1. EMERGENCE OF E-COMMERCE – A BRIEF HISTORY: INDIAN SCENARIO
SUDARSHAN ANAND
DPGD/JL13/1423
SPECIALIZATION: GENERAL MANAGEMENT
PRIN.L.N.WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH
Year of Submission: June 2015
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2. Acknowledgement
I am glad to have this opportunity in my life to upgrade my education and rebrush my skill sets
and knowledge to making me a better manager.
Being a working professional especially from the E-Commerce space, having worked on this
project revisited many memories, facts and personal experiences of the past 5 years riding on the
E-Commerce boom.
I thank Mr. Niraj Headoo, E-Commerce Director of Rediff.com India Ltd and a senior colleague
and mentor for having encouraged me to pursue this course and guiding me to complete this
project successfully.
Most importantly, I would also like to thank Welingkar Institute, for giving me this opportunity
and a chance for many working professional like me who missed out in upgrading their
education.
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3. APPENDIX-1
CERTIFICATE FROM THE GUIDE
This is to certify that the Project work titled Emergence of E-Commerce – a Brief History: Indian
Scenario is a confide work carried out by Sudarhan Anand
Admission No. DPGD/JL13/1423
A candidate for the Post Graduate Diploma examination of the Welingkar Institute of
Management under my guidance and direction
SIGNATURE OF GUIDE:
NAME: Mr. Niraj Headoo
DESIGNATION: Director-E-Commerce
ADDRESS: Rediff.com India Limited
Mahalakshmi Engineering Estate,
L. J. Road, Mahim West
Mumbai: 400016
Date: - 29-June, 2015
Place:-Mumbai
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4. Page 4 of 62

5. CONTENT
Acknowledgement 2
Preface 6
Overview 8
Characteristics of Indian E-Commerce 15
Status of E-Commerce in India 16
Online Business & Revenue Models 18
Funding 22
E-Commerce Infrastructure 25
Business Verticals 28
Margin Structure 29
Need for different management of physical infrastructure 30
Investments in infrastructure and operating models of the future 31
Impact on business of traditional retailers evident 32
Key Developments & Benefits of E-Commerce 36
Key factors to be evaluated before entering a new E-Commerce business 38
Trends to watch out for 42
Regulatory violations and unfair practices 45
Critical factors E-Commerce companies need to focus on to accelerate growth 46
Enabling Technologies 49
Technology Advancements 51
Key Drivers & Marketing Promotions 54
Recommendation 58
Conclusion & Recommendation 61
Bibliography 62
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6. Preface
This project covers indebt details about the Emergence of E-Commerce in India.
The project aims to highlight important aspects on current scenario, the scale of growth,
challenges faced, loop holes, opportunities and the future of the business.
The key reason to doing this project is to educate and motivate new talents and the future that lies
for them in this growing industry.
The facts and knowledge shared in this project is based on theoretical experience.
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7. Executive Summary
The project gives an insight on the emergence of E-Commerce in India. It covers details on how
this sector is currently progressing at a fast growth rate, what are the benefits for the common
man, how are traditional retailers being impacted, what risks do start ups companies need to be
aware of, the technological advancements, logistic challenges, employment and loop holes
government need to cover.
To accomplish the above, I have taken references from few projects by Industry experts,
references from the internet, newspaper facts and some of my own research work I had worked
on to present to our Sr. Management.
Let us start with the overview.
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8. Overview
Internet communication technology has not only made the entire system interactive, integrated
and seamless, but has also created completely new opportunities for cross - industry relationships.
Information networks across countries have been democratized and enabled nearly one‐third of
human population to share music, knowledge, news, and social life on an open playing field.
Such an all pervasive reach of communication technology has enabled entrepreneurs to conduct
business transactions without even meeting in person. This mode of transacting business through
communication technology, commonly known as internet, is what has come to be known as
“Electronic Commerce” or E-Commerce. E-Commerce is not just about buying and selling; it is
about electronically communicating, collaborating and discovering information. It has come to
impact a significant portion of the world affecting businesses, professions, and of course, people.
The term E-Commerce was coined in the early 1990s when internet became commercialized and
users began flocking to participate in the World Wide Web. E-Commerce in India is poised for
rapid growth in the years ahead with increasing internet penetration and availability of budget
smart phones.
Early E-Commerce entrepreneurs in India used the internet as an effective medium for facilitating
matrimonial alliances, travel‐related transactions and recruitment process. In recent years, owing
to robust growth in E-Commerce business, customers are experiencing “empowerment” in
marketing. That is, the market players not only offer high‐end products at competitive prices, but
also compete among themselves to satisfy customer needs through assured and timely home
delivery of products (with guarantee) as well as return of goods (after delivery) at no cost to
customers. Building client trust through a secured online payment system using high‐speed
internet has also helped drive up sale of goods and supply of services, both tangible and
intangible. Access to technology, foolproof system of logistics, and big investments are required
to put such arrangements in place. However, on account of increasing customer demand for
discounts laced with best services, profit margins would be minimal. Therefore, only the high‐
ticketed players who have access to capital, technology and the means to develop or hire
adequate infrastructure would sustain. Further, growth in E-Commerce industry attracts mergers
and acquisitions, which is already in sight and may accentuate. Merger and acquisition as a
strategic choice for maintaining competitive advantage will help expand the horizons of E-
Commerce and bring structural changes in the economy. The existing laws, through constant
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9. evolution, are trying to cope with legal, tax, competition and other regulatory issues; all the same,
these issues will keep coming to the fore until acceptable new understandings within national and
international jurisdictions emerge.
The rapid growth of E-Commerce in India over the last two decades, rising internet and mobile
phone penetration has changed the way we communicate and do business. E-Commerce is
relatively a novel concept. It is, at present, heavily leaning on the internet and mobile phone
revolution to fundamentally alter the way businesses reach their customers. India records 243mn
Internet users, ranks no 3 and is likely to reach up to 550 million in 2018. “Three factors—
expanding reach, more affordable access, and improved awareness will be the primary drivers of
online growth. While in countries such as the US and China, E-Commerce has taken significant
strides to achieve sales of over 150 billion USD in revenue, the industry in India is, still at its
infancy. Since the E-Commerce industry is fast rising, changes can be seen over a year. The
sector in India has grown by 34% (CAGR) since 2009 to touch 16.4 billion USD in 2014. The
sector is expected to be in the range of 22 billion USD in 2015.
India’s E-Commerce and Etail Growth
Source: IAMAI, CRISIL, Gartner, PwC analysis and industry experts
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10. Currently, E-Travel comprises 70% of the total E-Commerce market. E-Tailing, which comprises
of online retail and online marketplaces, has become the fastest-growing segment in the larger
market having grown at a CAGR of around 56% over 2009-2014. The size of the E-Tail market
is pegged at 6 billion USD in 2015. Books, apparel and accessories and electronics are the largest
selling products through E-Tailing, constituting around 80% of product distribution. The
increasing use of smart phones, tablets and internet broadband and 3G has led to developing a
strong consumer base likely to increase further. This, combined with a larger number of
homegrown E-Tail companies with their innovative business models has led to a robust E-Tail
market in India rearing to expand at high speed.
India is almost 10 years behind China in the E-Commerce space. China’s inflection point was
reached in 2005 when its size was similar to India’s current market size. Thankfully for India the
dynamics currently are similar to what existed in China then – growing broadband penetration,
acceptance of online marketplaces, and lack of physical retail infrastructure in many places.
Online travel accounts for nearly 71% of E-Commerce business in India. This business has
grown at a compounded annual growth rate (CAGR) of 32% over 2009-13.
Alibaba is an outlier when it comes to margins and making money in the E-Commerce
ecosystem. The Chinese company makes an operating profit of 40% compared to industry
standard (US and China) of 8-10%. Travel sites typically make 2.3%. Amazon, the industry
pioneer, is yet to achieve healthy profitability even after two decades of dominance. Indian
players, the report points out, are not even thinking of profitability yet. It’s a game of market
share and market penetration, causing all serious players to have a war chest ready for when the
industry scales multiple times.
For every Rs 100 spent on E-Tailing, Rs 35 is spent on supporting services like warehousing,
payment gateways, and logistics, among others. Delivery costs a platform owner 8-10% implying
significant burn. Though 50-60% of delivery logistics today are handled by large E-Tailers
themselves, this proportion may reduce going forward as the participation of lower tier cities
picks up. Presently, aggressive pricing in India is leading to E-Tailers making losses on every
segment. For a Rs 100 sale of a book, the E-Tailer incurs a loss of Rs 24, a loss of Rs 13 in
mobiles, and Rs 8 in apparel.
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11. Demand in India exists across 4,000-5,000 towns and cities, but there is no significant presence
of physical retail in almost 95% of these. High real estate cost is one of the main reasons why
organized retail is unable to expand at speeds expected earlier. Real estate as a percentage of
sales is 14 times higher than in the US. For large retailers in India, it is 7% of sales as compared
to 0.5% for Walmart.
Business transactions are categorized into either business-to-business (B2B), business-to
consumer (B2C), consumer-to-consumer (C2C), consumer-to-business (C2B) or the recently
evolved business-to-business-to-consumer (B2B2C). E-Commerce processes are conducted using
applications, such as email, fax, online catalogues and shopping carts, electronic data interchange
(EDI), file transfer protocol and web services and e-newsletters to subscribers. E-Travel is the
most popular form of E-Commerce, followed by eTail which essentially means selling of retail
goods on the internet conducted by the B2C category. According to E-Commerce Europe,
country-wise, the US, UK and China together account for 57% of the world’s total B2C E-
Commerce sales in 2013 with China having total sales of 328.4 billion USD. As against this,
India had sales of only 10.7 billion USD, 3.3% of that of China in 2013 with fifth position in Asia
Pacific. This is despite the fact that India enjoys high demographic dividends just like China.
