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E-Commerce in India – Is it really Profitable??

Posted by Sachin.Singhal On May - 3 - 2008
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In one of my previous posts, I had extended the invitation to Commercewiki readers to contribute to this blog. This post is by one of the readers – Sachin Singhal who has done a great job in articulating the profitability situation of eCommerce in India. Thanks Sachin for your contribution – comments are welcome from everyone.


Yesterday I was listening to Avril Lavigne’s song “Tomorrow is a different day” and certainly believe it to be true when it comes to e-commerce industry in India.

No Doubt, Travel portals are outperforming in India. Travel alone constitutes 50% of Rs 4800 crore online market in 2007-08. Recently MakeMyTrip has touched whopping Rs1000 crores of turnover. It around 20% of total e-commerce market. It’s expected that travel portals will grow 65% annually. We are experiencing an exponential growth in this vertical. Are these companies making profit or able to break even? How much is the average cost of acquisition? Well these questions still lingers me. The average cost of acquisition in E-commerce industry is around Rs 1100. If the average order size on these travel portals is Rs 4000 and typical net margins are 6-7% (That too on the higher side), these portals will make only Rs 300 on average. That’s far below the cost of acquisition.But the big question arises how the Non-Travel Portals are performing in India? Largest market of non-travel industry is electronics, digital and lifestyle products. Major players in this are old pros Indiatimes, Rediff shopping, homeshop18, eBay & some new kids on the block like Cafegadgets.in, Gadgetsguru and numerous startups.Average margin is 7-8% in electronic and lifestyle product. If we assume 35% as the share of these portals, then it’s worth Rs 1680 Crores and a bottom-line of Rs 135 Crores. When it comes to bottom line are we all fighting for a piece of cake?Keeping in mind all these questions one must be forced to ask “Is E-Commerce Really Profitable in India??”. Well that’s a million dollar question. And it’s surrounded by so many “Ifs and Buts”. Currently most of the e-commerce portals are striving to break even. Weak pc penetration, Low broadband usage, reluctant credit card users and high cost of acquisition are the major gray areas in this vertical. According to CLSA Internet Report 2007, India will have 55 million internet users by March 2008 growing at 30% over next three years. At this rate it will breach 100 million barriers in next two years. Similar growth trends are predicted for broadband subscribers. Considering the past this is quite optimistic.Majority of the online shoppers don’t hesitate in using credit cards online provided the transactions performed by them are safe. Internet security is also major concern in this arena. We can win the trust of the customer if we have certifications like Verisign, Hackers Safe or Thawte Seal.

Internet advertising expenditure is increasing by leaps and bounce. Most of the advertisers prefer to spend pay per click, pay per action or through publishers in affiliate network. Not everyone can afford to burn money by spending on advertising. Internet advertising is pure overhead. It’s a Catch22 situation. One has to adopt “aggression with precaution” strategy. Most of the companies end up spending millions of Rupees just to reach potential customers in a flash without foreseeing the repercussions on balance sheet.

If I have advertising budget of Rs X per month then I would prefer to spend X/2 and save rest of the amount for contingencies. Main stress should be strategic tie-ups which will provide me visibility and foot falls without spending anything. Cost of Acquisition is an overhead that should be minimized. In long run the direct traffic and traffic from referring sites should constitute the major chunk of the pie. Google Adwords and other PPC campaigns share should not be more than 15-20%. We can’t rely on pure internet revenue in India as the market is still in nascent phase. One has to take alternate ways to keep up the pace and make business model profitable. Diversification in sales channel like corporate sales, print media sales can boost the sales to considerable amount. For that business need to invest in human resources and such type of investment is directly proportional to sales.

All these strategies can bring renaissance in e-commerce market in India and certainly we can hope for a new dawn.

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30 Responses to “E-Commerce in India – Is it really Profitable??”

  1. Srinagesh Eranki says:

    Any pointers regarding offline plays from pure online merchants in India?

    I am not talking about offline players having an online presence, per se.

  2. Hi Srinagesh,
    I feel offline channels cannot be ruled out in India as e-commerce market is still in nascent stage. As the online market will grow strong the offline presence can be faded out. Pure online model is still not successful here until volumes are enormous. Patience is the key for all this as e-commerce in India is growing at rapid pace.

  3. john says:

    Can anyone give e-commerce scenario of online selling of apparels, shirts, t-shirt etc in India

  4. Hi John

    After technology, lifestyles is the largest selling category online!

    Apparels sell quite well.. check the listings on ebay / rediff.

    Tc

    Ankur

  5. john says:

    Hi Ankur, thanks for the information

  6. Suprabha says:

    With large number of players entering the e-commerce arena, the products are getting commoditised. What with so many travel portals, e-learning, and online markets. Big players can wrench the market. Can startups survive?

