Challenges and Opportunities for Building a Profitable E-commerce Brand in India
Despite funding, a majority of e-retailers have only earned a chunk of customers and focused more on retaining repeat buyers rather than widening their base
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Propelled by the increased Internet and smartphone penetration, the rising consumer wealth and ongoing digital transformation, India is the fastest-growing market for the eCommerce industry. A report by India Brand Equity Foundation (IBEF) has predicted the Indian eCommerce industry to be worth $200 billion by 2026. The same report expects the number of Internet users to grow from 604 million in 2018 to 829 million by 2021.
E-commerce companies received more than $7 billion in venture capital and private equity in 2018. Despite the funding, the majority of e-retailers have only earned a chunk of customers and focused more on retaining repeat buyers rather than widening their base.
Besides, India largely remains a value-sensitive market, which means the margins in the sector are lower than the other global eCommerce markets. Hence, establishing a profitable business model for Indian e-retailers is a massive challenge.
Many early-stage problems for online retailers, such as infrastructure, awareness, and payments, have been solved to a certain extent. There is still a long way to go. Let us dig into the eight challenges and opportunities that lie in building a profitable Indian eCommerce brand.
Price battle in marketplaces: In the run-up to festivals, eCommerce marketplaces offer hefty discounts and cashback on everything—from home appliances and electronic devices to fashion and apparel. The aim being, to attract the average Indian online shopper, for whom, discounts are the second most important factor influencing their purchase decision. As per a report by Retailers Association of India and LitmusWorld, this comes second to product features.
Since the majority of them use the same vendors, there is no difference in merchandise.
For large eCommerce companies, the price battle may not lead to a question on their survival. For small-time retailers and start-ups, this business model is unsustainable and ends up hurting the balance sheet at the year-end.
Unsold inventory: Almost all e-commerce companies in India run on an inventory-based business model. To reduce their inventory exposure, they work on a sales-on-return basis with vendors. That means if a product doesn't get sold in a stipulated time, the vendor will take it back. While such arrangements work with 3,000 shipments a day, they are unmanageable beyond that.
The reason being, inventory-based models buy products in advance. Every year, they are left with 12-15% of unsold inventory. If you add the cost of storing these goods including the warehouse, hiring store managers and insurance and security costs, it takes a major toll on the profits of the eCommerce company.
High returned-to-origin (RTO): A logistics term, RTO refers to undelivered orders of an ecommerce company. The number usually shoots up when managers, responsible for shipment and delivery, set high daily targets for their staff.
The delivery agents, when unsuccessful in delivering some of the orders, mark them as RTO.
RTO makes up 25-40 per cent of the merchandise sold online. A return policy is the standard business policy. At the same time, they cannot charge the customer or add this cost to the overall product cost. The logistics cost is also high. Especially in fashion, apparel and large appliances even when they offer detailed images, video catalogs and size charts, the RTO is high.
E-commerce is far from becoming a profitable business. That being said, technology solutions are proving to be opportunities that are being used in e-commerce to cut down on their costs.
Let's explore them in detail.
Address correction: Addresses in India are not structured. Customers end up entering incorrect addresses (such as wrong city name or pin code) or incomplete information (such as missing street names). Wrong addresses cause delayed orders, which hurts the brand reputation.
With the help of machine learning, e-commerce companies can detect spam address, compute address quality scores, correct mismatched city-pin codes and suggest correct addresses to customers at the time of filling out the details.
Product size recommendations: In categories such as apparel and footwear, brands follow different size conversions, which customers may not always find favorable. Machine learning help eliminate the problem by recommending product sizes that would best fit the customer.
The suggestions are made after carefully analyzing the past purchases (including returns data for the product was too small or big) and browsing history of customers.
Catalog quality: Product catalog issues such as poor quality images, colors, or descriptions can adversely affect the buying experience. E-commerce can leverage artificial intelligence algorithms to analyze thousands of product listings and connections between catalog items to identify the missing information such as brand name or color on other products.
Another important factor is the freshness and expanse of collections and designs. What would drive a customer to keep coming back to your portal?
Refund and Returns: Late return or refund is a common complaint among e-commerce customers. Online retailers can use algorithms to detect good buying-behavior and process faster returns through customer categorization.
By analyzing a customer's past purchase behavior, they can identify between those genuinely returning the shipment and fraud attempts. The technology can give insight into customers providing absurd reasons for placing their returns.
This information helps e-commerce companies in saving time by calling customers who are genuinely upset with the delivery.
The future of e-commerce in India belongs to those who offer a seamless customer experience. Currently, the price is the primary factor that sets apart online retailers. To grow and succeed, brands need to identify a product or service differentiator that can solely be fulfilled by them. What sets you apart?