India’s internet penetration with total e-households at 46 million against China’s 207 million is
one of the reasons behind India’s poor B2C sales growth.
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12. According to Forrester Research, an independent technology and market research firm, only 16%
of India’s total population was online in 2013 and of the online users only 14% or 28 million
were online buyers. India, therefore, was still in a nascent or immature stage of evolution of
online retail spending. China was in ascending stage at 50%, whereas Japan (69%), Australia
(57%) and South Korea (70%) were in mature stage.
Top 10 countries in terms of population and corresponding e-households
Source: E-Commerce Foundation, 2014
An analysis of the demographic profile of internet users further testifies that E-Commerce will
rise rapidly in India in coming years. Around 75% of Indian internet users are in the age group of
15 to 34 years. This category shops more than the remaining population. Peer pressure, rising
aspirations with career growth, fashion and trends encourage this segment to shop more than any
other category and India, therefore, clearly enjoys a demographic dividend that favors the growth
of E-Commerce. In coming years, as internet presence increases in rural areas, rural India will
yield more E-Commerce business.
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13. Demographic profile of India online users (As on September 2013)
Source: Statista website accessed on 9 December 2014
Geographical distribution of Internet users in India
Source: IAMAI - IMRB
By 2020, E-Tail in India is expected to account for 3% of total retail. Further, orders per million
are expected to more than double from five million in 2013 to 12 million by 2016, which will
mean more opportunities for both consumers and E-Tail companies. While the share of online
shopping in total retail has increased at a fast pace in the last few years, it is still miniscule
compared to the figure in China, where the share is 8-10%.
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14. The homegrown players have shown tremendous growth and attracted some big investors. The
entry of global biggies like Amazon and Alibaba has taken the competition to a new level.
E-Tailers are differentiating themselves by providing innovative service offerings like one-day
delivery, 30-day replacement warranty, cash on delivery (COD), cash back offers, mobile wallets,
etc. The supply chain has improved significantly and E-Tailers are even leveraging on the
services of Indian Post for greater reach across the country. In 2014, Indian Post collected 2.8
billion through COD option of payment.
The Government’s ambitious ‘Digital India’ project that aims to offer a one-stop shop for
Government services will further bolster the sector by introducing internet and broadband to
remote corners of the country and increase trade. This initiative through a targeted investment of
nearly $17 billion will transform India into a connected economy and also attract investment in
electronics manufacturing and create millions of jobs.
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15. Characteristics of Indian E-Commerce
Large percentage of population subscribed to broadband Internet, 3G internet users, and a recent
introduction of 4G in few cities. Availability of much wider product range (including long tail
and Direct Imports) compared to what is available at brick and mortar retailers. Competitive
prices compared to brick and mortar retail driven by disintermediation and reduced inventory and
real estate costs. With increased usage of online classified sites more and more consumers are
buying and selling second-hand goods. Evolution of Million-Dollar startups like Jabong.com,
Saavn, Makemytrip, Bookmyshow, Zomato Etc. India's retail market is estimated at $470 billion
in 2011 and is expected to grow to $675 Bn by 2016 and $850 Bn by 2020, – estimated CAGR of
7%. [Citation needed]. Another big segment in E-Commerce is mobile/DTH recharge with nearly
1 million transactions daily by operator websites
Though the sector has witnessed tremendous growth and is expected to grow, a lot of E-
Commerce ventures have faced tremendous pressure to ensure cash flows. But it has not worked
out for all the E-Commerce websites. Many of them like Dhingana, Rock.in, Seventy MM
amongst others had to close down or change their business models to survive.
Some of the characteristics that define E-Commerce in India are:
Cash on Delivery as a preferred payment method. India has a vibrant cash economy as a result of
which 80% of Indian E-Commerce tends to be Cash on Delivery (COD).
Direct imports constitute a large component of online sales. Demand for international consumer
products (including online purchases from international retailers) is growing much faster than in-
country supply from authorized distributors. E-Commerce uses sophisticated technology and
logistics to create a cross-border supply chain that allows consumers to shop online for
international products that are delivered duty paid to their doorstep.
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16. Status of E-Commerce in India
Today E-Commerce has become an integral part of our daily life. There are websites providing
any number of goods and services. Then there are those, which provide a specific product along
with its allied services Multi-product E-Commerce- These Indian E-Commerce portals provide
goods and services in a variety of categories. To name a few: Apparel and accessories for men
and women, Health and beauty products , Books and magazines, Computers and peripherals,
Vehicles, Software, Consumer electronics, Household appliances, Jewelry, Audio/video,
Entertainment, Goods, Gift articles, Real estate and services Single-product E-Commerce. Some
Indian portals/websites deal in a specialized field, for example:
Automobiles - On these sites we can buy and sell four-wheelers and two-wheelers, new as well as
used vehicles online. Some of the services they provide are: Car research and reviews, online
evaluation, Technical specifications, Vehicle Insurance, Vehicle Finance. To name some popular
websites; Carwale, Cartrade, Cardeko, Gaadi, Zigwheels etc
Stocks and shares and E-Commerce - In India today, we can even deal in stocks and shares
through E-Commerce. Some of the services offered to registered members are: Online
buying/selling of stocks and shares, Market analysis and research, Company information,
Comparison of companies, Research on Equity and Mutual Funds. Sharekhan, Icicidirect,
Religareonline, Kotaksecurities are few popular websites.
Real estate and E-Commerce- They provide information on new properties as well as properties
for resale. One can deal directly with developer through consultant. Allied services: Housing
Finance, Insurance companies, Architects & Interior Designers, NRI services, Packers &Movers.
Few websites that are known for in this space are Magicbricks, 99acres, Makaan & Housing.com.
Travel & tourism and E-Commerce - India has a rich history and heritage and E-Commerce is
instrumental, to a large extent, in selling India as a product, encouraging Indians as well as
foreigners to see its multifaceted culture and beauty. The tourist destination sites are categorized
according to themes like: Adventure -trekking, mountain climbing etc, Eco-Themes pertains to
jungles, flora and fauna. Yatra, Travelguru, Expedia, Makemytrip, Trivago, Goibibo are few
popular sites.
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17. Gifts and E-Commerce - In the bygone days, one had to plan what to gift a loved one, trudge
across to your favorite shop, and browse for hours before purchasing a gift. The gifts are
categorized as: Collectibles like paintings and sculptures, Luxury items like leather goods,
perfumes, jewelry boxes, etc, household curios and carpets, etc, Toys & games, Chocolates,
Flowers, Wood-craft & metal-craft. Few sites like Giftease, Archiesonline, Indiangiftsportal cater
to customers looking to gift products.
Fashion and E-Commerce – fashion stands amongst the top 3 category position, many commerce
companies have defined strategies and build foundation leveraging on this category. The key
success and popularity can be described in 2 folds; one being availability of brands at discounted
rates which customers could never afford and second being getting the private labels that
currently dominate local markets but can now compete nationally with the popular brands.
Private labels are also the most preferred customers E-Commerce companies bank their margins
on. During special promotions these set of private brands can offer as much as 40% gross margin
to the E-Commerce companies. Snapdeal, Jabong, Myntra, Fashionara, Flipkarty etc are some
very aggressive websites who have dominated the fashion segment.
Hobbies and E-Commerce- The most popular hobbies from time immemorial are reading, music
and films. The books cover a wide range of topics like Business, Art, Cookery, Engineering,
Children’s Stories, Health, Medicine, Biographies, Horror, Home & Garden, etc. Saavn, Firstcry,
Waitrosegarden, Gardenguru.
Matrimony and E- commerce- It is said that marriages are made in heaven, but in the world of E-
Commerce they are made on marriage portals One can search for a suitable match on their
websites by region of residence (India or abroad), religion or caste. Allied services for registered
members: Astrological services, Information on Customs and Rituals, Legal issues, Health &
Beauty, Fashion & Style, Wedding Planners. Shaadi, Jeevansathi, Bharatmatrimony are few
popular sites.
Employment and E-Commerce- Two major portals likewww.Monsterindia.com and naukri.com
(meaning job.com in Hindi) are instrumental in providing jobseekers with suitable employment at
the click of a mouse. The service for job seekers is free and for Employers they charge a nominal
fee. Jobs are available online in fields ranging from secretarial to software development, and
from real estate to education. Monster, Timesjob, Shine & Naukri are few job portals.
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18. Online Business & Revenue Models
E-Commerce market in India has started to become crowded and complex with several players
fighting for a fair share of customers’ mind and wallet. As the competition in the E-Commerce
heats up, the companies are using multiple business models in order to get customer attention
including:
Inventory model e.g. Shopper Stop, Croma
Social networks e.g. TripAdvisor
Aggregator Model e.g. Ola Cabs
E-Marketplace e.g. Flipkart, Snapdeal
Transaction broker e.g. IRCTC
Click and Collect service e.g. Amazon
To get the maximum benefit from E-Commerce business, a large number of companies are
adopting different innovative ideas and operating models including partnering with online
marketplaces or setting up their own online stores. Some key operating models include the
following:
Marketplace and pick-up & drop – It is a model where sellers often partner with leading
marketplaces to set up a dedicated online store on the latter’s website. Here sellers play a key role
of managing inventory and driving sales. They leverage on high traffic on the marketplaces’
website and access their distribution network. However, the sellers have limited say on pricing
and customer experience.
Self-owned inventory – It is a model where the E-Commerce player owns the inventory. The
model provides better post purchase customer experience and fulfillment. It provides smoother
operations due to ready information on the inventory, location, supply chain and shipments,
effectively leading to better control over inventory. On the flipside, however, there are risks of
potential mark downs and working capital getting tied up in inventory.
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19. Private label – It reflects a business where an E-Commerce company sets up its own brand goods,
which it sells through its own website. This model offers a wide-ranging products and pricing to
its customers and competes with branded labels. Here, margins are typically higher than third-
party branded goods.
