Since I’ve your attention now, lets face the truth first. It’s 2012 and building an e-comerce company in India today is very tough. And worse, it’s going to be tougher every day. Why you ask – here’s top 4 reasons why I think so:

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1. Poor payment infrastructure: Heard enough of it. Here’s few basic facts

  • First up, its takes almost a month+ from initialization to closure (i.e. you’re ready to accept payments). For a startup, it’s a month’s burn.
  • Second, the amount of paperwork involved will make you feel you’re again starting another company.
  • Third, the processing fees (also known as TDR) is abnormally high – starting from anywhere from 2-7% (depending on whom you’re negotiating with). On top of that, there’s setup cost, AMC (god knows why gateway providers charge this annually). So if you factor all these extra costs, you would see that your overall processing charges are at least 25-50 basis points higher. This according to me is the biggest deterrent to Indian e-comerce industry since startups are generally pressing hard on the margins & forgoing those extra percentages could make or break your business model.
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2. Unreliable logistic solutions: Have you ever shipped anything in your life using courier/logistic provider? I’m sure you’ve. Remember the cost. If by any chance you do, then think how do these e-comerce companies make money when they don’t charge you for shipping. Feel bad yet? No – then factor in the unreliability in shipping that these logistic solutions bring in for e-com companies. From cost perspective, average cost of logistic solution delivery is around Rs 50-150 i.e. $1-3. Now here’s few interesting facets:

  • Most of the indegenious logistic solution providers don’t understand or care about the involvement of technology required to make the process of procurement to delivery seamless. And here, we as consumers demand 1-day delivery.
  • Secondly, from the balance sheet perspective for these logistics companies e-comerce companies add very less to their overall revenue. So that bottoms out the focus of these companies.
  • Thirdly, thanks to our Government structuring of our address pin-codes, the delivery boy doesn’t find it comforting to complete the last mile delivery quickly. So delayed and inefficient delivery system.
  • Fourth, the return rates are not coming down at all. Averagely companies face from around 5-40% return rates (depending on the category of products). Also consider around that more than 40% of today’s shipment happens on COD (cash-on-delivery) – I call it “sweet poison” for India’s e-comerce.
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3. Rising customer acquisition costs: Any e-comerce startup has to weekly/fortnightly/monthly manage a metric called CAC (customer acquisition cost).   The low the acquisition cost the better it is. Now the acquisition cost ranges from somewhere between INR 500-1200 or $10-24 depending on the product category. For those who say that they have low CAC in the range of $3-6, they are lying. For them, the metric of CAC isn’t for buyers but for registered members or subscribers or some other vanity metric.

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4. Falling average ticket size: This is what every startup CEO should be worried about. If they are not, then they are probably thinking that scale would solve all their problems in the future or they are simply living under the rock. In today’s date, average ticket size of Indian e-comerce startup would be around $15-20 (depending on the category). Now add operational costs like inventory, warehousing, employee etc etc. Now if you do simple math with above mentioned numbers from payment processing, logistics, acquisition cost etc, you’ll soon realize that the maths don’t add up.

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Nuff said.

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So if I’d your attention till now, this article is not about gloom & doom in e-comerce industry in India. Just wanted to pull out of the facts to make my point. And I’ll gracefully leave it to the pundits to speculate & predict.

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Now the good part. The part which any entrepreneur who swears by blood, beer & cheap coffee would love to hear.

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Yes I do see the silver-lining amongst all these problems & issues I mentioned.

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1. Start a payments company – No, I’m not talking crazy here. It’s not easy but not impossible. BTW you didn’t think the present payment companies weren’t small ever, huh. Come on, someone with hard balls did fight it through to get it started – why can’t you? Although I do think that a well-setlled e-comerce company should be the one to start a payments company since no one knows about the pain behind every percentage they lost or those failed transactions or the initial paperwork they been through. I think they should lead the way & bleedy built an amazing payments company & sub-let others. Solves the purpose entirely. Till then, I think you should lead the way. There’s definitely a huge gap which needs to be fulfilled.

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2. Start a logistics company – Yes. Go ahead. Built an amazing logistics company which understand tech. And use technology to reduce friction. Trust me, there’s lot of value and magic that can be created just by doing that. No wonder, one of the largest e-com company already relies on its own logistics rather than anybody else’s.

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3. Help startups reduce acquisition costs – For this a classic SAAS model would work IMO. Provide deep insight analytics into e-com companies’ numbers. Help them understand their own customers. Help them differentiate between active & non-active members. Help them how to make non-active ones more active. Help them to better their conversion funnel. But it has to be tech product built like a bot inside each clients’ datasets. The bot should crunch data into valuable information which in-turn provides tangible benefits. Don’t worry if any company would give you access to their internal numbers. They would – just provide solid use-cases and few clients. What everyone looks for is little bit of social proof to get started with.

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4. Can you help startup progressively increase ASP – Can you think of a way which helps e-com startups create more loyal buyers? I’m sure you do. Most of the customer loyalty programs that you see around e-com space is not even worth talking. Sorry but those Rs 500 or Rs 1000 free invitation gift voucher etc doesn’t work anymore. Too many people have beaten these things to death. Customers want something new. Here’s your opportunity to make a killing of this gap. Think why do airline loyalty still works? Why does hotel chains have for creating loyals?

Hope this information helps you.

Till then, stay well and have fun 🙂

Disclaimer: this blog post is from my personal experience of reading similar articles, talking to entrepreneurs, investors. Also my little experience running & working in an e-com startup helped.

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