The Indian e-commerce sector is facing challenges due to misplaced priorities of companies. Companies focused on increasing gross merchandise value and funding rounds rather than profitability. This led them to spend heavily on discounts, inventories, and warehouses while ignoring customer retention. While startups like Amazon focused on logistics and customer experience, others replicated the US model without understanding Indian customer preferences. For e-commerce to succeed in India, companies need to focus on minimizing costs, understanding local customer dynamics, and increasing customer loyalty through retention strategies rather than promotional discounts.

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The Indian E-Commerce
Conundrum
The Indian e-commerce sector is in the middle of a crisis of its own
making, but it’s not too late to turn a corner

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Introduction:
‘It was a game of musical chairs. One fine day, the music stops’, said K Vaitheeswaran wistfully in an
interview with TechinAsia, earlier this year. His LinkedIn profile lists him as the founder of
Fabmall.com (later branded Indiaplaza) as one of his ‘key achievements’. Founded in 1999,
Indiaplaza was one of the pioneers of Indian e-commerce, surviving the dotcom boom & bust, 9/11
and the global economic meltdown before things went kaput.
After fourteen years of its existence, the landlord whose rent hadn’t been paid, the suppliers whose
dues hadn’t been cleared, the customers whose prepaid orders hadn’t been fulfilled and the staff
whose salaries hadn’t been credited for months had all lost their patience. Indiaplaza succumbed to
a slow, painful death.
The likes of Flipkart & Snapdeal have been the poster boys of Indian e-commerce since their
inception. The sizeable funding rounds, the advertising eruption and the massive discount bribing
had been the persistent theme for the Indian e-commerce circus. The music hasn’t stopped but the
tune has definitely begun to change. The news of operational cost-cutting, business model
restructuring, devaluation and subsequent trouble in raising funds has slowly started trickling in. The
question is, where does it all go wrong for the Indian e-commerce bigwigs?
Misled by Irrelevant Metrics:
The battle for the biggest piece of the pie in the Indian e-commerce space has turned into territorial
warfare in which your biggest weapon is funding. The need for persistent funding has led to an
environment where the companies are trying to woo their investors with pointless metrics like Gross
Merchandise Value aka GMV.
GMV is a metric which suggests the total order value, an attribute used to evaluate online retail
businesses when they cannot be measured in terms of revenue and profitability. For example, if
Flipkart sells a mobile phone for Rs.10000, it lists the same as its GMV, a convenient proxy for the
actual revenue. What Flipkart really makes from this transaction is the commission which usually
stands at 3-5% i.e. Rs.300-500, in this case excluding the potential loss from discounts, cancellations
or refunds and cashbacks.
It goes without saying that the GMV numbers find a very prominent place in conversations with their
investors and these numbers also keep the PR machinery well oiled. While the GMV can’t count for
profits, similarly, app installations do not guarantee traffic and user signups cannot ensure real

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transactions. Hence, the chest thumping around the data being thrown around is more or less a
blatant lie.
Losing Focus:
The newly introduced FDI policy of 2016 forced the companies to follow a marketplace model while
the lure of margins means that they continue to follow the inventory model, handling everything
from warehousing to logistics, while also competing with their own sellers. Combine stockpiling in
warehouses, massive discounts and minimal margins (apart from apparel) and you have a business
that doesn’t make much sense at the commercial level.
The prospect of reduced customer re-engagement costs, increased revenue from advertising and an
unlimited scope for experimentation pushed the likes of Myntra to go app-only last year, a move
that was later backtracked, to suggest that the decision was not in-sync with the Indian consumer.
The decision to deny the provisions of a desktop or mobile website by forcing the mobile app down
the user’s throat meant that the customer who was already a victim of a volatile mobile internet
service started looking for more convenient options ultimately driving him away, hence, taking a toll
on revenues.
No Emphasis on Profitability:
The Indian ecommerce has been a breeding ground for contrasting market data and controversial
market reports leading to a lot of contradictions. In the financial year of 2015, the top 22 Indian e-
commerce companies reported a total loss of around Rs.8000 crores with the likes of Amazon,
Flipkart & Snapdeal accounting for 80% of it. Having deep pockets and not knowing when to stop are
usually the ingredients of a toxic cocktail.
Goldman Sachs estimates that Indian e-commerce businesses, having already burnt $6 billion are
likely to need another $20 billion to become sustainable which seems increasingly tough in today’s
dynamics. Essentially, investors have begun to realize that venture capital with a short-term
investment horizon cannot compete with long-term strategic investments. And the founders need
to clamp down onto a slow and rigorous ground to make money because if the business is not
making any money, it is essentially an expensive hobby which, in this case, is being paid for by
someone else.

