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eCommerce Blog – Opportunities in US and India (by Darpan Munjal)

Online Business Models for India

Posted by Darpan Munjal On June - 22 - 2008
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The stakes are getting high in the eCommerce space in India. As more and more online retailers enter the market, they are driving up the cost of customer acquisition. Although this level of entry in the eCommerce market is good from a long term perspective, the challenge is that most entrepreneurs don’t have the resources or capital to wait for years before they can see some signs of profitability. The good news is that there are still some business models out there, which are mostly untapped. If you execute these well, you can not only create uncontested market space, you can make it difficult for others to compete in the game. These ideas do require some innovation –however, I am not talking about a significant technological innovation – I am talking about innovation in service offerings that can help you leap outside the traditional industry boundaries. I have written most of my articles around B2C opportunities, in this article I will focus primarily on the B2B opportunities within the online space in India.

So what are some of these ideas? Well, before discussing the specific ideas, I want to start with some of the key traits of these business models. Most of the ideas that I will discuss have one common theme – low cost of initial acquisition and high switching costs. These ideas involve offering innovative, easy to plug-in, value added services to online retailers at such a low price point that retailers have no reason to look any further. So what does one gain by this charitable gesture, you ask? Well, the key is to cut so deep into the core business processes of the online retailers, that it becomes progressively difficult for them to switch to a different provider over time.

Nothing better than starting with an example – so here goes. Power Reviews is a service provider which provides technology to online retailers in US to capture and display customer/product reviews on the site. It goes one step beyond the traditional customer reviews, and offers unique capabilities to aggregate the ratings across multiple product dimensions. The great thing about Power Reviews is that it is can be fully integrated into a website within few days. Even better, the entire offering is available for no cost to online retailers! So what is the catch, you ask? Power Reviews also maintains another online property called Buzzillions.com. The only thing they ask online retailers in return for their sophisticated Reviews technology is that the reviews collected on the retailer’s web site are syndicated and aggregated on the Buzzillions website. This is a great model – on one hand, Power Reviews is offering a significant value to the online retailers, and on the other hand, they are building a great destination site for customers with aggregated reviews from all participating retailers – a win/win scenario for power reviews, online retailers and the end customers.

Internet technology is moving more and more towards a widget based, plug and play based approach and niches are being carved out from various aspects of online shopping experience. There is no reason for online retailers to build all capabilities from scratch – instead, it is much more cost effective to power components of the shopping experience using these best in class, niche technologies which are maturing every day. Whether you are an online retailer or a service provider, the opportunities are limitless. The key is to build win-win partnership models where the sum of being part of a value chain is greater than the individual parts. For the Indian market, where eCommerce is still in its early stage of evolution, this opens up a lot of uncontested space. Here are some ideas:

  1. Customer/Product Reviews: A model such as an Indian version of Power Reviews is not only viable, it is much needed at this time. Most online retailers have built very basic product review capabilities and the review content is moderated very poorly. A lot of times, the reviews listed on product pages are general questions from customers that look more like customer service issues, than product reviews. Having access to a service provider that can not only provide highly sophisticated technology but also provide value added services for review moderation will be a huge success. On the other hand, there still isn’t any destination portal that provides unbiased and extensive product content/ information to help buyers make purchase decisions. The only “somewhat” credible source is mouthshut.com but it is too broad – offering reviews from car dealers to restaurants to products – making it less appealing for someone who is looking specifically for reviews around purchase, along with immediate price comparison information. A Power Reviews like model will help in quickly building up this unbiased destination portal, which could offer a significant value in the Indian context.
  2. Content Management: Product content is a fundamental component of the online shopping experience and an essential differentiator for successful online retailers. Several surveys have been done in the mature eCommerce markets where customers rate high quality product content as one of the most important factors to enhance a buyer’s online experience. However, if you look at the product content on most ecommerce sites in India, you don’t have to be really online savvy to come to the conclusion that the content is extremely basic. Whether it is the product images, or the copy or the attributes – most of the content is provided directly by third party sellers who do nothing more than copying and pasting it from another site. Notwithstanding the copyright issues, the content is generally not of much help to customers in helping them make the shopping decision. There is an opportunity for service providers to start building and licensing a rich repository of online content for major categories such as electronics. Content is a critical component for any online retailer and it is an activity that takes up significant resources to keep up with and manage. Having access to a rich repository that is being managed and built by a service provider who does it for a living can be a huge value-add. In addition, we can extend the above example of Power Reviews, and instead of charging significant licensing fees for this content, the service providers can in return, obtain reverse licensing for additional user generated content being generated on the online retailers site. Again, a win-win situation for customers and online retailers.
  3. Email & Campaign Management –Email marketing is one of the most cost-effective and quantifiable ways to market an online retailer’s products and services, allowing them to send more personal, precisely targeted messages than other mediums. When used correctly and effectively, permission-based email marketing can also become the number one customer acquisition and retention tool. However, Email marketing has still not evolved as a mature channel for online retailers in India. It is still being done in an adhoc fashion, and there is a need for more mature service providers, who can provide an overall management of email program, including activities such as handling end to end planning, reviews, as well as monitoring Bounce rates, click rates, A/B testing based upon the concepts. Given the highly quantifiable nature of this channel, service providers can look at offering revenue sharing models where the initial cost of using the platform is negligible, but they get paid based upon the performance and effectiveness of these marketing programs.
  4. Assisted eCommerce Solutions – One of the reasons eCommerce hasn’t yet reached enough scale in India is because of relatively low Internet penetration, especially in B or C class cities. There are models possible where a combination of technology as well as local presence can help in building virtual hubs in parts of country where internet is not easily available. This will require a larger investment, and a regional sales force – but the pricing advantage or availability of large virtual assortment of products can provide strong reasons for individuals living in this city to consider online channel as a shopping alternative. Service providers can think of a number of categories in this space – from local kiosk solutions to internet café solutions that work on a affiliate/ rev share model so that the online retailers are only paying a percent of the additional demand being aggregated through these channels.
  5. Payment Gateways – A large expense that eats into the operating margins of online retailers in India is the transaction cost to payment gateways who act as the interface between online retailers and issuing credit card banks. In today’s environment, not many options are available to online retailers. In some cases, the smaller volume online retailers end up paying 6-7% of their sales as payment gateway fees, wiping out majority of their product margins. CCAvenue – one of the original players in this space, charges 7% transaction fees as part of its “economy plan”. If you are a retailer, selling products in the electronics category, you are probably earning 8-10% gross margin. In this scenario, there is not much scope for online retailers to achieve reasonable profitability. Although I don’t want to undermine the importance of a payment gateway solution, but when I see 7% being charged for a service, that at an overly simplified level involves routing transactions from the retailer to the bank, I do think that this space needs more entry. Payment gateway is the core need of any online retailer, and the market can easily support 8-10 strong players in this space. The initial setup cost to build a payment gateway service offering will certainly be high – but there is a large opportunity to begin offering easily integrated, Plug and play solutions in this category at significantly lower transaction costs.