  7. Your concern is valid. But the answer to your question is yes. As a start up you have to be proactive while acquiring marketing techniques. They can’t afford to be reckless in marketing expenditure. Just follow a balanced and pragmatic approach and you can come out with flying colors.

  8. Ecommerce will be the next big thing. Just watch out for another five years and we will see it is the next big thing.

  9. atuljain7 says:

    I am highly impressed with the kind of content this website has. This site has all kinds of information that an IT professional wants when it comes to research.

    I have started my own blogging at http://atuljain7.blogspot.com with an aim to provide all the indepth information to all IT professionals related to ecommerce which cannot be found on any other website.

    Plus, I am also distributing freebies to certain bloggers who are providing valuable information on my blog.

    Cheers….

    Atul

  10. Vivek Jain says:

    Dear Sachin

    We appreciate your analysis on ecommerce industry.

    The cost of acquiring a customer can be reduced drastically if the right segment is targeted. Few online retailers use print, television etc as their marketing medium along with various online portals. The customer acquisition cost through these offline modes is very high. Every player cannot opt for offline advertisement due to budgetary constraints. Larger player go for offline marketing and increase the base of online buyers. Smaller ones wait for the spill over effect.

    The online retail industry in India is still at a very nascent stage. Online retailers have adapted the model of a marketplace where they act a facilitator of transactions. It involves lower overheads in terms of lower office space, manpower requirement etc.

    We are bringing back the traditional retail concept into online too. All products shall be dispatched from our own warehouse. This is to ensure that we have better control over our supply chain. It will surely result in higher overheads, thereby putting strain on our marketing budget. This will however lead to better customer satisfaction and hence retention.

    We currently do not have any data on the online retail industry segregating marketplace and pure retail concept. This would have helped us to take a better decision.

    Bringing a sea change in online retail – http://www.hindglobal.in
    Powered by Rinks Retail Pvt Ltd

  11. Rajeswari says:

    All your articles have been very useful for me. Few c’s from me:
    Will a Collect and Go model work ? – Can the retailers(online + brick-and-mortar stores) devise a model where customers can order online and then pay and collect at shop?.

    Combine Gift registry model with online retailing – Allow the customers to create their own wedding registries and send their ‘wanted’ gift list to their friends?. This is a huge success in US. Will this model work in India ? Has anyone tried already>

  12. This is an intresting article on eCommerce trends and how travel as a vertical is growing at a very fast pace compared to rest of B2C.

    Can some one share on wht is happening on B2B front. Now again B2B is segmented
    - Comapny targeting Distributors world wide
    - Distributors targeting retailers or institutional buyers world wide

    My question is today recruitment industry is almost 7 yrs old online and not many eRecruitment sites have forrayed in to eCommerce model.

    Monster has successfully launched eCommerce model and are doing good in the matured markets like the US, Europe. India we are still trying to reach the target audience but unfortunately we are not having the luxury of having HR sites / HR online forums / specific B2B sites where we know we can target SME segments (except sites like Indiamart / expressindia etc..).

    can some one help / suggest how and where we can target the SME segment (This si the segment which has huge potential to buy recruitment solutions online as their needs are not as huge as a corporate)

  13. HI Rajeshwari,

    We are coming up with similar concept. Its like we will be having retail outlets supported by our online presence. So anyone interested can order it online. If someone wants to have a look and feel of the product, he can visit our nearest retail store and can buy it from there as well. These kind of models are need of the hour for online as well as local presence. Similar kind of concept we are coming up in US, Singapore, Thailand, Turkey and in other countries.

  14. Hi Vivek Jain,

    Well I appreciate the effort you have put in to bridge the gap between retail and online space. But this model is not viable for startups who don’t have solid backups. The main problem lies in stocking the products and then selling them.It would result in numerous problems like aging, obsolete stock, Depreciation, blocking cash in inventory. Slowly and steadily it will it will ensure that balance sheet has huge losses to register. The most competent model would be to procure the items as when the order occurs. For that you just have to tie up with national distributors, II tier distributors who can arrange the goods anywhere in the country as and when demand occurs. You can check with them with availability of the goods weekly or bi-weekly. This model is called back to back. you can mail me at s.singhal82@gmail.com . I would give you a better idea.

  15. Vijay R. Nainani says:

    Hello All,

    I have been reading all the posts with great interest. In fact I am currently doing the planning and groundwork to launch an online retail website in India next year. Most likely I will base it in Bangalore.

    If anyone has any thoughts or suggestions or advice for me I would very much appreciate it.

