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How discounting will lead to the doom of online retail

How discounting will lead to the doom of online retail
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

Online retail or e-commerce in India is growing very fast and currently there are more than 1,500 websites selling products online. Out of these, there are only three to four major players, and the remaining ones are all small time start-ups aspiring to make it big in the online retail space, pinning their hopes on the newly found aspirations of the middle class Indian to embrace technology and do shopping while staying in the comfort of their homes.

Though the growth is phenomenal and its encouraging to see that many young Indians are coming forward to take the entrepreneurial plunge riding on the back of their online retail store, they are missing out on some key points to consider before setting up their online retail business.

Let me tell you, there is a difference between opening a website and operating a business, where transaction would take place day in and day out. Most of the retail websites that are offering one or the other feature to lure customers are actually trying to do the same thing as the website next to them. All of them are actually giving the same features like price comparisons, free delivery, discounts and more discounts.

Now it might be a good manipulation technique to attract new customers to their website by giving heavy discounts (some are even selling lower than the cost price of the product), but how long will this trend last? If the customer is habituated to low prices and discounts all through out the year then he/she would immediately switch to the next online store when the first one stops giving discounts. And that day would surely come when the Investor money stops coming in and the site has to attract traffic though other means and not by giving heavy offers and rebates.

Online retailers are basically creating a commodity business, where the product or service has no value and only the price matters. With so many options available online, it’s hard for any one player to create brand loyalty in the current market conditions.

The discount game can only help the online retailers in getting repeat business but will not create a loyal customer base who would be willing to neglect competition and keep buying from the same retailer again and again because of their product quality or service. The only way the websites can survive in the future is by selling more and more, and increasing their volume of sales, but that would be tough nut to crack given the rate at which new sites are coming up every day and the competition is cut-throat.

We are not challenging the fact that heavy discounting will not work, but the question is how much price is the business willing to pay for the money it will make. Over a period of time the gains would be lower and lower and the cost will increase for the online retailer providing discounts. Some examples can be seen in the present day itself where Snapdeal reported a loss of Rs. 264.6 crore, YepMe posted a net loss of Rs 45 crore on net sales of Rs 61 crore, while the net loss of Shopclues was at Rs 38 crore and higher than its net sales of Rs 30.5 crore.

Coming down to the advertising and marketing strategies, the tricks employed by new entrants are again very similar and focused on discounts, some of them are trying celebrity endorsements, and some are giving exclusive offers for few hours every day and calling that as a “Flash Sale”, thereby making the user feel the urgency to buy something so that they don’t miss out.

But the fact that the retailers are not realising is that the user is now matured and addicted to discounts. They know that if the item is not available at a lower price in Site A then it would be available in Site X for sure, and when their time and internet connection is unlimited then there is no harm in constantly looking out for discounts till they get one.

The online sellers have successfully fallen into their own grave and now the user will surely move to the next big site if they constantly find the prices of products higher on a particular site. And the online store that’s out of investor’s cash will not even get a second chance to grab the attention of the buyer, as they don’t have a physical presence so that the user can see the advertisements while commuting on the road or walk into the store to check the price.

Online sellers of present day have to think creatively and have to gradually move away from discounting. Now is the time for small e-tailers to think hard and think fast on how to create value for their customers and attract them to their sites without just relying on heavy discounts and offers. If this addiction were allowed to last for a longer duration, then it would ultimately lead to an online retail bubble, which would eventually explode and wipe out all small e-commerce websites along with it and just leave the big sharks to do the business and monopolise it.

Edition: December 2016

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