The list of opportunities is limitless. As I mentioned in one of my previous posts, the ecosystem is slowly evolving which will help improve the maturity level of end to end ecommerce experience. However, if you are interested in offering services in this space, or are already playing in this space, this is the time to think about how you can carve out a niche and a unique business model that can not only provide low acquisition costs for online retailers, but can also create a significant value for your business and the end customers.

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21 Responses to “Online Business Models for India”

  1. Srinagesh Eranki says:

    Very thorough. We have come to expect no less!

    The other one that comes to mind is fulfillment. I’m unsure what options (if any) exist in India.

    With regards Payment Gateways (for instance), is there any way to find out the most popular ones in India? I’m thinking something akin to http://www.webhostingtalk.com/

  2. Great article. I can actually relate to your article in many ways. As an e-commerce company, the main concern we have is cost per acquisition, which could be more than the transaction amount in most of the cases, and we couldn’t afford to burn the money just for the sake of creating a brand, this helped us in evolving our business from B2C to B2D (Business to Direct), we are now the largest online distributor for most of the brands we carry & acquisition cost is as low as 1%.

    Our business philosphy has been to reach the customer in every possible way, apart from our website – cafegadgets.in, we have recently ventured into Mobile search & m-commerce and Cafegadgets e-kiosk, which are now operational in more than 30 locations including retail chains, corporates & institutions.

  3. Well Said! If we look at ecommerce trends in India, we require such kind of extensive content on websites. As the industry grows more n more differentiating factor will be required. I believe same things can be done differently by adding little flavors to it.

  4. Jim M says:

    Hi Darpan, Thanks for mentioning us. It’s amazing how fast ecommerce technologies are spreading to and from India and around the world. -Jim, VP, Buzzillions Platform

  5. Sanjay says:

    A great article, as always! I have been following your blog with keen interest, and look forward to new articles all the time!

  6. Ram Sharma says:

    This is true. Ecommerce will be the next big thing in India. What with the urban working population increasing with every year there will be little time left to go to physical stores. E-Commerce will certainly fill this gap.

  7. Vivek Jain says:

    Acquisition cost is definitely the key. However, we also need to look at the loyalty of the customer. Are the customer really loyal that the cost of acquiring him is recovered over a period. We think otherwise. Innovation and price point along with awareness is the key in Indian online space. Try selling an MP3 player at 500 on your site and see the traffic. Next day, advertise this in a newspaper and see the traffic. It would be definitely 10 times over. Awareness is much more important than innovation and price. You cannot keep a customer unless you offer him a good deal everytime. This is exactly what rediff and indiatimes do. They bombard the customer with regular advertisement and get business.

    - Vivek Jain
    http://www.hindglobal.in
    Powered by Rinks Retail Pvt Ltd

  8. Sandeep says:

    Excellent article – Another model to explore for service/product companies is the SAAS model in the eCommerce space. This can be based on Amazon model and should offer huge opportunties both from the SMB as well from Large business. This will not require much innovation as best practices from Amazon are already available and will definitely attract lot of customers.

