E-Retailing: Entering A New Phase

We have seen a fantastic phase for e-commerce in the last 12-15 months. This phase can be viewed from 2 lenses: Supply, i.e. start-ups, investors & ecosystem enablers; and Demand, i.e. consumers.

It all started with great excitement sometime in mid 2010.

The demand side has consistently grown since, and still continues to expand, backed by a very robust and strong growth thrust that gave everyone the confidence that the fundamentals were in place and e-commerce is here to thrive.

As the demand side took shape, and interesting comparisons from China & other markets panned out, the supply side saw unprecedented activity. There seemed to be somewhat of a land grab situation, and a consequent whiplash effect. Any slight positive signal from consumers resulted in a frenzy among startups and investors who bet big "the industry gathered tremendous momentum and it was a heady phase that ensured all enablers are put in place at a very fast pace, which would probably serve the industry well in the long run. In the process however, companies/ investors in the space also realized two things – (i) e-commerce would require large amounts of capital to invest in building the right operations and infrastructure; and (ii) not every company would go all the way.

While investor sentiment went through a speed bump as a result, the fact remains that there is enough reason to cheer "the fundamentals are very much in place. The bottom line – people are buying online, and online consumption of goods and services will only increase. Now it is up to e-commerce companies to figure out a sustainable business model to serve this consumption.

The industry is looking solid. There are many good players investing to further develop the infrastructure for e-commerce, there is clear consumer value and increasing internet penetration across India. Also, the industry is seeing innovation across the domain and a strong focus on fundamental value creation.

The current phase is seeing a big focus on fundamentals – a great sign for an industry moving towards maturity. If you get down to the nuts and bolts, e-retail works this way: Companies invest marketing dollars to acquire a customer -> The customer transacts multiple times over a lifecycle -> The aggregate margins from these repeat transactions justifies the cost to acquire the customer.

While the initial phase did focus a lot on removing all barriers to get consumers to transact, and web development/ online marketing seemed like key differentiators, the current phase has seen investments to build a sustainable model on a customer-by-customer and on an order-by-order basis. A few areas hold the key to making the equation per customer work and we are seeing interesting innovation across these dimensions.

Customer Acquisition: The mantra is to get more customers to come looking for you, and maximize the bang for your advertising dollar. Word of mouth is great! You get customers who already know good things about you. To get word of mouth, referrals work a bit, but nothing beats a great experience for a customer to talk about it. So well worth it to invest in customer delight and operations. Also, free traffic over a long term comes through investing upfront in building quality destinations where people come – based on content, user communities, forums and often as a result – solid search engine optimization (SEO). Affiliates also help drive sales at lower costs: Find the right partners and help them be successful.

Increase margins per transaction: Focus on costs – deeper vendor relationships for better margins on products, efficient supply chains, lower transaction costs and a good inventory management model hold the key. Also, picking the right products & categories where unit economics actually work is critical – smart product portfolios need to be built. Products sold online have to have enough margins to bear the expenses of shipping/ packaging and collection. There is an opportunity to cross sell and up-sell through intelligent merchandizing and recommendations; multiple players are looking at private label opportunities to expand margins. Quite a few are also looking at sale of services that can be delivered online  (web based counseling, training/ learning modules/ lead generation, paid content etc) which are high margin opportunities to monetize a customer further online. This area is bound to get very interesting soon.

Ensure more repeat transactions: CRM and customer loyalty can make or break this business! You may have got a customer once, but you sure do not want to buy a transaction. You want to acquire and retain a customer. So invest in everything that helps to bring a customer back again and again. Good service, proper recommendations, and customized offerings driven by a deep understanding of customer behavior will go a long way.

So, all in all – e-commerce today has moved well beyond a few tech guys setting up a website, supported by lots of capital to spend on Google and Facebook ads or to just sell below cost. It is now a serious retail operation and it is about investing in everything fundamental that makes the model work over the long term. The good news "there is a working model and we are seeing great investor appetite to back the firms that are going about it in the right way. In the meantime, the consumer party continues.

(Prashant Tandon is managing director and co-founder of Healthkart.com, an online health store.)