White label - This model involves the setting up of a branded online store managed by the E-
Commerce player or a third party. The brand takes the responsibility of generating website traffic
and providing services by partnering with payment gateways. It helps build trust, customer
affinity and loyalty and provides better control of brand and product experience.
Flipkart (inventory-led model) - Flipkart has started as a price comparison online portal with an
initial investment of 8,000 USD and later turned into an e-retailing giant which recently ticked
the 1 billion USD in gross merchandise volume. It started with a consignment model where
goods were procured on demand and turned into inventory e-retailer supported by registered
suppliers since it provided better control on the logistics chain.
Flipkart established warehouses in Delhi, Bangalore, Mumbai and Kolkata managing a fine
balance between inventory and cost of delivering goods. Facing difficulties from the third party
logistics in the form of higher delivery cost, late deliveries and faulty products delivered resulting
in return and customer dissatisfaction, it has started its own logistics arm named e-Kart. E-Kart
provides a robust back-end support to Flipkart and ensures timely deliveries.
To achieve the economies of scale, recently e-Kart started providing back-end support to other e-
retailers. It has consolidated the market and added strengths by acquiring We Read, Mime360,
Chakpak.com, Letsbuy.com and Myntra along the way. The company employs around 13,000
employees and plans to add 10,000 to 12,000 more in next one to three years after a recent
acquisition of Myntra.
Amazon India (marketplace model) - Amazon started practicing the market place model by
launching its site in early 2013 in India. It started registering electronics goods sellers and ended
FY 2013 offering nearly 15 million products. Amazon India has two fulfillment centers in
Mumbai and Bangalore and plans to start five new fulfillment centers across the country. Known
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20. for its strong last-mile delivery network, Amazon India has set up a logistics arm named Amazon
Logistics and started offering same day delivery.
Rediff.com, Ebay– One of the oldest veterans in the E-Commerce space, these companies have
technologically advanced in their business by creating a inventory management tool, order
fulfillment, payment models for their sellers. They virtually holding no inventory and provide
sellers with services of third party logistics for last mile delivery. These companies have purely
focused in driving customers to their website with a strong sense of making their business
profitable.
Snapdeal India (marketplace model) – Snapdeal initially started off the coupon model shifted
their business model to E-Ttailing. It started off with its market place where inventory were held
by the sellers and their third party logistic partners would provide the last mile delivery. To
reduce the time gap on deliveries they progressed and moved towards one ship consolidation and
VOI (Vendor on inventory). Similar to Amazon India they have warehouses in Mumbai, Delhi
where their top selling goods are stored by sellers and they manage the dispatching. Depending
on their seller potential they decide what model to enable their seller to best suit their business.
To survive and sustain operations in the competitive market, companies are also taking advantage
of one or multiple revenue models including:
Advertising revenue model e,g. Yahoo.com
Subscription revenue model e.g. Flintobox
Transaction fee model e.g. eBay
Sales revenue model e.g. Amazon
Affiliate revenue model e.g. CouponDunia
There has been rise in startups that primarily depend on commissions to earn their revenue. For
example, Freecharge’s primary revenue source is commissions from telecom operators which
range from 2% (for incumbent operators) to as high as 5% (for new & small operators). IRCTC,
which accounts for almost 40% of India's online travel, makes 60% of its profit from
commissions on ticket sale. In such business models, the E-Commerce provider offers the online
platform to the merchants to gain better visibility and reach in the market. At the same time, they
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21. provide the market intelligence and data to better target their products and services compared to
competition. This helps in solidifying the relationship with merchants and also to increase their
user base. For example, Foodpanda have helped restaurants develop their online footprint in the
market.
E-Commerce sites such as CouponDunia have also started to gain commission from brands on
redemption of their free coupons offered by the site. The affiliate websites of price comparison,
cash-back offers, discount coupons, etc. which are estimated to account for 8% of E-Commerce
sales in India, furthermore gain significant commissions from other E-Commerce sites such as
Flipkart, Amazon, Snapdeal to help drive traffic to these sites. These commissions could range
from 5% to 50% depending on the product range, time span, and the size of players
From a transport app service provider Uber in the west to Ola Cabs in India, the aggregator
model has already written its success story. Aggregators could be market creators (e.g. eBay,
Zomato, Portea Medical) providing a digital environment where buyers and sellers can meet and
transact or transaction brokers (e.g. MakeMyTrip, BookMyShow) to process online transactions
for consumers. Their revenue model is generally based on transaction fees for enabling or
executing the transaction and value proposition is convenience, on-demand and cost effectiveness
for the consumer. Although the backend of these marketplaces involves extremely complex
integration to create sharing economy, but the success of these ventures depends on the simplified
experience they can provide to buyers, sellers, and even the employees. Hence, simplicity is the
core to these types of ventures providing the user desired products and services at the click of a
button. For example, Ola Cabs punch line Book a taxi with one touch! The customer, on the other
side, not only appreciates the WOW experience but is also ready to pay for the value he or she
receives.
These companies are poised to disrupt the incumbents in several sectors such as transport, travel,
hospitality, pharmaceutical among others. This is influencing the growth of vertical E-Commerce
in India with startups such as Portea Medical, Foodpanda, RedBus, Housing.com building on the
customer loyalty and lifetime value by offering a compelling buying experience so that the
customer moves from brick and mortar stores to online platforms.
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22. Funding
As of 2012, most of the E-Commerce companies are yet to start making money. However, due to
their growth prospects, many venture capital firms such as Accel Partners have invested
considerably. In one of the biggest fund raising, Flipkart.com, till November 2014, has raised
about USD 2.3 billion. Entertainment ticketing website BookMyShow.com raised ₹100 crores
investment by Accel Partners.
On 10 July 2013, Flipkart announced it had received $200 million from existing investors Tiger
Global, Naspers, Accel Partners, and ICONIQ Capital. New investors making up the additional
$160 million include Dragoneer Investment Group, Morgan Stanley Wealth Management, Sofina,
Vulcan Inc. and more from Tiger Global.
In February 2014, online fashion retailer Myntra.com raised $50 million from a group of
investors led by Premji Invest, the investment company floated by Azim Premji, Chairman of
Wipro. May 2014 also witnessed an acquisition of Myntra by Flipkart reportedly for ₹2,000
crores. However, cyber law and E-Commerce due diligence are still being ignored by investors
and financial institutions while investing in India.
In October 2014, KartRocket, an Indian E-Commerce platform, announced granting of a Series A
round led by technology investor Nirvana Venture Advisors and 500 Startups, together with
Tokyo-based Beenos, previously known as Netprice.com.
Snapdeal - USD 50 million in 13 April. Backed by Japans Soft Bank Corp, Snapdeal fights
directly with Flipkart which is said to be currently clocking 4.5 billion USD (inclusive of Myntra)
and Amazon which is closing in on close to 2 billion USD. Snapdeal has raised 1 billion USD
from various investors like ebay, Blackrock, Temasek.
Even as the numbers grow, E-Commerce players have been beset with excessive cash burn in the
range of 20-30 milliion USD per month which has led to the need of constant capital infusion
from investors.
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23. With the new government being elected, business confidence has significantly improved. In
2014, investors aggressively funded the E-Commerce sector due to strong growth prospects.
Apart from the traditional online formats of retail and lifestyle, newer online business segments
such as classifieds, real estate, grocery and healthcare were also tapped.
The E-Commerce businesses will continue to attract investor interest. Several of India’s blue-chip
PE firms, which previously avoided investing in E-Commerce, are now looking for opportunities
in the sector. The focus is mainly on ancillary service providers—companies involved in support
functions ranging from delivery, logistics and payments—with investments largely driven by the
relatively lower valuations and smaller amounts of capital required.
Date Company Amount Key investors
(million USD)
Jul-14 Flipkart 1,000 Morgan Stanley, GIC, Tiger Global, Accel India, Iconiq
Capital, DST Global
Dec-14 Flipkart 700 Tiger Global, Iconiq Capital, DST Global, Steadview, Qatar
Investment Authority
Oct-14 Snapdeal 637 Temasek, PremjiInvest, SoftBank Corp
May-14 Flipkart 210 Tiger Global, Iconiq Capital, DST Global
Oct-14 Olacabs 210 Tiger Global, Matrix Partners India, SoftBank Corp,
Steadview
Feb-14 Snapdeal 134 Kalaari Capital, Intel Capital, Nexus Ventures, Bessemer,
Saama Capital
May-14 Snapdeal 100 Temasek, PremjiInvest
Nov-14 Housing.com 90 Helion Ventures, Nexus Ventures, Qualcomm Ventures,
SoftBank Corp, DST Global, Falcon Edge Capital
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24. Date Company Amount Key investors
(million USD)
Mar-14 Quikr 90 Warburg Pincus, Norwest, Matrix Partners India, Nokia
Growth Partners, Omidyar Network, Kinnevik
Sep-14 Quikr 60 Warburg Pincus, Norwest, Tiger Global, Matrix Partners
India, Nokia Growth Partners, Omidyar Network, Kinnevik
Nov-14 Zomato 60 Sequoia Capital India, Vy Capital
Feb-14 Myntra 50 Kalaari Capital, Tiger Global, IDG Ventures India, Accel
India, PremjiInvest
Aug-14 Snapdeal 50 Ratan Tata
Jul-14 Olacabs 41.6 Sequoia Capital India, Tiger Global, Matrix Partners India,
Steadview
Nov-14 Proptiger Realty 37 SAIF, Accel India, Horizen Ventures
Sep-14 Freecharge.in 33 Sequoia Capital India, Ru-Net Holdings
Sep-14 BigBasket 32.7 Helion Ventures, Ascent Capital, Zodius Capital, Lionrock
Capital
Jun-14 Amazon. 30 Catamaran Ventures
Oct-14 CarTrade.com 30 Warburg Pincus, Tiger Global, Canaan Partners
Sep-14 CommonFloor 30 Tiger Global
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25. E-Commerce Infrastructure
Payment Gateway
Payment gateways help the E-Tailers to receive money instantly rather than waiting for the COD
payments, thus reducing chances of theft and fraud. The retailers are slowly moving towards
payment gateways for improving security and dealing with other complexities which arise with
financial transactions. The banks as well as the E-Tailers are offering different offers like cash
back and Easy Monthly Installment (EMI) to encourage customers for card-based payments.