    To add to this if a company offers the full ecosystem by tying with best-of-the-breed companies say PowerReviews, Search,Web2.0, Commerce Product, Order Mgt, Fraud & Payment,3PL, 4PL and also provide Call center services which is an essential part of any eCommerce initiative, it will definitely add value to companies who want to go for a India based hosted solution. Currently I dont find any player which offers the full suite of services.

    Another option rightly pointed out by Srinagesh is Fulfillmet. There are hardly any players in India who specialize in taking care of Fulfillment. There are specialized companies in US like DotCom Distribition, OH Logistics which have thier own Distribution center and completely take care of fulfillment.Huge opportunity to be tapped there as well I guess.

  9. John says:

    Actually there is need of more players in payment gateway, when the competition arise, the price of payment gateway fee will reduce…then it will considerable margin increase to online retailers

  10. Swaroop C H says:

    @Srinagesh There has been some discussion on the different payment gateways on the Bangalore OCC mailing list : http://groups.google.com/group/bangaloreocc/t/9340e26b105b654d/

  11. Thanks Darpan, for such an exhaustive and informative articles on trends, future and requirements for a Successful E-commerce business in India. Few Issues raised by you really need appreciation such as. Content Management, Email & Campaign Management and the need for cheaper payment Gateways.

    The good news on Payment Gateway Front is that now Lots of players are there such as ICICI bank, HDFC bank, Citi bank, Axis Bank (UTI formerly) and Yes the costly one CC Avenue also. In fact you can bargain with them for Reduced Transaction cost once you are able to give them good business volume. Regarding the charge they take It varies from 7-8% to 2%. But still, there is space for new technologies like google payments, and of course new players for payment Gateway.

    The most important thing I found in your article is Email & Campaign Management which is largely ignored by most of E-com players in India. It is equally true that E-mail campaign in done in very ordinary fashion and Its potential is not harnessed. We have to look at it.

    Regarding Contents Management, I think India needs some more IT Rules and legislation because Contents piracy ” Copy and Paste” model is still a big challenge for all of us. We at nbcindia.com regularly faces such things.

    yogender kumar sharma

  12. It was a amazing experience to visit this website and read the articles and contents.

  13. Vijay Kaundal says:

    Very informative article.

    I think content management really has a long way to go in Indian e commerce sites. Even elsewhere there are not many good options available. There are some like Teamsite and Tridion Content management system that are available but these are too expensive and have their own limitations.

    E commerce has been the next big thing in India for a long time now. In order to actually realize its potential users need to be enabled first to connect to the internet to be able to reach your websites.

    Then there is a lot of brand building and trust building exercise required. I have tried using e commerce sites only twice in India. Once the session expired on the payment page but money got deducted from my account and the second time I received stuff without the accessories.

    But yes there is a lot of potential and now is the time to start working on it.

    One area I can think of is site tracking in terms of number of hits, number of conversions to orders etc etc

  14. spaash says:

    Hi Darpan and all,

    I need some of your ideas related to using E-commerce in India as service channel, esp to counter warranties,compliant handling. I am planning to start a venture like that, and want to know what are the top 5 industries I should focus,

    Regards

    Spaash

  15. nishant says:

    Very informative article. We have recently launched something similar at http://www.reviewgist.in/widgets.jsp .

  16. Eugene says:

    I am looking for some idea and stumble upon your posting :) decide to wish you Thanks. Eugene

  17. Abhay says:

    an amazing aticle and well written…
    i did like the issues related to content management and email marketing and would definitely be visiting again for some new ones related to e commerce ….
    thanks for the sharing this pool of information…

  18. googlee says:

    Great article ! We are in the process of evaluating our business plan for a startup in the e-commerce space. Thanks for sharing so much fo information.

    FYI: I browsed through some other payment gateways options in India & found their startup costs too high (http://www.ccavenue.com/content/comparative.jspwhich) are complete deterrents for small businesses.

  19. G Venkata Narayana says:

    Excellent Article on E-Commerce.

    Lot of thanks to Mr Darpan (also to his Team, if any) for such a nice article.

    I do agree that in India, there are so many things have to do in Information Technology, especially awareness, reach, training & pricing factor. These days everybody is busy & don’t want to go to our traditional shops, instead, person would like to get all the information on the product at their table only, in that case in future the e-commerce would be a big boom in India.

    There are lot of players, but their reach in not enough in online business. A lot to discuss on the matter.

    Anyway thanks for nice artile.

  20. sukesh says:

    Nice article. Something useful for beginners too..

  21. Bhuvan says:

    I agree that payment gateway providers is a key to the growth of Indian E-commerce industry. I believe many 3rd party Payment gateway are looking at India as a serious market…like the eWay of Australia, they are quite strong in the Asian market and there pricing strategy is geared towards helping many many businesses to come online…i am looking forward to seeing them in India.

    Also Darpan, why not interview eWay for your blog and let many know there is a hope from 7% to flat fee.

    cheers

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