 "In search of profitability")
E-commerce ventures in India face common problems today: acquisition costs are high, repeats are low and basket sizes for most e-commerce companies are small. Driven by demanding investors and unforgiving consumers, they have two choices: make profits or move tracks.
The first choice is the more difficult of the two. While overheads are lower than brick-and-mortar businesses, e-commerce is capital intensive due to the inventory and infrastructure requirements, and, therefore, overall profitability can only come with scale. If historical data from other geographies is anything to go by, experts say e-companies may take up to five years to show major profits. Little wonder, to reach profitability, many e-businesses have returned to long-standing tenets of expense control and margin growth. They are meeting these challenges with interesting solutions, ranging from offloading shipment to suppliers to offering subscription services to launching own label products. Mind you, these are simple only on paper. We look at three new trends witnessed in recent times and examine how efficient these solutions are likely to be in the long term.
Offloading shipment to suppliers
The poster child of Indian e-commerce, Flipkart, may have transitioned from an inventory-based model to a marketplace but it still intends to manage the forward logistics. The fact that it owns the forward logistics channel could be one reason that drove its decision. Snapdeal, another marketplace player, too continues to hold the delivery reins. But a handful of players are looking to get out of the delivery end of the business altogether.
Shipment and warehousing costs typically constitute 10-15 per cent of the selling price, say analysts, and can bring down the overall margins. So players like Tradus are simply connecting the seller and the buyer via their platform. However, the reverse logistics handling of returns, if any is still managed by the website. Marketplace players mostly chase electronic payments whereas inventory-based guys focus on the cash-on-delivery model. The magnitude of returns is therefore much smaller for them (marketplace players), says Rajiv Prakash, founder at Next In Advisory Partners, which specialises in advisory services for e-commerce firms. (Companies tweak business models for profits)
Offloading last-mile delivery may be gaining currency, but there are several problems in the model, especially for the marketplace players. Often merchants refuse to accept the returns and the website is stranded with unsold inventory. The only option left to them is to dispose of the products by offering deep discounts.
Most e-commerce players say designing interesting deals and discounts is the least of their problems. They are more concerned about the overall customer experience, determined to a large extent by the last-mile delivery that many small-time traders may not have the wherewithal to handle. That is one reason many still prefer to retain a handle on the delivery function. It also means they need not build elaborate mechanisms for tracking deliveries.
If there are lapses in delivery on the part of the supplier, the rap often falls on the website. Whats more, with a marketplace model you are already vulnerable to inventory blocking as the same product may be listed on multiple websites. How do you ensure that the supplier will cater to your consumer first and not another portals when orders coincide? The option of offloading shipment to suppliers may help to keep a check on costs in the short term but there are questions about its ability to boost profitability substantially over time.
Launching private labels
In these tough times, consumers are demanding greater value, which often translates into greater pressure on pricing and profit margins. Offline retailers such as the Pantaloon and Big Bazaar have taken matters into their own hands, building private labels that compete with well-known brands. They are leveraging their unique customer relationships and insights to drive innovation and differentiation.
Many e-commerce players too have thrown their hats into the ring. Lifestyle products e-tailer Myntra.com has started hawking its own label Dresserbery. The trend is still restricted to apparel, though you can see some players looking to establish a toehold in low-entry-barrier segments like accessories and toys. This is one trend that has found approval among experts and investors. Alok Mittal, MD, Canaan Partners India, a VC firm, says on a like-to-like pricing, private labels provide better margins and help recover the investments made in customer acquisition quicker.
A little back-of-the-envelope calculation will make things easy. Say, the average selling price (ASP) for a private label is around Rs 800. With shipment in the range of Rs 200-250, the margin can be as high as Rs 300- 350. With low ticket price, customer acquisition is easier than in case of some established retail brands; better still, the customer acquisition cost in this case can be recovered with three to four repeat transactions from the customer. In case of an outsider brand, the margin would be lower, at Rs 100-200 (considering the discounts you need to offer to lure consumers), with other costs approximately at similar levels. The customer acquisition cost in this case will be recovered only after a minimum of five transactions.
As ASP rises, the number of transactions needed per customer to achieve break-even grows and the gap in margin between private labels and external brands increases.
Of course, there are some challenges that have to be tackled before this model can deliver on its promise. The foremost is generating awareness (and thus demand) and driving repeat sales. This is not easy given that one is battling against established names with an offline experience in place to drive sales and customer loyalty. Most consumers are aware of how a Tommy Hilfiger shirt or a Levis jeans fits; they go online for convenience and better deals. That level of comfort will be missing with private labels at least in the early phase till the consumer gets used to the new brand and the options it offers. Some experts even say the possibility of returns is higher in the case of private labels.
