With investors reluctant to back start-ups, offering discounts is a challenge.
The e-commerce industry, which took off well in the country, is struggling to get investments in this phase. One of the most common reasons for this is that many investors have turned prudent before investing in and backing e-commerce start-ups. Although, many e-commerce companies are making ample revenues, none of them have turned out to be profitable so far due to deep discounts and heavy investments in inventory, warehousing and logistics. However, the challenge lies for the start-ups who cannot give deep discounts like the big players and still be in the race for sales. Even, if they try to do so, it puts their sustenance in a fix, with lack of sufficient finances.
“Earlier, funding for e-commerce businesses was easy, but it is a challenge in the current scenario. Investors are very sceptic before backing start-ups. However, any industry can face this phase and it is not specific to e-commerce. A lot of people invest money and help build businesses but only the ones with strong and real fundamentals will survive,” says Suchi Mukherjee, founder and CEO, Limeroad.com.
“The investing phase was in 2011 and in early 2012 and it gradually eased out for e-commerce companies,” says Rama Raju R, CEO, Upto75.com.
Talking about discount strategy to attract customers, Suchi says, “Deep discounts do not solve a problem. Instead business get stuck in a zone where users are not loyal to the company but to the price. There will always be a cluster of people who chase the product at lower prices and buy them. However, these discounts or coupons cannot rope in consumer loyalty to brands. One should realise that 50 per cent of the products are sold at full price and lack of differentiation between sellers lead to such discounts.”
“Discounting should be viable for the economics of the businesses. It is very difficult to have customer loyalty for the online store. Proximity to the buyer majorly drives sales in a physical retail store. Likewise, it is the discount that drives sales in an online store. Every seller guarantees service and delivery and there is no real differentiation apart from discounting price when they are selling a branded products. Online dynamics work on discounting. Giving vouchers or providing discounts on the products will be long-term play for the big players but a small player cannot afford discounts,” he says.
“However, there are other factors like availability, which drive sales. Availability and offering a range of products to the customer in an e-commerce store also doesn’t come cheap. This will depend on factors like warehouse capability and investing on inventory. Again, affordability and investment support is an issue to maintain a huge inventory,” he says.
Suchi recommends e-commerce ventures should not chase growth for the sake of it. Solving a problem with capital light and scalable business idea is the need of the day. “The margins are also very less for e-commerce players when selling branded products. Businesses can differentiate by exclusive sourcing or manufacturing of products, which is not easily replicable by other players and gradually turn out as brands. These brand of products can give decent margins. Start-ups should also be able to sustain with self-funding and get their economics right if they choose to discount,” adds Raju.
Questions to ponder before venturing into e-commerce
- Are you solving a real problem?
- Which set of users are you targetting?
- Are you creating natural intrinsic reason for a customer to get back to the store for buying?
- Are you spending efficiently?
- Does the deep discount support the business economics?
- Is the idea capital light and scalable?
- Can it be self-funded?