibility among merchants from Fashion And You, and around 300-350 merchants, and among the largest sales partners for most lifestyle merchants. This is a volumes business, and merchants need to be convinced that you will deliver volumes for them.

What’s the source of revenue – transaction based, or based on the merchants marketing budget?

The revenue source is transactional. In fact, many of the businesses that we’re talking about are not institutional setups, so marketing and sales intermingle. I dont know whether it goes into the sales budget or the marketing budget.

But is this a low margin business?

No way. I wouldn’t do a low margins business (laughs). A lot of people are not focused on margins, but GroupOn works on around 50% margins, and 30-40% margins is what this market might settle at.

So what are you focusing on?

Our focus right now is on getting great deals. Geographical expansion is organic, and part and parcel of the business. Adding too many cities is not a high priority right now.