What will work in this case is the ability of the retailer to leverage the insights he generates from consumer traffic and buying behaviour online, and his ability to react quickly to their feedback. This is one area where an online retailer has an advantage over the offline one he is actually sitting on a pile of consumer data.
Subscription services
The model pioneered by magazines and newspapers across the world is now hot property in the world of e-commerce. Craft a compelling offer and tie-up consumers for a length of time. Health-related and personal care products portal, Healthkart.com, for instance, is offering subscription services to make purchases easy for the customer and to lock in sales over a prolonged period.
The service works in a fairly straightforward manner. Customers can select products (that are listed under the subscription option of course) that they purchase repeatedly, say, on a monthly basis, and set the frequency of delivery, say, every three or six months. In other words, you pay the entire amount upfront and expect the products at your doorstep at the decided intervals. The retailer is assured of a steady source of revenue.
The service was launched about four months ago and is popular with categories such as adult diapers, certain grooming products, diabetic strips etc. These are early days yet but this is a proven model offline. Prashant Tandon, MD and co-founder, Healthkart.com, is cautious nonetheless. We have received a couple of hundred subscriptions so far. At the moment we dont see it as a big part of the business, but then we have put only a restricted number of products under the service currently, says Tandon.
Adding more products for subscription is only part of the solution. First, Tandon and his team must contend with two challenges. One, to popularise the subscription services model, and two, improve payments and inventory management.
Unlike in the West, we cant keep a card on file in India. The entire amount must be prepaid. Consumers are still not very comfortable with the option, says Tandon.
Keeping a card on file allows the portal to store your credit/debit card details and each time there is a transaction, charge it to the card. The option is not viable in India, say market players, given the largely cash-based nature of transactions. Plus, people are weary of handling over their financial details to a merchant, least of all, an online player.
Problem No. 2 is the erratic nature of supplies and ensuring that sufficient inventory is held to match demand. While reserve stock is held for subscriptions, it may not be feasible if and when the volume of subscriptions goes up. That would demand better coordination with the suppliers, inventory management and considerable forecasting skills.
Tandon doesnt see the landscape changing drastically but hopes that once the consumer sees the benefits, things will change. The good news is that the subscription service has elicited interest from a large number of brands, particularly in categories like personal and beauty care and nutrition supplements.
If you really think about it, some of these new trends are common-sensical. The basic criteria for online success are the same as offline: designing a compelling product/proposition, selling it, collecting the money and fulfilling the orders without a hitch.
The first choice is the more difficult of the two. While overheads are lower than brick-and-mortar businesses, e-commerce is capital intensive due to the inventory and infrastructure requirements, and, therefore, overall profitability can only come with scale. If historical data from other geographies is anything to go by, experts say e-companies may take up to five years to show major profits. Little wonder, to reach profitability, many e-businesses have returned to long-standing tenets of expense control and margin growth. They are meeting these challenges with interesting solutions, ranging from offloading shipment to suppliers to offering subscription services to launching own label products. Mind you, these are simple only on paper. We look at three new trends witnessed in recent times and examine how efficient these solutions are likely to be in the long term.
Offloading shipment to suppliers
The poster child of Indian e-commerce, Flipkart, may have transitioned from an inventory-based model to a marketplace but it still intends to manage the forward logistics. The fact that it owns the forward logistics channel could be one reason that drove its decision. Snapdeal, another marketplace player, too continues to hold the delivery reins. But a handful of players are looking to get out of the delivery end of the business altogether.
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Shipment and warehousing costs typically constitute 10-15 per cent of the selling price, say analysts, and can bring down the overall margins. So players like Tradus are simply connecting the seller and the buyer via their platform. However, the reverse logistics handling of returns, if any is still managed by the website. Marketplace players mostly chase electronic payments whereas inventory-based guys focus on the cash-on-delivery model. The magnitude of returns is therefore much smaller for them (marketplace players), says Rajiv Prakash, founder at Next In Advisory Partners, which specialises in advisory services for e-commerce firms. (Companies tweak business models for profits)
Offloading last-mile delivery may be gaining currency, but there are several problems in the model, especially for the marketplace players. Often merchants refuse to accept the returns and the website is stranded with unsold inventory. The only option left to them is to dispose of the products by offering deep discounts.
Most e-commerce players say designing interesting deals and discounts is the least of their problems. They are more concerned about the overall customer experience, determined to a large extent by the last-mile delivery that many small-time traders may not have the wherewithal to handle. That is one reason many still prefer to retain a handle on the delivery function. It also means they need not build elaborate mechanisms for tracking deliveries.