Startups like Paytm and FreeCharge are providing mobile wallets while almost every commercial
bank is providing the option to pay online via credit or debit card. The popular EMI option which
can be availed by credit card users with online payment are luring customer to pay online upfront
for high-value items.
The payment gateways use various security measures such One Time Password (OTP), CVV in
case of debit/credit card, etc. Amongst the several payment gateways in India, some well known
payment gateways that are widely used include
CCAvenue & Tech Process. The mobile payments have also started to pick up. There are
multiple ways to enable mobile devices for transactions through Near Field Communication
(NFC), Quick Response (QR) code, sound wave or Bluetooth low energy (BLE) technologies.
Point of Sale (POS) device is enabled to process on-premises payments using these technologies.
These processes are not only easy, convenient, and fast but also quite secure
When it comes to running an online business the crucial part is how the customer will pay. An E-
Commerce payment gateway is a service that authorizes credit card, debit card or online banking
payments and processes them securely with a user’s merchant account for electronic fund transfer
(EFT). The world is moving from cash to digital money and thus there is a need of payment
gateway for sustainable future E-Commerce.
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26. The Indian E-Commerce sector is heavily dependent on Cash on Delivery (COD) mode of
payment as it is the most preferred choice for Indian consumers due to lack of trust in online
transactions, limited adoption of credit/ debit cards, and security concerns among others. More
than 50% of online transactions are done on cash on delivery method and it is available across
600 cities and towns of India.
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27. Hosting
There are many hosting companies working in India but most of them are not suitable for E-
Commerce hosting purpose, because they are providing much less secure and threat protected
shared hosting. E-Commerce demand highly secure, stable and protected hosting. Cyber security
issues of E-Commerce business in India would be required to be managed by Indian E-
Commerce stakeholders in the near future. In fact, Indian government is planning to introduce
cyber security breach disclosure norms in India very soon. Recently Target Corporation suffered
a cyber attack that has put it under litigation threat in multiple jurisdictions. Trends are changing
with some of E-Commerce companies starting to offer SaaS for hosting web stores with minimal
one time costs.
Logistics
The strong emergence of E-Commerce will place an enormous pressure on the supporting
logistics functions. The proposition of E-Commerce to the customer is in offering an almost
infinite variety of choices spread over an enormous geographical area. Firms cannot compete
solely based on sheer volumes in today’s ever-evolving, information symmetric and globalised
world of E-Commerce. Instead, the realm of competition has shifted to delivering to ever-
shortening delivery timeliness, both consistently and predictably. Negligible or zero delivery
prices, doorstep delivery, traceability solutions and convenient reverse logistics have become the
most important elements of differentiation for providers.
While the current logistics challenges relating to manufacturing and distribution of consumer
products and organized retail are well-known, the demands of E-Commerce raise the associated
complexities to a different level. E-Commerce retailers are well aware of these challenges and are
cognizant of the need to invest in capital and operational assets.
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28. Business Verticals
Vertical specific E-Tailers on the rise: Vertical specific E-Tailers find it motivating to focus on a
niche product or service as they can differentiate their services from mainstream E-Commerce
players. The value proposition of these ventures helps them raise funds easily and also helps in
customer acquisition as they generally try to solve the challenges faced by people daily. The
critical aspect of these industry specific ventures is offering a compelling and user-friendly
experience, mostly driven by convenience, richness of information, and cost effectiveness.
Big Basket, an online grocery store, is marketing to deliver groceries at home without the hassles
of traffic and saving time to do better things. Ola Cabs, a cab service provider, differentiates its
offerings by providing a great user experience to people looking for car rentals and cab service.
There are many innovative startups coming in the service industry trying to organize the
unorganized sectors in India. For example, UrbanClap, an online platform for customers to scout
for the best professionals in the service industry—architects, wedding photographers, yoga
teachers, educational counselors or lawyers. Similarly, innovative startups like Timesaverz
provide online platform for home services – plumbing, repair, electrician, or cleaning to the urban
people who are ready to pay a price for convenience.
Vertical Specific E-Commerce players in India
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29. Margin Structure
E-Tailers get between 5-20% as margin depending on the category which qualifies as its revenue.
Below picture depicted the fashion industry and various stake holders with their operating
margins in the supply chain management.
Source: Self-made graph during a presentation to our Sr. Management at Rediff
The Manufacturer / Brands sells directly to Distributors, Large Format Retailers (LFR) purely
due their volume share of purchases. These intermediaries generally operate on a 50% plus
margin unlike an E-Tailer who gives out maximum discount to online customer in lieu of price
attraction. Currently this strategy is looked upon as customer acquisition by E-Tailers to build
their loyal customer base over a period of time. Jabong offers its customers additional cash
coupons on purchases for Sign Ups, Paytm offers additional cash backs to its customers on
purchases. Flipkart offers deals to its customers on purchases through their mobile app.
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30. Need for different management of physical infrastructure
The business model of the conventional retailers and E-Commerce providers differ significantly.
The conventional infrastructure model relies on increasing depth and breadth of coverage through
several inventory nodes, warehouses and stocking points connected by based on various other
factors ranging from production cycles, nature and variety of the SKUs to even local taxation
laws. The conventional order point occurs at retail stores and static customer fronts located
at the end of the chain, and inventory requirements are predicted empirically based on several
months or years of past data. In fact, competing sales channels may also duplicate infrastructure,
an indication of the typical sub-ordination of the logistics function within the overall sales and
distribution process.
The rising growth and complexity of E-Commerce categories and delivery networks is expected
to have a large spill-over to infrastructure and logistics investments which will include more
warehouses, sorting and delivery centers and employment. Based on current productivity trends
and growth estimates, it can be estimated that over the next three to four years, there will be an
addition of 7.5 to15 million sq ft in the form of additional central fulfillment centers alone with
an average size of 80,000 to 1,50,000 sq ft each. This, by itself represents an additional 6 to 12%
of all the space available in the form of organized warehousing in India and almost 25 to 50% of
all incremental addition of consumption-driven warehousing space in the same period.
To enhance the reach further to match the growth in warehousing, additional sorting and delivery
centers will also be critical. Such additional centers with each measuring around 10,000 to 20,000
sq ft will be added. Industry estimates reveal that the total spend on warehousing and sorting
centers could be as high as 3 to 6% of top-line revenues, which represents an cumulative spend of
over 450 to 900 million USD of spend in warehousing till 2017-2020. The industry is expected to
spend an additional 500 to 1000 million USD in the same period on logistics functions, leading to
a cumulative spend of 950 to 1900 million USD till 2017-2020.
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31. Investments in infrastructure and operating models of the future
The growth in E-Retailing will spawn several investments in logistics infrastructure including
large fulfillment centers and warehouses, downstream parcel and sorting centers, focus will be on
equipping these nodes with state-of-the-art technology and modern warehousing practices
promoting visibility across the logistics chain. The kind of infrastructure will not only be bare
one shell but will focus on specific handling requirements of the commodities transacted.
As times becomes the essence of delivery, quicker modes of transportation and reduced transit
times will increasingly become the key demands. Currently, India operates at a very low level of
air cargo penetration characterized by only a few airports equipped to handle large volumes of
express delivery parcels.
As the race to the market moves to the Tier 2 and Tier 3 cities a day may not be far off when
there is an increasing demand of expanding air cargo connectivity to smaller towns through
various merry go round aircrafts using charter airplanes and general aviation. Airport operators
including the Airport Authority of India (AAI) need to carefully evaluate this particular category
of air cargo on par with other categories of airport infrastructure development. Similarly, for
certain product categories, railways movement can also be explored.
The Indian railways are exploring various schemes like parcel trains and increasing the
competitiveness of parcel loads in passenger trains. For certain commodities on the short haul
routes; railway can become a predictable and low-cost transport choice. Therefore the whole
transportation paradigm of the future may evolve around a judicious mix of rail, road and air
transport modes.
Economic potential due to the rise of E-Commerce logistics the rising growth and complexity of
E-Commerce categories and delivery networks is expected to have a large spill-over to
infrastructure and logistics investments which will include more warehouses, sorting and delivery
centers and employment. Based on current productivity trends and growth estimates, it can be
estimated that over the next three to four years, there will be an addition of 7.5 to15 million sq ft
in the form of additional central fulfillment centers alone with an average size of 80,000 to
1,50,000 sq ft each. This, by itself represents an additional 6 to 12% of all the space available in
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32. the form of organized warehousing in India and almost 25 to 50% of all incremental addition of
consumption-driven warehousing space in the same period. To enhance the reach further to
match the growth in warehousing, additional sorting and delivery centers will also be critical.
Such additional centers with each measuring around 10,000 to 20,000 sq ft will be added.
Industry estimates reveal that the total spend on warehousing and sorting centers could be as high
as 3 to 6% of top-line revenues, which represents an cumulative spend of over 450 to 900 million
USD of spend in warehousing till 2017-2020. The industry is expected to spend an additional 500
to 1000 million USD in the same period on logistics functions, leading to a cumulative spend of
950 to 1900 million USD till 2017-2020.
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33. Impact on business of traditional retailers evident
Over the past 4-5 years, competition from online retailers such as Flipkart (in books, music and
electronics), Myntra and Jabong (in apparel) has eaten into the revenues of physical retailers.
Specifically, competition in the last three years has been intense compelling many to go online.
