After seeing the mishap of many Indian e-commerce companies in the last decade the question arises what kind of business model is successful in Indian e-Commerce Space?
Well, the answer is not very simple for this. The game of e-commerce is not that simple in India as it is in most of the other western and European countries. Let’s first analyze what are the pain points of e-commerce companies in India first of all.
Finding a Niche
Finding a niche in e-Commerce means finding people who will be willing to transact over the internet for a specific product.
No doubt that India is the second most populated country in the world with over 500 million internet users. But only 21 million out of them shop online.
Well, it’s still a pretty good number; it’s even more than the whole population of several countries in the world.
But, if you see it through the eyes of Venture Capitalists those who put in money in many e-commerce websites in the hope of getting better returns are still very less.
Customer Acquisition in Indian e-Commerce
To make people come on an Indian e-Commerce site and make a purchase involves heavy cost due to advertisement and marketing.
This cost is significant, and still, it seems that every e-commerce player is ready to shell out money to get a customer due to the several companies selling the same kind of products online with great offers and discounts.
I have analyzed that the average figure for this metric in the current Indian e-Commerce ecosystem is between INR 500 – 1000 per customer, which isn’t sustainable for even medium-sized companies, let alone the newbies. You need a huge chunk of money to burn in acquiring a customer.
This is the next biggest problem for a startup.
Reliable Logistics and Supply Chain
India’s logistics suck. We still have very poor logistics. A large part of the e-commerce success in the developed nations was due to their rock-solid logistics already in place. It is a nightmare in India trying to find an address or a location.
We don’t even have a properly standardized “physical postal address system”. However, failure in this area can mean harmful damage to a startup’s online business future. The average Indian online customer poses great trust issues for e-Commerce transactions and this in effect hurts the brand in many ways.
Bad products, or damaged products in transit, or in cases where consumers who simply changed their mind or could not be reached at home (which is 10-12%) also require reverse logistics and which is a sine qua non.
These goods cycle back into inventory after weeks and carry a high cost of restocking and re-listing, and sometimes have to be written off altogether.
The longer a faulty product from an e-Commerce portal stays with a customer, the worse the reputation of the e-Commerce portal gets.
And issuing a discount or gift coupon in lieu of that is not the best option. Rather, e-commerce players should focus on delivering it right to the customer.
Customer Service
Customer service is something that is mostly ignored in the Indian context, most of the time customer ends up in frustration and decides not to shop online again.
However, in this dense e-Commerce market, quality customer support is going to be a big differentiator.
Reassuring customers of a situation or telling them the status of a process is sometimes all that is needed to keep the customer from hitting the panic button and taking to public media or writing something bad about your brand on social media and other places online.
Getting customer support oriented resources in India is a challenge that most of the startups.
Cash-Based Transactions in Indian e-Commerce
A small fraction of Indians has virtual payment instruments like credit cards or internet banking facility.
Even after having a virtual payment instrument, Indian customers are skeptical about filling out their financial details online due to the fear of compromising their online security.
Largely we are a cash-driven economy. Almost every e-commerce company offers Cash On the Delivery mode of payment, due to competition in the market. However, my thesis here is that this is incredibly hard to scale.
As humans are involved in the collection of cash etc., fraud rates are very high. It dips into the margin levels of the Indian e-commerce players, and also delay in payment.
Courier companies generally hold the money for two weeks. This means that the e-commerce company has to restock inventory before the cash from its last sale has arrived. And to restock the new entry they have to again spend money from their pockets. It is also expensive, some couriers charging upwards of 3 percent of the product value for the service.
Even, in this case, you need extra manpower. Why? To make phone calls to the customers to confirm the order before shipping it. This obviously requires money and resources.
Marketing Costs in Indian e-Commerce
Marketing costs are very high in case of startups because they outsource their marketing assignments to the advertising agencies which charge them a lot of money plus you get hardly 1-2% conversion from showing ads on Facebook and Google.
I have analyzed that to make money these agencies show up the ads on irrelevant networks and to irrelevant people. I recently saw Ads of lingerie on the Facebook page of my cousin who is studying in 9th standard. Does that make sense to target 14-15 years boys in such ads?
Do not make the advertising agencies and google rich with your money or VC’s money. The better idea is to hire an in-house resource and monitor your marketing campaigns. Also, keep a tab on your marketing spends and do it very carefully.
Raising Funds to Scale
Once an e-Commerce company has got its traction going, getting the branding right is going to be quintessential.
Getting your branding right is a significant part of your online success and scaling process and this obviously requires funds.
The current funding bodies are once bitten, think two hundred times about funding Indian e-Commerce companies.
An e-Commerce company can sustain to a certain extent. But scaling requires funds, because of this many Indian e-commerce players have returned to pavilion.
So, now get back to the question, we asked at the very outset:
What Kind of a Business Model is Successful in Indian e-Commerce Space?
And, the answer is either those who have a lot of money to burn or those who have already thrived in the brick & mortar model. Or those who just want to scale up and have not the VC’s sword hanging over their necks.
Still, I have researched and found that handicraft is something which can do better in online space. As it is just too niche.
Or the small e-commerce companies who are manufacturing their own products with high margins can sell online. And they can survive as well until there is no other player in the market with similar products.
Good Luck!
Comments and suggestions are always welcome!