If there are lapses in delivery on the part of the supplier, the rap often falls on the website. Whats more, with a marketplace model you are already vulnerable to inventory blocking as the same product may be listed on multiple websites. How do you ensure that the supplier will cater to your consumer first and not another portals when orders coincide? The option of offloading shipment to suppliers may help to keep a check on costs in the short term but there are questions about its ability to boost profitability substantially over time.
Launching private labels
In these tough times, consumers are demanding greater value, which often translates into greater pressure on pricing and profit margins. Offline retailers such as the Pantaloon and Big Bazaar have taken matters into their own hands, building private labels that compete with well-known brands. They are leveraging their unique customer relationships and insights to drive innovation and differentiation.
Many e-commerce players too have thrown their hats into the ring. Lifestyle products e-tailer Myntra.com has started hawking its own label Dresserbery. The trend is still restricted to apparel, though you can see some players looking to establish a toehold in low-entry-barrier segments like accessories and toys. This is one trend that has found approval among experts and investors. Alok Mittal, MD, Canaan Partners India, a VC firm, says on a like-to-like pricing, private labels provide better margins and help recover the investments made in customer acquisition quicker.
A little back-of-the-envelope calculation will make things easy. Say, the average selling price (ASP) for a private label is around Rs 800. With shipment in the range of Rs 200-250, the margin can be as high as Rs 300- 350. With low ticket price, customer acquisition is easier than in case of some established retail brands; better still, the customer acquisition cost in this case can be recovered with three to four repeat transactions from the customer. In case of an outsider brand, the margin would be lower, at Rs 100-200 (considering the discounts you need to offer to lure consumers), with other costs approximately at similar levels. The customer acquisition cost in this case will be recovered only after a minimum of five transactions.
As ASP rises, the number of transactions needed per customer to achieve break-even grows and the gap in margin between private labels and external brands increases.
Of course, there are some challenges that have to be tackled before this model can deliver on its promise. The foremost is generating awareness (and thus demand) and driving repeat sales. This is not easy given that one is battling against established names with an offline experience in place to drive sales and customer loyalty. Most consumers are aware of how a Tommy Hilfiger shirt or a Levis jeans fits; they go online for convenience and better deals. That level of comfort will be missing with private labels at least in the early phase till the consumer gets used to the new brand and the options it offers. Some experts even say the possibility of returns is higher in the case of private labels.
What will work in this case is the ability of the retailer to leverage the insights he generates from consumer traffic and buying behaviour online, and his ability to react quickly to their feedback. This is one area where an online retailer has an advantage over the offline one he is actually sitting on a pile of consumer data.
Subscription services
The model pioneered by magazines and newspapers across the world is now hot property in the world of e-commerce. Craft a compelling offer and tie-up consumers for a length of time. Health-related and personal care products portal, Healthkart.com, for instance, is offering subscription services to make purchases easy for the customer and to lock in sales over a prolonged period.
The service works in a fairly straightforward manner. Customers can select products (that are listed under the subscription option of course) that they purchase repeatedly, say, on a monthly basis, and set the frequency of delivery, say, every three or six months. In other words, you pay the entire amount upfront and expect the products at your doorstep at the decided intervals. The retailer is assured of a steady source of revenue.
The service was launched about four months ago and is popular with categories such as adult diapers, certain grooming products, diabetic strips etc. These are early days yet but this is a proven model offline. Prashant Tandon, MD and co-founder, Healthkart.com, is cautious nonetheless. We have received a couple of hundred subscriptions so far. At the moment we dont see it as a big part of the business, but then we have put only a restricted number of products under the service currently, says Tandon.
Adding more products for subscription is only part of the solution. First, Tandon and his team must contend with two challenges. One, to popularise the subscription services model, and two, improve payments and inventory management.
Unlike in the West, we cant keep a card on file in India. The entire amount must be prepaid. Consumers are still not very comfortable with the option, says Tandon.
Keeping a card on file allows the portal to store your credit/debit card details and each time there is a transaction, charge it to the card. The option is not viable in India, say market players, given the largely cash-based nature of transactions. Plus, people are weary of handling over their financial details to a merchant, least of all, an online player.
Problem No. 2 is the erratic nature of supplies and ensuring that sufficient inventory is held to match demand. While reserve stock is held for subscriptions, it may not be feasible if and when the volume of subscriptions goes up. That would demand better coordination with the suppliers, inventory management and considerable forecasting skills.
Tandon doesnt see the landscape changing drastically but hopes that once the consumer sees the benefits, things will change. The good news is that the subscription service has elicited interest from a large number of brands, particularly in categories like personal and beauty care and nutrition supplements.
If you really think about it, some of these new trends are common-sensical. The basic criteria for online success are the same as offline: designing a compelling product/proposition, selling it, collecting the money and fulfilling the orders without a hitch.