The impact of online retail is most evident in segments where the product specifications are
standard and differentiation low, such as books, music and electronics. Unable to match the huge
discounts offered by online retailers, traditional booksellers and music stores are either shuttering
outlets or folding up. For example, Planet M, a part of Videocon-owned Next Retail, has been
closing stores since 2012. Between 2011 and 2013, it shut over 100. As of March 2013, it had 85
open. As a part of this restructuring, Planet M has adopted a kiosk-based model for expansion
which saves lease rentals.
Even in segments such as apparel, E-Commerce companies have become extremely aggressive
offering discounts throughout the year, and conducting shopping festivals repeatedly to play the
volume game. This is difficult for a physical retailer because of the added costs of lease rentals
and higher inventory. If that were not enough, the exponential growth of online retailers has got
them the attention of venture capitalists and private equity players, affording relatively easier
access to capital.
The rapid growth of online retail is, in a sense, reflected in the deteriorating financials of physical
retailers over the past 3 years. At an aggregate level, operating and net margins of companies
such as Shoppers Stop, Cantabil, Kewal Kiran, Provogue, and Trent have all shown a declining
trend. Even operating parameters such as same-store sales growth, conversion ratio and sales per
square feet have been on a decline. For example, in the case of Shoppers Stop, sales per square
feet have declined from Rs 8,518 in 2010-11 to Rs 7,837 in 2012-13, while the conversion ratio
has come down from 24 per cent to 22 per cent over the same period. To be sure, the surge in
online retailing is not the only reason for the weak performance of traditional retailers. There are
other factors such as economic slowdown and local competition, but what’s irrefutable is that the
online upstarts are chomping away business.
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34. To stay in the game, traditional retailers have been working on their internet strategy. For
instance, Shoppers Stop, which started its online store in 2008, is revamping its digital platform,
which currently contributes 1% of the revenue has boosted presence and improved features and
user interface to bring its online visage on a par with leading E-Commerce websites. The
company is also trying to leverage its physical network by giving customers the option to return
products at its stores. Apart from Shoppers Stop, Croma has an online store with options such as
store pickup and cash on delivery. Even manufacturers of retail products such as Titan Industries
(watches, jewellery, eyewear, etc) and Aditya Birlas Trendin (apparel - Allen Solly, Louis
Philippe, Peter England, etc) have set up beachheads in cyberspace.
The big retailers are trying to complement the traditional retailing with digital commerce by tying
up with big E-Tailers. The partnership between Snapdeal & Croma or Amazon & Future Group
owned Big Bazaar is no more a partnership between two retailers. It has extended to a vendor and
technology partners offering technology and logistics services. Reliance retail is planning to
launch its E-Commerce website seeking to attract people from online retailers. The extended
reach of the online channel is the primary reason for offline retailers to launch E-Commerce
offerings.
Going ahead, we believe more and more traditional retailers will board the online bandwagon.
What we are witnessing in India today played out in the US about a decade-and-a-half back. That
was when today’s big daddies such as eBay and Amazon debuted. In the next 4-5 years, by the
turn of the century, they had become big enough to pose a threat to traditional retailers such as
Wal-Mart, forcing them to come up with online strategies of their own. Today, after nearly a
decade since the seismic shift began, some traditional retailers boast of a large online presence.
Similarly, physical retailers in India will have to establish their presence online quickly. And,
with the right strategies, they can even compete effectively.
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35. To tackle the queue problem at its stores, Wal-Mart allows customers to shop online and opt for
either home delivery or store pick-up. Today, Wal-Mart is among the top 5 online retailers in the
US with estimated revenues of USD 10 billion in 2013 from the online segment alone. There are
other examples as well, such as BestBuy and Toys“R”Us, which have developed a significant
online presence over the past decade and are now among the top online retailers in the US.
Omni-channel retailing is a relatively new concept that refers to the development of a seamless
approach to the consumer experience through all available shopping channels, such as brick-and-
mortar stores, Smartphone’s, tablet computers, personal computers, direct mail, television, radio,
catalog, and the likes.
With E-Tailer disrupting the traditional shopping, every retailer is looking for an online and
offline presence either through Omni-channel or through marketplace E-Tailers. Retailers that
enable more touch points and focus on delivering a smooth, information rich integrated
experience will benefit from higher share of wallet, brand equity scores and ultimately more
sales. Successful cases in the west such as Macy's click and-collect have not only proven that
Omni-channel strategies can increase spending per customer, but also improve customer
satisfaction levels if implemented properly. Similar option of click-and-collect is extended by
Amazon in India by providing physical locations to enable customers to pick up the products at
time convenient to them.
The retailers in India have also started to work on their Omni-channel sales strategy. For
example, Future Group inked an exclusive deal with Amazon while Tata Group owned Croma
partnered with Snapdeal to sell private brands online and to leverage the strengths, investments
and innovations in technology and talent to reach out to wider set of consumers. While the
reverse is also true with companies like FirstCry opening physical stores later to complement the
online sales and experience. Just as physical stores are seeking to get into the online and mobile
space, the time is also right for online stores to make their presence felt in the offline space.
Organized retailers will need to invest significantly more to compete with the E-Commerce
giants.
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36. Key Developments & Benefits of E-Commerce
Going Mobile - Mobile to be the most influential aspect of E-Commerce with mobile apps being
developed by most E-Commerce websites, smart phones are increasingly replacing PCs for
online shopping. In 2013, only 10% of the mobile users used smart phones, and only 5% of the
E-Commerce transactions were made through a mobile device. This figure has more than
doubled, and more than 13% of all E-Commerce transactions today happen via mobile.
According to some industry players, over 50% of the orders are being placed through mobile
apps, which is not only leading to substantial customer acquisition but also building customer
loyalty for various brands. However, most mobile transactions so far are for entertainment, such
as booking movie tickets and music downloads. This trend will change soon with more and more
merchandise being ordered online. More business coming from smaller towns E-Commerce is
increasingly attracting customers from Tier 2 and 3 cities, where people have limited access to
brands but have high aspirations. According to E-Commerce companies, these cities have seen a
30% to 50% rise in transactions.
Enhanced shopping experience - Besides general online shopping, customers are also shopping
online for weddings and festivals, thanks to wider range of products being offered and aggressive
advertisements. The free and quick shipment and wider choice of products, along with the ease of
shopping online as compared to in-store shopping, is also helping E-Commerce gather
momentum. Further, E-Commerce companies are doing rapid business due to sales. New
concepts such sales on weekends, holidays and festivals are attracting a lot of new customers and
building customer loyalty among existing customers. Television and social media, particularly
Facebook are playing a proactive role in promoting E-Tailing through aggressive advertisements.
This has helped several E-Commerce companies build substantial brand image.
Exclusive partnerships with leading brands - Over the year or so, there has been a trend of
exclusive tie-ups between E-Tailers and established boutiques, designers, and high-end lifestyle
and fashion brands. For instance, in 2014, Jabong added international fashion brands such as
Dorothy Perkins, River Island, Blue saint and Miss Selfridge, along with local fashion brands
through Jabong Boutiques. Similarly, Myntra benefited from exclusive tie-ups with brands such
as Harvard Lifestyle, Desigual and WROGN from Virat Kohli. Expanding the product basket
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37. There is a recent trend of relatively newer products such as grocery, hygiene, and healthcare
products being purchased online. Similarly, lingerie and Indian jewellery has also been in great
demand among customers outside India. Export comprises 95% of cross-border E-Commerce,
with the US, UK, Australia, Canada and Germany being the major markets.
There is a growing awareness among the business community in India about the opportunities
offered by E-Commerce. Ease of Internet access and navigation are the critical factors that will
result in rapid adoption of Net commerce. Safe and secure payment modes are crucial too along
with the need to invent and popularize innovations such as Mobile Commerce.
Research studies have indicated several factors responsible for the sudden spurt in growth of
E-Commerce in India such as:
Rapidly increasing Internet user base.
Technology advancements such as VOIP (Voice-over-IP) have bridged the gap between buyer
sand sellers online.
The emergence of blogs as an avenue for information dissemination and two-way communication
for online retailers and E-Commerce vendors.
Improved fraud prevention technologies that offer a safe and secure business environment and
help prevent credit card frauds, identity thefts and phishing.
Bigger web presence of SME’s and Corporate because of lower marketing and infrastructure
costs.
The young population find online transactions much easier.
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38. Key factors to be evaluated before entering a new E-Commerce business
To achieve their vision, E-Commerce companies will need to understand the intricate landscape
of new markets in addition to their own internal capabilities and limitations. The following
factors must be considered:
Market size: Before moving too aggressively into a new market, it is important to consider how
sizable the overall opportunity is.
E-Commerce readiness: It is essential to fully understanding the payment and logistical
infrastructure, consumer behavior, retail opportunity and technological developments.
Scope of growth: It is also important to look at the internet penetration, demographics of the
online buying population and understand which phase of development each market is in.
Barriers to entry: Players should understand the regulatory environment and connect with
solution providers, content distribution networks, and digital agencies.
Competition: There is also a need to do an in-depth assessment of what competitors are doing,
their online strategy and the nature of each offering
External challenges
External forces impact how E-Commerce companies plan their growth strategy and provide
seamless customer experience onsite and post transaction.
Product and market strategy: E-Commerce companies have to address issues pertaining to rapidly
evolving customer segments and product portfolios; access information on market intelligence on
growth, size and share; manage multiple customer engagement platforms; focus on expansion
into new geographies, brands and products; and simultaneously tackle a hypercompetitive pricing
environment.
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39. Customer and digital experience: Companies have to provide a rich, fresh and simple customer
experience, not geared towards discovery; manage inconsistent brand experience across
platforms; manage proliferation of technologies; and handle time-to-market pressure for new
applications. In the recent past, social media has become more influential than paid marketing.
Payments and transactions: When get paid by net banking one has to end up giving a significant
share of revenue (4% or more) even with a business of thin margin. This effectively means
parting away with almost half of profits. Fraudulent charges, charge backs etc. all become
merchant’s responsibility and hence to be accounted for in the business model.
