 "New and improved")
When embarking on a new business, it's a good idea to follow conventional wisdom and learn the rules before flinging yourself in at the deep end. However, there will be moments when you wouldn't know whether to follow precedent or venture off the beaten track. In those moments, it's good to remember that breakthrough ideas and disruptive business models are often traced to leaders who were ready to plough a lonely furrow.
If you take the difficult path instead of looking at received wisdom for inspiration at every stage, you may just hit upon the next Rs 100-crore idea. A hundred crore is not big in the grand scheme of things, but it certainly is if you're trying to earn it in a small market with limited possibilities. The e-commerce market in India is just such. Pegged at Rs 2,500 crore (in 2012, according to Franchise India), it has at least 400 players vying for the consumer's attention and money. Most of them, however, are negative on gross margin (to be positive they should sell products for more than the sum of the cost of the unit plus the discount on it, payment gateway costs, expenses incurred in carrying inventory and delivery, and returns costs, if any).
Since there is so little leeway to make big mistakes, most of the players in the fray are taking the signature models of the last phase and tweaking them, to give them a new direction and journey. Take Mumbai-based e-retailer of home, furniture and lifestyle goods Pepperfry.com for instance. It isn't the first big e-commerce site, but its executive director Ambareesh Murty has added twists and features the others did not grasp. While analysts continue to argue that the Indian e-commerce industry was able to generate volumes when it graduated from a marketplace model to the one where the e-commerce player takes upon itself the task of running inventory and logistics - Flipkart being the poster boy of this model - Pepperfry has adopted the mostly unchartered managed marketplace model, done away with warehouse management and has outsourced logistics.(SWOT ANALYSIS: MARKETPLACE V/S OWN-INVENTORY MODEL)
How to be profitable
As the e-commerce space becomes cluttered, top-notch customer service, easy buy and return policies, and last mile connectivity are becoming the key differentiators. The biggest, however, seems to be the ability to keep one's nose above water. This entails cutting the inefficiencies that have found their way into the system. According to a study by Zinnov Management Consulting, for an average selling point of Rs 1,200, the average loss a firm incurs is Rs 1,290. The break-down shows, warehousing and shipping amount to Rs 150, packaging Rs 25, payment gateway/COD around Rs 35 and discounts up to Rs 300. Net profits remain elusive and scale is imperative. (E-COMMERCE IS GROWINGRAPIDLY)
But given that most of the players in the space are just a year or two old in business, ramping up in a jiffy is not an option. Enter managed business models. According to Praveen Bhadada, director, market expansion, Zinnov Management Consulting, "Companies spend about 10-12 per cent of their revenues on delivery, warehousing and inventory write-offs. If managed business models can optimise a portion of this, say 50 per cent, it could have a positive impact on the margins."
This brings us to the key elements of the managed marketplace model. The first is outsourcing logistics. This is like the reseller/distribution model in the IT industry. The second is limiting inventory. The first one is the easier. There is an entire ecosystem that has developed around e-commerce companies. "We have companies like Delhivery, Chhotu.in (now even DTDC has a separate arm to cater to e-commerce websites) that provide managed logistics for a host of e-commerce companies," says Bhadada. "This model can help in expanding reach without huge bottom line implications."
For the second, one should identify suppliers who won't insist on upfront sales and upfront payment - which means one has to invest in warehousing - and putting more emphasis on demand forecasting, with incentives like minimum pick-up guarantee.
How to be different
Pepperfry's isn't a new business model. It's an evolution nonetheless. In the first flush, e-commerce ventures saw themselves as facilitators who brought the buyers and sellers on the same platform and made no pretensions about managing the conversations between them. Think eBay. In the second wave, when the Flipkarts of the world dominated the show, e-commerce ventures saw themselves as organised retailers and took up the task of managing logistics and inventory in a manner that a brick-and-mortar retailer would do in, well, the brick-and-mortar world.
The Pepperfry generation wants to develop a network of small and medium businesses. Murty, a former eBay India hand, says, "We did not want to build a retail business. eBay is in my DNA and eBay is a marketplace. A marketplace enables small businesses and entrepreneurs to showcase their products to customers across the world."
At Pepperfry, empanelled merchants list their products on the site. When an order is received, the intimation is sent to the merchant, who then ships the item to Pepperfry's fulfilment centres. Once there, the products go through quality checks, after which they are packaged and shipped through third-party courier partners.
Fast moving categories are delivered in three-four days while categories like furniture and jewellery may require up to 14 days if the vendors don't have the finished item in stock.
The managed marketplace model may look simple, but it requires planning and forecasting. The key challenge in a managed marketplace model is the availability of items with the merchants, Murty says. "A merchant can expect to achieve incremental business of Rs 15-25 lakh in a year by selling on Pepperfry," he adds.
