Is there merit in starting e-commerce ventures now?

That online commerce has a strong value proposition is proven. For urban consumers, the biggest value proposition is convenience followed by choice. For consumers in tier 3 cities and below, access to choice is the biggest value proposition.

Given the size and scale of the country, and given that internet penetration still has significant headroom for growth, that online commerce will only grow is a given.

Therefore, on the face of it, it appears that there is indeed merit in starting e-commerce ventures, especially in categories that have not been dominated by someone and where newer brands could have an opportunity to establish leadership positions.

ecom

However, e-commerce is not a game of just making products available on a nice looking website. The business case of e-commerce depends on being able to maximize the lifetime value of a customer. Let me explain further…

Suppose online advertising rates for your e-commerce site costs you say Rs.10 per click. If you spend INR 100,000 then 10,000 people would have viewed your website. If out of them 0.5% were to buy ‘something’, then 50 people would have become your customers. And 0.5% conversion is a pretty decent rate. In most cases it will be lower. Given this, for every customer you acquired you have spent Rs.1000 in acquiring that customer. If your conversion rate is lower, or if you end up paying more per click, the acquisition cost could go as high as Rs.5000, depending on the category.

Now, if you consider for this example, an average transaction size of a consumer on your site to be Rs.2000 (which is higher than the average in most e-commerce sites) and if you assume a gross margin of 15% (could be higher, but there is usually high discounting to retain customers and hence assumed to be in the 15% range) then you are earning Rs.300 for that transaction. If you assume Rs.100 to be the cost of shipping and packaging, your margin on each sale is Rs.200.

Even at the lower end of Rs.1000 as the cost of acquiring that customer, unless the customer buys at least 5 times from you, you are not even going to recover the money you have spent in acquiring the customer. Add to this, the fact that for every visit, the customer is likely to enter your name in the google search and click on the first link that appears i.e. the link you have paid to display. Considering for every customer who types and clicks that paid link, a fraction of those will buy, the cost of servicing that customer continues to be high.

Now, think about it. Apart from the top 2-3 e-commerce sites in the country, which other website did you or your friends shop for at least 5 times? Very rarely. And that is the challenge for e-commerce entrepreneurs.

E-commerce, even if it has a large market opportunity, is usually dominated by 1-2 portals. May be 3 in some markets in some categories. But this is a game of market dominance. There is therefore no early-stage funding available to ‘test if the concept will work’. That consumers buy across categories is proven. That there is a business case IN THE LONG RUN is proven too. Hence, if you want to establish presence in the e-commerce space, though it is fraught with risk, you will have to have the initial capital to get beyond the foundation laying stage. Once a brand is established and the business case appears to be clear, VCs and PE funds will chase you to take growth capital. That’s because the market is large and out of the 100s of companies that start, a handful will survive. Once the survivability of a venture appears to be reasonably clear, investors will be keen to back it.

E-commerce is also a business where one needs tremendous operations management understanding and ability to lead and manage large teams.

It is therefore not surprising that the ones who are currently starting e-commerce ventures are folks who have a deep understanding of the complexities of business, and the initial capital to start and sustain an e-commerce venture for a while. It is therefore not surprising to see a recent article on investment bankers giving up lucrative careers to start e-commerce ventures. They have an understanding of the dynamics of business, as well as the capital to fund their ideas. Click here to read the article.

Apart from investment bankers, I have also noticed interest from a number of offline retailers and manufacturers to start e-commerce ventures. For them, because the infrastructure and other costs are shared across their main business, the business case overall is stronger than pure play e-commerce ventures.

Net, that was a long answer for a short question. The short answer to the question is this “If you are starting an e-commerce venture now, the chances of success are slim. A unique ‘idea’ (e.g. no one is selling gym equipment’) is not going to make you succeed”.

 

 

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Author: Prajakt Raut

Prajakt Raut is the founder of Applyifi.com, and author of the book for startups - ‘Starting Up & Fund Raising’ Prajakt personal goal in life is to encourage and assist a 100,000 people to become entrepreneurs. _____________ Prajakt is the founder of Applyifi - an online platform that provides startups a 36-point scorecard and assessment report on the venture's investment readiness [www.applyifi.com], and helps them improve their odds of getting funded. Prajakt is also the founding partner of The Growth Labs, a platform where growth-stage companies get sharp, incisive advice from senior professionals and experienced entrepreneurs. [www.thegrowthlabs.in] Before starting Applyifi, Prajakt was the head of operations at IAN, founding member of a leading incubator, and the Asia-Director for TiE (2004 - 2007). Previously Prajakt had co-founded Orange Cross, a healthcare services company, and was part of the founding team member of Idealake Technologies. While in college Prajakt had founded a printing business and has spent over 10 years working in leading advertising agencies. Prajakt’s book, ‘Starting Up & Fund Raising’, helps startups understand an investor’s perspective, and helps them improve their odds of getting funded. The book also helps entrepreneurs understand the building blocks of a business.

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