E-Commerce companies may face issues around security and privacy breach and controlling
fictitious transactions. Further, RBI restrictions for prepaid instruments or
E-Wallets act as impediments. From a transactions perspective, cross-border tax and regulatory
issues, and backend service tax and withholding tax can have serious implications.
Logistics: Getting the product delivered safe and secure, in the hands of the right guy in right
time frame. Regular post doesn’t offer an acceptable service level; couriers have high charges and
limited reach. This would require getting insurance for high value shipped articles increasing the
cost.
Fulfillment: Companies will need to check if the physical infrastructure gets affected by the
internet speed. Also, the lack of an integrated end-to-end logistics platform and innovation-
focused fulfillment option could cause delivery issues. Challenges around reverse logistics
management and third party logistics interactions could also act as barriers to growth.
Internal challenges
Internal forces impact how E-Commerce companies can organise to drive and sustain growth.
Organization scaling: E-Commerce companies will have to make sure organization design keeps
pace with the rapidly evolving business strategy, along with fluid governance, strong leadership
and management development. From a growth perspective, identifying acquisition opportunities,
fund raising and IPO readiness becomes necessary. From a technology perspective, it is important
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40. to transform IT as an innovation hub and address the lack of synergy between business,
technology and operations functions of the enterprise.
Tax and regulatory structuring: Octroi, entry tax, VAT and lots of state specific forms can be
confusing at times with lots of exceptions and special rules. Companies will need to address
issues around sub-optimal warehouse tax planning; imbalance between FDI norms vis-à-vis
adequate entity controls; inefficient holding, IPR or entity structures; and international tax
inefficiencies. Future challenges include the new Companies Act, policy on related-party
transaction pricing, and the uncertainty around GST roadmap.
Risk, fraud and cyber security: From a risk perspective, E-Commerce companies could face
issues around brand risk, insider threats and website uptime. Issues around employee-vendor
nexus, bribery and corruption make companies vulnerable to fines. Cyber security also raises
some concerns around website exploitation by external entities.
Compliance framework: E-Commerce companies have to comply with several laws, many of
which are still evolving. Potential issues around cyber law compliance, inefficient anti-corruption
framework, legal exposure in agreements or arrangements, indirect and direct tax compliance
framework and FEMA contraventions and regularization could pose problems. Also, uncertainty
around VAT implications in different states due to peculiar business models could cause issues.
Vendor Management - However advanced system maybe, vendor will have to come down and
deal in an inefficient system for inventory management. This will slow down drastically. Most of
them won’t carry any digital data for their products. No nice looking photographs, no digital data
sheet, no mechanism to check for daily prices, availability to keep your site updated.
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41. Annual Results FY’14 (USD Million)
Valuations & funds raised in 2014 (USD Million)
Source - Various Industry News
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42. Trends to watch out for
Employment - It is also estimated that currently over 25,000 people are employed in e-retailing
warehousing and logistics. Even with efficiency improvements in individual performance and
productivity in the delivery networks, it is estimated that there will be an additional employment
of close to 75,000 people in these two functions alone by 2017-2020, representing an increase in
Employment by almost three times.
Revenue - Despite a huge potential, long-term profitability of the e-retailing industry in the
country is still under question. After so many years of operations, all the major e-retailers are yet
to start making profits. In the wake of wafer-thin margins and sub-optimal infrastructure resulting
in higher delivery cost, the long-term profitability still seems a distant possibility.
FDI Investment - FDI in the inventory-led retail will also be an important factor in shaping
up the future of the industry. In the current scenario, global e-retailing giants like Rakuten and
Alibaba are eyeing an entry into Indian e-retail market. Amazon has recently announced a 2
billion USD investment operating on marketplace model. FDI allowance could be a vital factor in
attracting significant investments resulting in better infrastructure and robust supply chains.
Tax - Evolution of taxation policies in the country will in a large way effect the way industries
practice warehousing. With uniformity in taxation laws across the country, E-Retailers are
expected to move closer to consumption centers with an aim to address the duplicities in the
logistics chain by removing the overlaps in form of delivery and sorting centers which are
traditionally closer to the consumption centers. It will also result in uninterrupted access to the E-
Retailing market. In a recent case, a south Indian state had sent a tax notice to E-Retailers
resulting in all E-Retailers withdrawing services in the particular state because of differing tax
policies.
Logistics - Evolution of logistics landscape in the country will be a very important factor in
determining the course for the E-Retailing industry. Logistics evolution will be necessary to
realize the potential robust growth. The evolution of the existing logistics providers and more
players entering the third party logistics domain will result in realization of the huge potential of
the E-Retailing industry.
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43. Major third party logistics players (such as FedEx, DHL, UPS, Gati, etc) will have to gear up to
the increasing demands of the e-retailing industry thereby helping in rationalization of delivery
costs and provide much needed balance between using captive logistics network and third party
logistics. To take the opportunity and help the e-retailing industry to overcome infrastructural
bottlenecks, resurrection of the Indian Postal Service can be a game changer.
Collaborating the strong last-mile capability with technological upgradation will ease the
dependence on the other modes of transportation. After taking a holistic view of the industry
trends, E-Commerce is poised for an exciting period of exploding growth in a period of three to
five years. This is expected to lead to substantial investments in supporting infrastructure and
innovative and game changing business models.
Today, we are talking about E-Commerce progress level of India, the seventh-largest by
geographical area, the second-most populous country, and the most populous democracy in the
world. Indian E-Commerce space percentage is getting higher as more and more online retailers
enter the market. Although this level of entry in the E-Commerce 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 get profits.
The past 2 years have seen a rise in the number of companies' embracing E-Commerce
technologies and the Internet in India. Most E-Commerce sites have been targeted towards the
NRI's with Gift delivery services, books, Audio etc
Major Indian portal sites have also shifted towards E-Commerce instead of depending on
advertising revenue. The web communities built around these portal sites with content have been
effectively targeted to sell everything from event and movie tickets the grocery and computers.
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44. Indian Banks too have been very successful in adapting technologies to provide customers with
real time account status, transfer of funds between current and checking accounts, stop payment
facilities. ICICI Bank, Global TRUST BANK AND UTI Bank have enabled electronic banking
over the internet.
Speed post also plans to clone the federal express story with online package status at any moment
in time.
The future does look very bright for E-Commerce in India with even the stock exchanges coming
online and providing an online stock portfolio and status with a fifteen minute delay in prices.
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45. Regulatory violations and unfair practices
Legal issues of E-Commerce in India are generally ignored by E-Commerce websites. This may
change in the near future as foreign companies and E-Commerce portals would be required to
register in India and comply with Indian laws. E-Commerce websites dealing with nutraceuticals,
bitcoin, ayurvedic products, online pharmacies, online payment, online poker etc. are violating
laws of India.
Enforcement directorate (ED) of India has already initiated legal actions against companies
dealing with Bitcoins in India Tax liability of foreign companies like Google, Facebook, etc is
also under consideration in India.
Similarly, illegal online sales of prescribed drugs by illegal online pharmacies of India are also
under scrutiny of regulatory authorities of India.
Myntra, Flipkart and many more E-Commerce websites are under regulatory scanner of ED of
India for violating Indian laws and policies. US-based transport application provider Uber Inc has
also been questioned by the service tax department of India. In January, 2015, the Kerala
Commercial Taxes Department imposed a fine of INR 54 crore on Flipkart, Jabong, Vector E-
Commerce, and Robemall Apparels, for doing illegal business in the state and from which
Flipkart had to pay the bulk of fine with INR 47.15 cr.
The Federation of Publishers’ and Booksellers’ Associations in India (FPBAI) has also
questioned the predatory pricing tactics adopted by various E-Commerce websites in India. The
Confederation of All India Traders (CAIT) has also decided to approach the Competition
Commission of India to oppose the predatory pricing tactics of Indian E-Commerce websites.
Demands for introducing suitable provisions to regulate taxation, anti competitive practices and
predatory pricing of Indian and foreign E-Commerce websites have also been raised.
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46. Critical factors E-Commerce companies need to focus on to accelerate growth
Customer Experience - As the customer’s progress from research to purchase to fulfillment
stages, their expectations change fast. E-Commerce companies need to understand these change
drivers and adapt their proposition accordingly. Easy transitions between ordering on tablets,
mobile phones or PCs will have to be facilitated. Besides, convenient multichannel returns and
delivery options need to be developed along with the provisions of touch and feel the product
before buying. They should also ensure sufficient after sales service and support. Online product
reviews and ratings, videos, more advanced sizing and fitting tools should be provided.
Technological Advancements - E-Commerce companies constantly have to upgrade their
offerings with changing technology. For instance, shopping through mobiles have truly arrived,
they need to devise easy to use mobile apps for their websites. They need to ensure that their
websites have the required speed to do fast business, especially during sale, deals and discounts.
Solutions enabling seamless integration of back-end and front-end infrastructure, customer
experience enhancement initiatives, integrated inventory management and analytics would be
crucial for the E-Commerce firms.
Delivery Experience - With lack of integrated end to end logistics platform, the E-Commerce
industry is facing issues related to procurement operations and transportation. Online purchases
from Tier-2 and Tier-3 cities are expected to significantly increase, thanks to the emergence of
low cost smart phones, however, poor last mile connectivity could act as a deterrent. Keeping
control on logistics and on ground fleet management, especially courier companies, is essential
for growth.
Payments and Transactions - India continues to be a cash-based society due to limited banking
and credit card penetration. This, combined with a lack of consumer trust in online merchants,
has forced companies to offer COD services, which imposes significant financial cost for firms in
the form of labour, cash handling and higher returns of purchased items. Data protection and the
integrity of the system that handles the data and transactions are serious concerns. Companies
should take necessary action for management even if this imposes a cost on them.