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Logistics – Last Mile Delivery:
A recent report by Deloitte suggests that India’s Business to Consumer (B2C) segment is in a firm
position to grow by at least 7 times and the number of people shopping online is expected to grow
over 10 times to 220 million by 2020. The bigger the logistical network, greater are the number of
challenges, the most pertinent being the last mile delivery.
Last mile is the final leg of the supply chain, which can either be self-owned or outsourced. Although
logistics multi-nationals like DHL and FedEx do operate in the country, they can only deliver to one-
third of the total pin codes available and the muddle of the Tier 3 and the Tier 4 towns forces them
to deliver through third-party carriers which are unreliable and deliver later than the average
delivery time.
This has forced the e-commerce giants to set up their own logistics arms by acquiring firms and
establishing their fulfilment centres. In a time when investors are holding their funding cards very
close to their chest, burning such huge volumes of cash is an obvious concern for companies.
Payments:
In a country plagued with low penetration of debit cards and credit cards, coupled with the inherent
scepticism around revealing their bank details to a web page, the Cash on Delivery (COD) payment
system has found a lot of admirers among the Indian consumer base. The e-commerce companies
themselves though, aren’t exactly huge disciples of the same.
Courier companies responsible for the collection of cash tend not only charge a certain percentage
for the transaction, they also tend to hold the money for weeks which means that the seller has to
restock the inventory before receiving the payment for the previous transaction. And worse, the
problems don’t cease here.
The biggest business slayer though is when the customer either refuses to receive the order or
decides to return the order. The hassle-free, ‘easy return’ policy forces the companies to bear the
brunt and pay up to 10% of the transaction for the reverse logistics.
What can be done to sort things out?

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Understanding Consumer Dynamics:
Haresh Chawla, founding CEO of Network18 states that there are only three Truths to your business:
1) How many of your customers repeat
2) How often they repeat
3) The rest of your business is just a support system for points 1) & 2)
At a very fragmented level, when you are out there on the playing field with the customer, there is
no hiding place behind your soaring user growth and the profound investor valuations. In a time
when the analysis of consumer data has become so important to an enterprise, it is essential for the
intelligence team to put away their laptops and realize that the user on the other side is a part of a
huge heterogeneous audience with a motivation.
Scepticism towards buying off of an online portal, a language barrier coupled with the paranoia of
making a mistake and being charged for it, can play potential spoilsport in converting a user to a
customer. The only relevant obstacle between your customer and you is either a five-inch mobile
phone screen or the fifteen-inch screen of a laptop – empathy is invaluable while over-engineering is
an unforgivable crime.
Focus on Customer Retention, not Acquisition:
The amount of money spent by a company to make a user visit its website or mobile app is called the
customer acquisition cost (CAC) while the amount of money made by the company from that user
over a particular period is called the Lifetime Value (LTV). Basic mathematics suggests that if your
CAC is consistently lower than the LTV, it is time to raise a red flag and wave it fiercely.
Customer acquisition goes beyond barraging the customer with choices and bribing them with
discounts. The audience out there can be classified into first timers, light users and heavy users. Too
much emphasis is put into converting the non-users into first timers. The secret lies in making the
light users who are quietly scrolling down on your website or tapping away on your mobile app buy
more stuff than they originally intended to buy.
First timers and light users reflect great numbers on VC presentations but it is actually the heavy
users who are going to get your cash registers ringing. It is essential to understand that things don’t
end at the level of the website or the mobile app, every successful transaction is the beginning of a
new relationship with your customer who is going to give you more aspects to analyse, and will forge
a deeper bond.
Lessons to be Learnt from Amazon:
On paper, Amazon started its Indian operations in 2013, six years off the pace against Flipkart and
three behind Snapdeal but their foundation had been laid in 2007 itself, by the opening of
development centres in Chennai & Bangalore. Domestic knowledge coupled with global experience
acted as the early springboard for Amazon’s entry among the Indian demographic.
While its competitors poured in billions by offering ludicrous discounts trying to get the Indian
consumer on-board the e-commerce gravy train, Amazon focused on building its own warehousing
and delivery capacities, citing logistics to be a key factor in competence and standardization. The

