Choose marketplace only if you know what you are getting into

Twenty months ago, when I landed in this country, I found it very difficult and frustrating to let people know what we were going to do with ShopClues and what exactly was marketplace. That time India was in the early stages of e-commerce evolution and the people here only understood horizontal, vertical, flash or group buying business models for e-commerce. When we launched ShopClues.com in closed beta in November 2011, nobody understood marketplace and people started talking about sales on return basis or back-to-back inventory arrangement as their inventory management practices in order to call them marketplace.

Nine months ago when I wrote an article for VCCircle/TechCircle, I coined the term inventory led vs. marketplace, and highlighted the challenges of an inventory led model; the article attracted lots of interest. Many did not agree with my cautionary outlook on inventory led business models in e-commerce. But many told me that my article was forcing the VC community to think about the right business model for e-commerce in the country.

Since September last year we have seen many activities in the e-commerce space, especially for marketplace. Following is what I have been hearing about e-commerce: 1) ABC is downsizing and moving towards marketplace, 2) VCs would not even give you an appointment unless you have marketplace as a keyword in your pitch, 3) pivoting to marketplace is on top of the mind for 75% of CEOs of e-commerce companies in India, and 4) if ShopClues.com can do marketplace, so can we, etc.

So I thought of wearing my former Wall Street Internet analyst's hat and address the current evolution of Indian e-commerce and how it pertains to marketplace. In my view, many e-commerce companies are jumping in the marketplace bandwagon without realising what they are getting into.

Following are a few factors to be kept in mind when you consider marketplace as a business model for e-commerce:

1. Marketplace is not an easy discipline. It is arguably tougher than the inventory led business model. Compared with marketplace, it is easy to start and operate inventory led models. Also, it is much easier in inventory led models to find talent, let your partners and employees know what you do, and use learnings from off-line or traditional businesses. On the other hand, it is very difficult to start and operate marketplace because of its unique challenges.

2. Think about marketplace only if it is part of your DNA. If marketplace is something that does not come to you naturally, do not think about pursuing it as a business opportunity. The odds of success are limited for a startup and the odds are much slimmer, if you are pursuing something that you are not passionate about or uniquely qualified to pursue.

3. Pivoting to marketplace is great for survival but is an anomaly in reflecting the founders' true passion. Some startups win because founders are obsessive and passionate about what they are pursuing. Someone who is pivoting to marketplace because it is attracting capital or partners may not go too far.

4. Marketplace has network effects; everyone may not survive here. The size of catalog (selection), number of merchants, category depth and breadth, and marketplace dynamics such as merchant rating, product reviews, etc, create network effects and make it harder for new entrants to win. So, think about these factors before jumping into the marketplace business model.

5. The metrics one needs to measure in marketplace are completely different. In marketplace, one need to focus on take rate, category mix, merchant traction, trust and services SLAs more than anything else. In the inventory led e-commerce model, companies are obsessively focused on product margin, direct cost, inventory turnover and marketing spend. An aging inventory also results into many irrational business decisions such as promoting COD, very high percentage of revenue on marketing spends, deals, etc. In marketplace, one tends to focus less on these things.

6. Marketplace is a technology and service play vs. retail. For example, ShopClues.com is a technology company that happens to be in retail industry. It is not an inventory led e-commerce company that is a retail company and happens to use technology. The idea is one should be clear about what he/she wants to do.

E-commerce opportunity in India is sizable and some companies are going to make it big even if the road is bumpy. Choose marketplace only if you know what you are getting into, feel passionate about it, and you are uniquely qualified to do it.

(Sandeep Aggarwal is the founder and CEO of "ShopClues.com". He is counted amongst leading Internet experts globally, and has regularly appeared on CNBC, Fox, ABC News and regularly quoted by Wall Street Journal, Fortune, Forbes and other prominent media outlets.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.