Tax and Regulatory Environment - Laws regulating E-Commerce in India are still evolving and
lack clarity. Favorable regulatory environment would be key towards unleashing the potential of
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47. E-Commerce and help in efficiency in operations, creation of jobs, growth of the industry, and
investments in back-end infrastructure. Furthermore, the interpretation of intricate tax norms and
complex inter-state taxation rules make E-Commerce operations difficult to manage and to stay
compliant to the laws. With the wide variety of audience the E-Commerce companies cater to,
compliance becomes a serious concern. Companies will need to have strong anti-corruption
programs for sourcing and vendor management, as well as robust compliance frameworks. It is
important for the E-Commerce companies to keep a check at every stage and adhere to the
relevant laws, so as to avoid fines.
Operational Framework - Business models have been evolving rapidly in the E-Commerce sector
largely due to heightened competition and the inability of players to sustain high costs.
Companies in E-Commerce will need to adapt and innovate constantly to sustain their businesses.
Furthermore, several of these companies entered into the E-Commerce industry as startups and
have grown to a huge size aided by the continuous growth in the market but lack well defined
capabilities and organizational structure.
Digital Infrastructure - Digital disruption has driven change in the E-Commerce industry with
shoppers embracing multiple touch points in their purchase journeys. Companies should spend
enough resources on technology development as also advertising and branding, especially
because the younger population is demanding. In the journey toward digital business
transformation, embedding SMAC technologies in the business becomes crucial.
Customer Acquisition - The customer acquisition costs in Indian E-Commerce have been
climbing rapidly due to intense competition between multiple well-funded players. Only 2% of
website visits currently result into transaction. Thus, there is a gap between potential and actual
buyers. Coupled with high transaction costs, this area could pose serious problems. In the US,
75% of consumers have stated that they will usually switch between brands, and for the rest of
the world, this rate is 60%, according to E-Commerce Foundation. This suggests companies
should constantly work on their brand positioning
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48. Addressable Markets - To grow their businesses, the Indian E-Commerce sector needs to closely
watch the growth of their markets in the Tier 2 and 3 cities. They need to improve their logistics
and supply chain management in these cities, do an effective demand management to keep an eye
on what products are being sought in these cities. With E-Commerce largely being a borderless
activity companies need to keep in mind that customers always have the option to buy across the
border if they cannot fulfill customers’ expectations.
It is therefore important to overcome challenges in Financing, Infrastructure, Logistics and focus
on building Customer Loyalty to usher in the next wave of sustainable growth in E-Commerce.
Dedicated E-Commerce laws are required to address issues in the sector’s legal and regulatory
framework and Banks must play a leading role as ‘Facilitators’ by offering cost effective cash
management solutions, secure payment gateways and other relevant banking services.
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49. Enabling Technologies
The greater adoption of Internet and smart phones is the biggest driver of E-Commerce in India.
The success rate of some of the technologies is directly connected to the success of E-Commerce.
Cloud: Most of the E-Tailers are depending on cloud technology for its flexibility, scalability,
availability, mobility, and efficiency. Cloud communications can be an important enabler in
helping E-Commerce companies in ensuring personalized consumer engagement throughout the
purchase cycle and also in executing effective and near real-time marketing campaigns.
Mobile Applications: More than 235 million people in India access internet through mobile
devices. This is the primary reason for E-Tailers to focus their efforts on mobile app penetration
across the country. The mobile applications are helping to reach more customers located even in
remote and rural areas. E-Commerce companies have been able to bridge the service gap
considerably by sending service updates and other communication via their mobile app, e-mail,
and SMS. The revenue coming from mobile app is on the rise e.g. 50% for Flipkart while 70%
for Quikr. Customers can get alerts, view product catalogues, purchase and pay with a simple
mobile application offering a compelling user experience. Also, from mobile usage, the E-Tailers
get valuable customer information which can be used for analytics to improve their services and
sales.
Digital Advertisements: The digital advertisement industry is growing rapidly as there is a
growth in digital communication devices around the world. The increase in smartphones, tablets
is enabling advertisers to reach a wider audience. According to analysts, the Indian online ad
market will grow year-on-year at 30% to reach ` 35.75 billion by March 2015. The digital
advertisements are flexible and can be adapted for any kind of device like Television, laptop,
tablet, or smart phone. The two-way interactive capability and the ability to customize the ad for
target audience also make digital advertisements more effective.
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50. Search Engine Optimization (SEO): With thousands of products in the digital catalogues, the E-
Commerce players find it easy to be visible with the help of SEO technology. SEO can help the
websites to be more specific, measurable, realistic, and time efficient and hence can significantly
boost profits. E-Tailers should optimize the critical aspects of their online store and earn rich
snippet displays in search results on various search engines to drive more targeted, motivated
buyers to their products
Analytics: The rise of Internet, smart phone and social media users has made analytics an integral
part of any digital business. There is abundance of customer data in every business including E-
Commerce and analytics helps in deriving meaningful insights to help the business in growing
and serving the customers better. Massive increases in the volume of data and the complexity of
information from CRM, ERP, point of sales (POS) data and other systems make it difficult to
have customer behavior insights without a focused analytical interface. The E-Commerce
industry generates data from several sources like E-Tailer website, IT systems, review and ratings
providers and social media sites. E-Tailers need to have real-time access to information to
measure return on online investments and optimize the channel mix.
There are basic analytics capabilities available with the E-Commerce players like basket size
analysis, average order value and conversion ratio, but with the changing scenario and increasing
customer base the organizations need to deploy deeper analytics solutions that provide actionable
insight around overall digital customer experience. The analytics solution should include end to
end process starting from the vendor management and supply chain to customer satisfaction. It
should have holistic view of the data spanning across all departments such marketing, sales,
customer service, finance and the supply chain for gaining better insights and making strategic
business decisions.
The availability of E-Commerce applications on various mobility devices is helping to drive sales
and revenue. E-Tailers like Flipkart, Amazon and Jabong now get 50% of their revenues from
consumers shopping on their mobile phones. Predictive analytics is helping the E-Tailers to
provide better solutions in real-time enabling compelling user experience even on mobile screens.
Analytics is the future of the online business but it needs a focused study of the organizational
objectives and goals for effective implementation and cost savings.
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51. Technology Advancements
Emergence of new technologies, especially mobile, in India has sparked a social change that’s
difficult to quantify. While mobile, internet, and social media penetration and growth can be
quantified; describing the changes in social values and lifestyles that have accompanied those
trends is far more challenging. New technologies such as virtual walls and virtual mirrors will
further help improve the retail customer experience, thereby encouraging greater consumption.
Virtual mirrors let shoppers ‘try on’ clothes and accessories virtually before making buying
decisions.
Customers on Lenskart can click their picture though webcam and try out various eye frames.
Virtual walls help customers scan barcodes for items on an electronic wall using their mobile
phones and place orders with retailers. In India, HomeShop18 has launched India’s first virtual-
shopping wall. Scan N Shop at New Delhi’s international airport uses a similar technological
interface.
Still shot of Scan and Shop concept of Homeshop18
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52. Jabong, Myntra, Fashionara websites which cater primarily to lifestyle products have focused
teams working on customer friendly UI (user interface) to virtually allow customers to navigate,
filter and select products from their huge catalogue.
Customers can filter out products based on size, fit, style, discounts
A key outcome of the technology revolution in India has been connectivity, which has fuelled
unprecedented access to information. Millions of people who had little means to join the national
discourse can now gain new insights into the world around them. Farmers know crop prices.
Consumers understand global standards of product and service quality. Rural Indians recognize
the differences between the opportunities available to them and those available to their urban
counterparts. And citizens have a mass forum for expressing their political opinions. The upshot
of this connectivity revolution has been empowerment of Indians.
The number of mobile subscribers in India jumped from 261 million in 2007-2008 to 910 million
in 2013-2014. Along with telephony, internet penetration is soaring in rural and urban India.
Moreover, the number of rural internet users is growing by 58% annually. Increases in the
number of smart phones and 3G subscriptions are further driving this growth. Indeed, the number
of smart phone users is expected to grow at a CAGR 91% from 2012 through 2016, jumping
from 29 million to 382 million. Similarly, the number of 3G subscribers could expand at a CAGR
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53. of 84%—from 23 million to 266 million—during the same period. Thanks to rising internet
penetration, the gross number of online users in India now exceeds the number of people who
have completed primary education. This shift emphasizes the increasing relevance of India’s
digital economy. The number of internet users soared from approximately 20 million in 2004 to
nearly 250 million in 2014. By contrast, the number of people who have studied beyond the
eighth standard is about 200 million, indicating that even uneducated people Conclusion
are accessing the internet. While increases in the use of traditional options for gaining
knowledge, such as education, may be linear, the proliferation of knowledge through the use of
new digital technologies appears exponential.
The E-Commerce industry in India may currently be behind its counterparts in a number of
developed countries and even some emerging markets. However, with India’s GDP growth
pegged at 6.4% by the International Monetary Fund and the World Bank, it is expected to grow
rapidly. Moreover, the Indian E-Commerce industry has access to funds from within the country
and international investors. Overall, the E-Commerce sector is maturing and a number of serious
players are entering the market. What differentiates the Indian E-Commerce market from that of a
country like China is that while market concentration in China is largely on account of Alibaba-
owned Taobao and Tmall (with these players holding a higher percentage of market share than
the top players in most of the other major markets), in India the market share is divided amongst
several E-Commerce companies, each coming up with its own business model. As a result,
customers have a wide range of products and services to choose from. In our view, there is
humongous potential for E-Commerce companies owing to the growing internet user base and
advancements in technology. However, this will not be without its share of challenges, be it
operational, regulatory, or digital. How a company prepares itself to meet these challenges will
decide whether or not it succeeds.
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54. Key Drivers & Marketing Promotions
There could be various methods of E-Commerce marketing such as blog, forums, search engines
and some online advertising sites like Google ad words and Ad roll.