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move to tie up with the Indian Post in order to reach out to the far corners of the country might turn
out to be a deal-breaker.
Despite being early movers, the likes of Flipkart and Snapdeal have failed to capitalize on their
headstart by focusing on scale instead of intelligence because the former was apparently the ‘easier
goal to chase’. Selling the same products by the same sellers to the same consumer base was the
wrong fight to pick with Amazon.
Minimalism is Key:
The phase between 2007 and 2015 was a time of enormous funding and even bigger
announcements with the investors being all too happy to play cheerleader by pumping in the
money. Amidst the constant pouring of the funding fuel, the investors didn’t know how much cash
they were burning, how much remained in the bank and how far their unit economics was going to
take them.
When your clientele features an army of millions of smartphone-obsessed individuals, it is
convenient to be intoxicated by the potential of a business model that has been extremely
successful in the US. Put in the seed money, the soaring rent money, the salaries of your IIT/IIM
recruits and other astronomical operational costs into financial projections and the survival strategy
starts to fire blanks.
Thriftiness is essential. The Indian entrepreneurs cite the likes of Amazon, Uber and Airbnb as their
idols but no attempt is made to clone one essential virtue that these multibillion-dollar ventures
pride upon: frugality. There are no extra points for the size of the capitalization table, how well the
business is being run has a higher reckoning.
Diversification and Innovation Trends:
2015 was a year when mortality gave the Indian internet-based start-ups a good hard stare. The time
has come for the adversaries who have been bleeding each other out with out-of-depth deals &
discounts, to settle in some kind of arrangement. Various top e-commerce honchos have predicted
the Net Promoter Score (NPS) which is used to measure ‘customer loyalty’ to be the next metric to
drive their companies.
Data is key. Break down every aspect of customer behaviour and get your best people to analyse
every small bit. What does the consumer buy, when do they buy, how often do they buy it, what is
prompting them to tap or click on the ‘place order’ button, every facet needs to be extensively
looked into.

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Video seems to be the next flag bearer in terms of ‘innovation’. The language barrier needs to be
overcome, and better internet penetration will be crucial in driving it home.
Diversification means the addition of an array of higher-margin commodities including subscription-
based services to your already-existing inventory of products. The day is not far away when you’d be
buying a car accessory online and will end up comparing your vehicle insurance on the same portal.
Strategies will have to be developed to get more out of your customer’s wallet.
Majority of semi-urban and some of the urban consumers today finds solace in dealing with a brick-
and-mortar retailer because of an emotional connect. Understand their requirement, walk with
them through their purchase cycle, and you have an opportunity to build loyalty for a lifetime. This is
where the internet-based companies tend to struggle.
Going forward, it is extremely likely that the ones who successfully bridge the gap between online
and offline will take the trophy home. The customers will walk into your outlet looking forward to
experiencing a brand and seeking your advice. Your store is just an extension to their need, engage
with them in a way that you have them reaching out for their smartphone and completing the
transaction before they leave.
About the Author:
Shubham Garg is a Business Analyst with Zensar’s Cisco account. He is currently
working with Cisco’s EFDS (LDO) Business Operations team and operating out of
Zensar’s headquarters in Pune, India. He takes keen interest in identifying the
latest e-commerce trends and writes as a hobby. Shubham is hugely passionate
about football and has worked in content procurement with editorials like
Sportskeeda & International Business Times in the past.