    Basically I am trying to cover all the areas from website hosting, marketing, product importation, small warehousing with office attached to start, payment methods, delivery methods etc… It is a niche segment of the retail industry but one thats not currently there in India. However after doing my research its the right time. I cannot say more about it until it happens

    We are looking to build up slowly and surely and make a name for ourselves by being different, cool and innovative.

    Thanks for all the help!

  16. hello,
    gr8 websites for startups..gr8 articles.

  17. Ajay says:

    Hello

    Yes E-commerece in india is yet to boom with the internet awareness in the country it will be really successfull to do online business. Take the success of bazee now Ebay.com they are doing good business. I am launching a new website named onlinedukan.com next month for my fellow indians. This website will provide platform for buyers and sellers who want to buy or sell their things for free without any commisions being charged. it will be a good platform for companies to showcase their goods and sell it for free. onlinedukan.com will be launched next month and we are expecting an overwelming response & suggetions from our countymates.

  18. The article give a realistic approach……great Info!!

  19. idris says:

    Interesting information… I believe eCommerce in india is not a mega hit. You have mentioned few important points such as weak pc penetration, low broadband usage etc, but one thing i’d like to state is education, awareness and trust (as you stated already) many online users in india use internet for business and academic research, communication and casual surfing. People are not aware of what is booming in the internet industry, who has internet presence? even if they have online presence there will be less or no visibility in the internet space. Trust is one the biggest factors, i was really astonished when my friends asked me how good is ebay in terms payment processing? are the product displayed overthere are real? if this is the case for ebay then what would be the case and user’s perception when a new ecommerce company arrives in the market. Are we (indians) still lacking in understanding ecommerce?

  20. Sachin Singhal says:

    Idris..

    Your doubts are genuine. As Indians we have this tendency to have the look & feel of the product. Times are changing as people are getting more brand conscious. Due to standardization of products, online buyers are looking for Original Manufacturer’s warranty, Secured payment method & a good price. India is getting more and more educated in this e-commerce, that’s why online transactions are growth exponentially. And not only eBay other websites are doing exceeding well in this space.

  21. Vivek Jain says:

    Dear Sachin

    Back to back models definitely helps in lowering costs. However, we need to look at our vision and the differentiation that we need to create in the online space. It will act as an entry barrier for others. Any person can come and start an online business with back to back inventory and hence make life difficult for everybody. Even after being in this space for a decade, you still shall not be secure in a back to back sourcing model.

    The business risk definitely is high in this model and with no successful player yet in this place, the odds are definitely less tilted in our favour.

    Bringing a sea change in online retail – http://www.hindglobal.in
    Powered by Rinks Retail Pvt Ltd

  22. Sachin Singhal says:

    Hi Vivek,

    Back to back model is not the only differentiation that will lead to success in online space. And yes, if one has direct tie-ups with brand owners & for back up you have tier-I & tier-II distributors, one shouldn’t feel venerable. When the cost of investment is at its peak, “stock & sell” model is just like another online retailer.
    You are right when you say back to back model is anybody’s game….. I would add to it “only in short run”…. If you are looking from the longer perceptive then Darwin’s Theory of Natural Selection do apply i.e. “Survival of the Fittest”

    Regards,
    Sachin Singhal
    Cafegadgets.in

  23. Ashwin says:

    hi all could anyone let me know the actual growth of ecommerce industry in india. also the number of ecommerce users as of 2008. also the growth rate apart from the service sector, i want details for product sector.

  24. I am an IT Professional working in Birlasoft appriciated your article & thoughts..

    Keep Bouncing back..

  25. Shubs says:

    Hi

    Great article.
    Could you tell me portals in the financial services space that are profitable?
    There are 2 varieties of portals ad based and distributors of fin services – are any of either models working?

  26. Fergal says:

    Interesting post, keep the good stuff coming, good content appreciated!

  27. D.Arul says:

    i need more detail about E-Commerce, bec. i online base sales. i want name of the portals like ebay

  28. Sachin Singhal says:

    Hi All,

    Thanks for such over whelming response on this article. I appreciate the fact that in past one year some of the traditional, brick and mortar companies have seriously started evaluating e-commerce as an alternate channel. Apart from Netherland and Poland, India is also looked upon as leading emerging e-commerce market. Many international companies are carrying out extensive research in India and have started spreading their wings here. Cheers for that !

    P.S : You can reach me at s.singhal82@gmail.com in case you have any specific questions. I am open for discussion :)

    Regards,
    Sachin Singhal

  29. Rohit Rawal says:

    Dear Sachin,

    Thats quite an informative article you have put up.

    I am looking for information on any of the following -

    1) Whats the size of the online gifting market in India?
    2) Whats the size of online gift voucher purchase in India?

    Would you have any related information on the above?

    Thank you,

    Regards
    Rohit

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