Recently, page 1 of ET carried an article on eCommerce, suggestive of how the industry is in doldrums and funding has slowed down if not dried up all together. Also, the latest India Startup Report, citing 33% of the start ups being in the eCommerce sector, talks of hardly any IPOs having taken place. The fact is virtually nobody in the eCommerce business is making money, irrespective of scale.
While on the one hand, you have a galloping Internet population, a spate of young minds jumping into the turbulent waters of entrepreneurship and a developing and healthy eco-system, on the other hand you have well intention-ed ventures merging, sinking, bleeding, stagnating or closing shop. While the ventures with external funding are probably staying afloat much longer when compared to the poorer cousins, the tenure of survival was never a measure of success any way.
So the key question is: Can online eCommerce companies make money? Yes, they can. Making money is never easy, but always possible and I am sure this is the belief and hope that most entrepreneurs constantly nurse within their hearts, as they continue to wade painfully through the daily dose of myriad challenges. While each entrepreneur must diagnose for himself or herself, and figure out the way to profitability at the desired scale, some may find an external perspective useful.
The question of profitability can be addressed by answering a related question: Why Should Customers chose you over others? In other words, how are you different? What differentiates you? (the base logic here being that if a large number of customers perceive a differentiated value proposition, the cost of customer acquisition will come down significantly enough to move the venture towards profitability). Let us examine some existing value propositions.
We are the Cheapest - eCommerce has over the years become a discount destination for all purposes and therefore attracts customers predominantly looking for best deals. Is there a business logic to this? The real benefit of the Internet is convenience of purchase and delivery vis-a-vis the offline world. And you would expect some customers to even pay a slight premium for the convenience. Instead, to attract customers and to overcome their inhibitions towards a new medium, companies have tended to offer deep discounts and prices lower than cost. It is definitely time to reflect upon this, and move away from the quick-sandish positioning. Some players already have.
We are the Biggest - Some well-funded companies are spending abnormal amounts of money on acquiring customers, especially on television advertising with the clear objective of generating scale as quickly as possible. And they have succeeded, i.e. the companies who have scale today are largely the ones who have been spending on TV. However, does the model entail economies of scale, i.e. if you are not making money on 1 unit, will you make money on 1000 or 10,000 units?. Scale can be a good differentiator but it can also magnify the loss. The ET report indicates monthly losses of Rs. 5-10 cr, for companies with relative scale. That is by no means, short change. Perhaps, these companies are banking on customer loyalty or perhaps hoping to induce online buying as a habit, to reap benefits much later. Customer loyalty is definitely suspect in a scenario with lower price as the primary reason to buy and comparison extremely convenient. Habit creation with relentless blood-letting is at best a dangerous game of attrition. And are you sure customers will remember you for fostering the habit?
We are the First - Having the first mover advantage is an ideal differentiator to have. Naukri.com and Makemytrip.com moved first in their respective domains, and are today where they are. More importantly, they are not just the first, but also the leaders. And therefore enjoy the customer's trust more than any other competitor. Is it surprising then that these companies are in a select bracket of profitable Indian online ventures. However, being first can be a differentiator only for a few. It will be intriguing to see how the other travel players/job portals disrupt the market with a unique differentiator, for they cannot hope to be profitable or turn the tables on the leader without it.
We are Experts in XYZ - As the eCommerce market expanded, a lot of players verticalised around customer segments, hoping to be perceived as experts in their chosen segments - some started doing only kid products, some only for men and others only for women. Verticalisation based on product category such as jewellery or apparel or fashion or electronics only, starting to happen. This is of course a good business strategy if you have developed core competence in the chosen vertical, and that is integrated into the venture. However, is this what makes you truly different? Maybe. Customers will however perceive you as different only if you are actually different, i.e. unless your core competence translates into a significant value addition for the customers, the focus on a niche or vertical perse will not differentiate and you may have ended up only limiting your market potential.
We are a One Stop Shop - In other words, we offer the largest range of products and if you are looking for anything, anything at all, we have it. Does this differentiate? Yes, it does. However, does it attract enough number of customers to lower acquisition costs? Perhaps not. The average Indian customer likes to shop around, i.e. does window shopping, even when he or she knows what they are looking for. In such a scenario, being a one stop shop in itself may not suffice and one may need additional differentiated value propositions to achieve scale and profitability. It is also a value proposition which is extremely difficult to maintain, i.e. consumer will always find something that you don't have. So, if you are a books only e-tailer, it may be a very good way to differentiate but the same principle may not work as well for shoes.
We are Innovative - In the last couple of years, a host of funded ventures have opted for offering new features to allure customers. Cash on delivery, although already offered by many players, was brought to centre stage by big spending e-tailers like Flipkart. It helped expand the market tremendously, and soon enough cash on delivery became the standard and preferred option of most consumers forcing every e-tailer worth his salt to offer it as well. However, did it make business sense? Maybe, maybe not. With product returns of upto 40%, the customer was spoilt and the ventures continued to suffer losses, while gaining scale. The second wave of innovation was offered by fashion/apparel ventures with their try and buy offers, to overcome consumer's concerns of wrong size, fitting, etc. Concomitant with this kind of feature, is the fact there will always be customer returns. If it makes business sense, and perhaps it does for high margin product categories, it is a very good positioning to take. I now look forward to the reverse positioning being taken, i.e. you don't have to try, to buy from us or even Buy on Credit/Save your cash.
There are of course several other ways to differentiate, and while it is an extremely challenging task it is nevertheless critical to profitability. The entrepreneur has the inevitable choice to Differentiate Quickly or Die Slowly.