According to Mudit Khosla, CEO, Tradus.in, an online marketplace, the biggest advantage of the marketplace model is that it is scalable due to the cost advantages it affords. However, he says, the onus to educate the new breed of sellers/vendors, who want to use online marketplace, lies with the e-commerce brands. After all, they are the ones that interact with the consumers.
The other view
Some, however, continue to bet their shirts on the own-warehouse-and-logistics model. Just recently, Sachin Bansal, CEO, Flipkart, told The Strategist that the company's winning strategy was to build in-house logistics, own warehouses and a very large network support team. Jabong.com, which is a big player in the fashion and lifestyle space, also operates on the own-inventory model. According to Praveen Sinha, co-founder, Jabong.com, customer experience is very important. Owning inventory leads to better control on services. "If you know the product is high selling, why not stock it?" he asks. Second, the vendor/supplier infrastructure is not mature yet, which means you can't really depend on them to deliver things on time.
Manmohan Agarwal, CEO, owner, Yebhi.com and former CEO of Vishal Retail, has an interesting take. In a successful e-commerce model, he says, one doesn't have to do away with inventory but build efficiencies around it. "Our learning at Vishal Retail has come quite handy. We built systems, technology and controls around inventory from Day 1, knowing that when the business scales, the challenges would be very different. We addressed inventory and warehousing issues early on. Our suppliers finance our inventory. We have a 1 lakh sq-foot fulfilment centre, which is enough to cater all over India," he explains.
Agarwal says that Yebhi.com has started dabbling in the controlled marketplace format also, where instead of keeping the inventory in its own warehouse the company asks vendors to keep the inventory at their warehouses. "We have our own logistics team. Whenever the sale happens, within 24 hours, we bring it back to our warehouse. We then process it from there to the consumer. It is a blended format because I want to control the consumer experience," adds Agarwal.
The e-commerce space is evolving fast and there will be more experiments. As we continue to hunt for the perfect model, as a business leader, knowing when to go by the book and when to throw it out of the window, can mean the difference between success and that niggling I-blew-it feeling.
If you take the difficult path instead of looking at received wisdom for inspiration at every stage, you may just hit upon the next Rs 100-crore idea. A hundred crore is not big in the grand scheme of things, but it certainly is if you're trying to earn it in a small market with limited possibilities. The e-commerce market in India is just such. Pegged at Rs 2,500 crore (in 2012, according to Franchise India), it has at least 400 players vying for the consumer's attention and money. Most of them, however, are negative on gross margin (to be positive they should sell products for more than the sum of the cost of the unit plus the discount on it, payment gateway costs, expenses incurred in carrying inventory and delivery, and returns costs, if any).
Since there is so little leeway to make big mistakes, most of the players in the fray are taking the signature models of the last phase and tweaking them, to give them a new direction and journey. Take Mumbai-based e-retailer of home, furniture and lifestyle goods Pepperfry.com for instance. It isn't the first big e-commerce site, but its executive director Ambareesh Murty has added twists and features the others did not grasp. While analysts continue to argue that the Indian e-commerce industry was able to generate volumes when it graduated from a marketplace model to the one where the e-commerce player takes upon itself the task of running inventory and logistics - Flipkart being the poster boy of this model - Pepperfry has adopted the mostly unchartered managed marketplace model, done away with warehouse management and has outsourced logistics.(SWOT ANALYSIS: MARKETPLACE V/S OWN-INVENTORY MODEL)
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Indeed, a new twist to an old idea can still be a Rs 100-crore idea. Some authors will go as far to say that tweaking an old business model is one of the biggest parts of innovation. Pepperfry.com (owned by Trendsutra Platform Services), which started operations in January 2012, crossed Rs 100 crore in turnover in January 2013. From 10,000 products on sale in January 2012, the company has widened its catalogue to include about a lakh items (80 per cent its sales are from home and jewellery sections and 20 per cent from apparels). Murty says the fact that Pepperfry has outsourced logistics and has zero carrying cost gives it a distinct cost advantage. "Lower costs ensure better margins in our business," he says. "Our business runs on 25 per cent margin on an average. In categories like furniture, it is higher, at 30 per cent, while in jewellery it is around 15 per cent. Our competitive advantage comes from being the largest players in home and health and beauty categories," he adds.