India has got its own version Cyber Monday known as Great Online Shopping Festival which
started in December 2012, when Google India partnered with E-Commerce companies including
Flipkart, HomeShop18, Snapdeal, Indiatimes shopping and Makemytrip. "Cyber Monday" is a
term coined in the USA for the Monday coming after Black Friday, which is the Friday after
Thanksgiving Day. Most recent GOSF Great Online Shopping Festival was held during Dec 10
to 12, 2014.
In early June 2013, Amazon.com launched their Amazon India marketplace without any
marketing campaigns. In July, Amazon had said it will invest $2 billion (Rs 12,000 crore) in
India to expand business, after its largest Indian rival Flipkart announced $1 billion in funding.
Amazon has also entered grocery segment with its Kirana now in Bangalore and is also planning
to enter in various other cities like Delhi Mumbai and Chennai and faces stiff competition with
Indian Startups like Onedaycart.com, Bazaarcart, Bigbasket etc. Flipkart is also planning to enter
grocery segment soon.
Three E-Tailers (Flipkart, Snapdeal, Amazon) account for nearly 80% market share led by
Flipkart at 45%.
Affiliate Marketing
Affiliate marketing is a type of performance-based marketing in which a business rewards one or
more affiliates for each visitor or customer brought by the affiliate's own marketing efforts. The
industry has four core players: the merchant (also known as 'retailer' or 'brand'), the network (that
contains offers for the affiliate to choose from and also takes care of the payments), the publisher
(also known as 'the affiliate'), and the customer. The market has grown in complexity, resulting in
the emergence of a secondary tier of players, including affiliate management agencies, super-
affiliates and specialized third party vendors.
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55. Affiliate marketing overlaps with other Internet marketing methods to some degree, because
affiliates often use regular advertising methods. Those methods include organic search engine
optimization (SEO), paid search engine marketing (PPC - Pay Per Click), e-mail marketing,
content marketing and in some sense display advertising. On the other hand, affiliates sometimes
use less orthodox techniques, such as publishing reviews of products or services offered by a
partner.
Affiliate marketing is commonly confused with referral marketing, as both forms of marketing
use third parties to drive sales to the retailer. However, both are distinct forms of marketing and
the main difference between them is that affiliate marketing relies purely on financial motivations
to drive sales while referral marketing relies on trust and personal relationships to drive sales.
Affiliate marketing is frequently overlooked by advertisers. While search engines, e-mail, and
website syndication capture much of the attention of online retailers, affiliate marketing carries a
much lower profile. Still, affiliates continue to play a significant role in e-retailers' marketing
strategies.
Social Media
Social networks have started to play a significant role in the growth of the E-Commerce business.
The maturity of social media and its reach across masses and classes makes it a suitable platform
for online sales. Social media pages provide information regarding new products in the market,
user reviews and ratings of the product, recommendations, share products, etc.
Every 30 seconds, E-Commerce industry generates $1.2 million revenue with Facebook, Pinterest
and Twitter contributing $5,483, $4,504 and $4,308 respectively. In 2013, 39% of Facebook
users liked brand pages to research products while 74% of consumers rely on social media for
product-related guidance. Social media also helps E-Tailers to build brand awareness by
responding to customer queries. Seasonal sales and offers are displayed in social networks to
reach maximum number of people. E-Tailers have even started to motivate customers with
reward points to provide feedback on the product on social networks. Prospective customers also
interact with users of the product or service on social networks before making purchase decision.
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56. According to analysts, product reviews and ratings, as well as product recommendations, were
the most popular social commerce features integrated into leading E-Commerce sites as of
August 2013. Increasingly social networks have direct links to E-Commerce sites, which provide
complete product description, availability status, pricing and delivery information, and access to
product reviews and ratings, all of which help prospective buyers to make a purchase.
The social media provides a platform for E-Tailers to engage with customers for:
Advertisement
Building brand awareness
Developing a community of trusted users
Spreading Word-of-Mouth
Customer feedback
Flash Sales
Flash sales are limited time offers of physical goods that is mailed to an address and offered in
limited supply or for a short period of time. Flash sale sites, such as Groupon and LivingSocial,
targeted for US customers, have enjoyed media buzz and merchant enthusiasm for years. These
types of daily deals are quite popular in the western world and are now entering the Indian
market. A disruptive new business model, flash sales are especially run on special days like
festivals or weekends. Such daily deals are now increasingly seen on Indian E-Commerce sites
such as Flipkart, Snapdeal, Amazon, where the stocks are generally cleared in few minutes. For
example, the Micromax subsidiary Yu’s sale of Yureka smart phone saw all handsets being sold
out in just 5 seconds on Amazon. 26 Such flash sales are also used for quick experimentation of
new products or services. Snapdeal Savings Day deals are available to people visiting the popular
E-Commerce store via desktop, mobile, or apps, just as expected.
Amazon in a bid to promote the use of its mobile app is celebrating Amazon Appiness Day,
wherein deals are visible only to people who are browsing the store via one of Amazon's apps.
Digital offers are still a popular promotional marketing tactic, but merchants are demanding more
value from providers and seeking new ways to distinguish their offers from those of their
competitors. In response to increasing competition and growing demands from merchants, digital
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57. offer providers are also trying to differentiate their sites and mobile apps, attract new sellers and
buyers by expanding into luxury goods and exclusive experiences. For example, Snapdeal
acquired the luxury brand Exclusively.in to provide access to widest range of aspirational, high-
end products and services.
E-Commerce providers such Flipkart also provide a white label platform for other companies
such as Chinese Smartphone-maker Xiaomi, which enable the scalable execution of multiple
flash sales by consolidating expenses such as technology and sales.
Subscription
The E-Commerce subscription service is an emerging trend that all online retailers could learn
from. Successful subscription models are based on product discovery, demo or utility. Several
ventures are offering a range of products including cosmetics, healthcare, food, educational toys,
etc. on monthly subscription basis as it provides regular recurring sale, predictable inventory,
steady cash flow and also an option to upsell. The entrepreneurs who are behind some new
companies such as recreational toys provider Flinto or healthcare provider HealthKart appreciate
the flexibility the subscription model delivers, as well as the deeper customer relationships they
can develop quickly.
The loyal customers could amplify the brand and refer the products to friends through word of
mouth and social media. Suppliers can test new products by sending sample-sized products for
free to targeted customers and the E-Commerce platform provider does not worry about the
margin as it gets the monthly subscription from its customers.
In case of white labeling the products, the E-Commerce provider does not have to manage huge
inventory and can manage the demand of its products better through subscription and it will not
lose in the price war against the incumbents. Such models are beneficial for both customers and
retailers. The customer gets convenience at door step, free trial of new products on regular basis.
For a business, it is a blessing as they can not only predict volume and demand in advance but
also reduce stock piling and wastage. Since the subscription demands upfront payment, the cash
flows are safe and steady thus maintaining investor confidence.
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58. Recommendation
“We are leaving the age of information and entering the age of recommendation"
Chris Anderson
The massive adoption of the Web as an E-Commerce platform has led to a fundamental change in
the way that businesses of all sizes interact with their customers. Whereas potential access to a
larger, more diverse customer base is generally viewed as an opportunity, this can also represent
increased competition. The stakes are high and businesses have to develop sophisticated
strategies to attract and retain customers. Rather than focusing on “touch points” during the
marketing and sales processes, businesses are using intelligent algorithms and social technologies
to form meaningful, ongoing relationships with customers; these can involve frequent online
interactions, often employing social channels. Engaging with customers is no longer a series of
one-off experiences; it’s an ongoing dialogue. Surprisingly, these ongoing dialogues resemble
dialogues between people: they usually express intent and achieve their goals by building on trust
and open relations.
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59. The Added Value of Recommendation in E-Commerce
The use of recommender systems in an E-Commerce environment can impact financial
performance as well as the intensity of the dialogue with customers. More specifically,
recommender systems can enhance E-Commerce dialogues in three ways:
Conversion - Increasing the proportion of visitors to a Web-site that make a purchase.
Recommender systems help consumers find items that best fit their interests and inclinations;
these may include unplanned purchases driven by serendipity from the recommendations made.
By increasing Cross-sell - Recommender systems improve cross selling by suggesting additional
products or services to customers. If the recommendations are good, the average order size
increases. For instance, a site might recommend additional products in the checkout process,
based on those products already in the shopping cart.
By building loyalty - In a world where competitors are only a click away, building customer-
loyalty becomes an essential aspect of business strategy. Recommender systems can improve
loyalty by creating a value-added relationship between the site and the customer. Each time a
customer visits a website, the system “learns” more about that customer’s preferences and
interests and is increasingly able to operationalize this information to e.g. personalize what is
offered. By providing each customer with an increasingly relevant experience, a corresponding
improvement in the likelihood of that customer returning is achieved. Ultimately, the depth of
insight gained into a customer’s preferences and interests can be so great that even if a competitor
were to launch an identical, or even superior system, the customer would need to spend an
inordinate amount of time and energy “teaching” the competitor to offer a similarly attractive
experience
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60. In order for any organization to successfully implement a recommender strategy, the following
best practices apply:
Recommendation is aimed at improving the customer dialogue - The heart of recommendation
lies in gaining insights into your customer. Customers typically require an open, trusted
relationship before they will share such insights with you.
Keep the big picture in mind, but start small - A successful recommendation strategy will
probably feature a combination of different recommender types, but implementing them all at
once is not advisable. Our experience is that starting with a content-based approach is the best
first step and that enriching this can best be done on an incremental basis as you acquire an
increasing insight into your customers.
Successful recommendation is based on ‘big data’ and should not be underestimated.
Building user profiles, getting control of product data and integrating with existing customer
history are a few examples of ‘big data’ problems that should be taken into account when
implementing a recommendation strategy. It is important therefore, to understand that the success
of recommendation lies for a large part in the accumulation of historical information that may
require time to gather.
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