How to be profitable
As the e-commerce space becomes cluttered, top-notch customer service, easy buy and return policies, and last mile connectivity are becoming the key differentiators. The biggest, however, seems to be the ability to keep one's nose above water. This entails cutting the inefficiencies that have found their way into the system. According to a study by Zinnov Management Consulting, for an average selling point of Rs 1,200, the average loss a firm incurs is Rs 1,290. The break-down shows, warehousing and shipping amount to Rs 150, packaging Rs 25, payment gateway/COD around Rs 35 and discounts up to Rs 300. Net profits remain elusive and scale is imperative. (E-COMMERCE IS GROWINGRAPIDLY)
But given that most of the players in the space are just a year or two old in business, ramping up in a jiffy is not an option. Enter managed business models. According to Praveen Bhadada, director, market expansion, Zinnov Management Consulting, "Companies spend about 10-12 per cent of their revenues on delivery, warehousing and inventory write-offs. If managed business models can optimise a portion of this, say 50 per cent, it could have a positive impact on the margins."
This brings us to the key elements of the managed marketplace model. The first is outsourcing logistics. This is like the reseller/distribution model in the IT industry. The second is limiting inventory. The first one is the easier. There is an entire ecosystem that has developed around e-commerce companies. "We have companies like Delhivery, Chhotu.in (now even DTDC has a separate arm to cater to e-commerce websites) that provide managed logistics for a host of e-commerce companies," says Bhadada. "This model can help in expanding reach without huge bottom line implications."
For the second, one should identify suppliers who won't insist on upfront sales and upfront payment - which means one has to invest in warehousing - and putting more emphasis on demand forecasting, with incentives like minimum pick-up guarantee.
How to be different
Pepperfry's isn't a new business model. It's an evolution nonetheless. In the first flush, e-commerce ventures saw themselves as facilitators who brought the buyers and sellers on the same platform and made no pretensions about managing the conversations between them. Think eBay. In the second wave, when the Flipkarts of the world dominated the show, e-commerce ventures saw themselves as organised retailers and took up the task of managing logistics and inventory in a manner that a brick-and-mortar retailer would do in, well, the brick-and-mortar world.
The Pepperfry generation wants to develop a network of small and medium businesses. Murty, a former eBay India hand, says, "We did not want to build a retail business. eBay is in my DNA and eBay is a marketplace. A marketplace enables small businesses and entrepreneurs to showcase their products to customers across the world."
At Pepperfry, empanelled merchants list their products on the site. When an order is received, the intimation is sent to the merchant, who then ships the item to Pepperfry's fulfilment centres. Once there, the products go through quality checks, after which they are packaged and shipped through third-party courier partners.
Fast moving categories are delivered in three-four days while categories like furniture and jewellery may require up to 14 days if the vendors don't have the finished item in stock.
The managed marketplace model may look simple, but it requires planning and forecasting. The key challenge in a managed marketplace model is the availability of items with the merchants, Murty says. "A merchant can expect to achieve incremental business of Rs 15-25 lakh in a year by selling on Pepperfry," he adds.
According to Mudit Khosla, CEO, Tradus.in, an online marketplace, the biggest advantage of the marketplace model is that it is scalable due to the cost advantages it affords. However, he says, the onus to educate the new breed of sellers/vendors, who want to use online marketplace, lies with the e-commerce brands. After all, they are the ones that interact with the consumers.
The other view
Some, however, continue to bet their shirts on the own-warehouse-and-logistics model. Just recently, Sachin Bansal, CEO, Flipkart, told The Strategist that the company's winning strategy was to build in-house logistics, own warehouses and a very large network support team. Jabong.com, which is a big player in the fashion and lifestyle space, also operates on the own-inventory model. According to Praveen Sinha, co-founder, Jabong.com, customer experience is very important. Owning inventory leads to better control on services. "If you know the product is high selling, why not stock it?" he asks. Second, the vendor/supplier infrastructure is not mature yet, which means you can't really depend on them to deliver things on time.
Manmohan Agarwal, CEO, owner, Yebhi.com and former CEO of Vishal Retail, has an interesting take. In a successful e-commerce model, he says, one doesn't have to do away with inventory but build efficiencies around it. "Our learning at Vishal Retail has come quite handy. We built systems, technology and controls around inventory from Day 1, knowing that when the business scales, the challenges would be very different. We addressed inventory and warehousing issues early on. Our suppliers finance our inventory. We have a 1 lakh sq-foot fulfilment centre, which is enough to cater all over India," he explains.
Agarwal says that Yebhi.com has started dabbling in the controlled marketplace format also, where instead of keeping the inventory in its own warehouse the company asks vendors to keep the inventory at their warehouses. "We have our own logistics team. Whenever the sale happens, within 24 hours, we bring it back to our warehouse. We then process it from there to the consumer. It is a blended format because I want to control the consumer experience," adds Agarwal.
The e-commerce space is evolving fast and there will be more experiments. As we continue to hunt for the perfect model, as a business leader, knowing when to go by the book and when to throw it out of the window, can mean the difference between success and that niggling I-blew-it feeling.