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 Amazon's lessons for Indian e-commerce

companies

 While nobody doubts the potential of e-commerce in India, what is upping the ante is theprolific marketing spends of some of the companies in the space even as the players pursue

the profitability paradigm. As the world's most well-known e-tailing site Amazon launches

its marketplace model in India, the battlefield is going to get tougher in an already intrepid

marketplace.

 A popular meme on the internet cites the return of Jagmohan Dalmia, Nawaz Sharif and

Narayana Murthy to the BCCI, Pakistan and Infosys, and makes a case for the 90s being

 back. And yet for most TV viewers, it feels like a time warp right back to the early 2000s —

the infamous and very shortly lived dotcom boom.

Of course the Zatangs and Indyas have made way for an entirely new breed of e-tailing

 brands. The spends on this category have been on a northward progression.

 Agrees Dr Subho Ray, president - IAMAI (Internet & Mobile Association of India), there has

 been a spurt in traditional advertisements by ecommerce sites and this is primarily because

mass media such as television tends to bring more credibility. Add the fact that most online

companies are looking to raise money from private investors and thus there is a need for

 buzz and eyeballs to create a brand.

The Indian e-commerce market is going through a huge surge of growth and according to

2012 Crisil report, Indian online retail industry will grow from Rs 32 billion in 2012 to a

projected revenue of Rs 100 billion in 2015, a CAGR of 45-48%.

Internet users and 3G penetration is expected to grow at an estimated compounded rate of 

over 60% through 2015 which will result in over 180 million users in India with access to

online retail.

Pegging on this potential growth story, e-commerce brands are betting big on the Indian

consumer and hoping to lure her with their offerings ranging from fashion and lifestyle, to

 books and gadgets, and much more.

In this pursuit many of them like Myntra, eBay, Flipkart, Yebhi, Jabong, Babyoye, OLX,

Quikr, are parking humongous marketing dollars on high decibel television advertising,

celebrity associations and activation hoping to crack the code and have loyal customers.

 Yebhi.com, a leading player in the fashion and lifestyle space, claims to have many firsts to

its credit: for instance the unique try-n-buy feature, publicized through a high decible TV 

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campaign, wherein the customer can choose the product(s) online and return it if 

unsatisfied. Says Nikhil Rungta, chief business officer, Yebhi, "With this feature we are

trying to bypass the key barrier of lack of touch and feel that is afflicting most websites as

 well as replicating the offline model in the online world."

Recently, the portal also announced a tie-up by establishing 30 virtual stores across CafeCoffee Days across two cities — Delhi and Bengaluru — where customers can buy products

from a virtual wall using their smartphones, much on the lines of the celebrated 'HomePlus

Subway Virtual Store' launched by Tesco in South Korea.

 Another player, Jabong.com, recently went in for its first ever alliance with Bollywood by 

launching an exclusive collection inspired by the lead pair of the film Yeh Jawani Hai

Diwani on its website. Claims Manu Kumar Jain, co-founder, Jabong, "There was an

increase in the number of clicks on the website as a result of the association, from people

 who follow the stars and their style."

 While refusing to share the exact marketing spends, Jain said that, as a brand they want to

change the perception that pricing and discount can be the only levers for growth in this

market.

Flipkart.com that started off as a leading brand in books and electronics and now entered

the lifestyle space has created a distinct identity for itself with its campaign featuring kids in

moire grown up situations. Shares Ravi Vora, vice president - marketing, Flipkart,

"Advertising has helped us in creating interest amongst the target base to come and check 

us out, now the challenge is to continue being relevant to them."

The belief seems to be that unlike traditional brick and mortar retailing where the storefront

itself acts as an advertising medium, e-commerce retailers have to rely on traditional media

to create awareness. "In the early days of business it is important to spend on marketing.

However to reach profitability, it will become crucial for ecommerce companies to curb their

marketing to revenue ratio under 10%,"says Mukesh Bansal, CEO & co-founder of 

Myntra.com, a fashion and lifestyle portal.

 Avers Amitava Saha, co-founder, Firstcry which claims to be India's largest baby and kid

store, and adds that while their site traffic is decent the conversion is low compared to

markets like the US. In his view, it will improve as more people start buying online just as it

has happened in the travel industry.

So what is the right recipe of brand building? "E-tailing is characterized by low net profit

margins which cannot sustain high marketing expenses and over the medium term, the

expenses should be brought down to 7% of the revenues from the current high of 20% by 

some of the brands," says Seema Gupta, assistant professor - marketing, IIM Bangalore.

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In her view, once the brand has been built in the initial years, companies should reduce

their spends in traditional media and instead spread positive word of mouth through

superior customer satisfaction.

Quikr, a leading player in the online classifieds market in India, has seen a lift in all its

metrics once they started advertising on television. Shares Pranay Chulet, founder and CEO,Quikr, "We've been careful not to go overboard and have kept the focus on measurable

metrics." Their missed call TV campaign, piggy-backing on the great Indian innovation of 

the missed call, got them over a million of these in about 6 weeks.

 A moot point is that in most cases, while spends on brand building are prolific, the quality is

not as consistent. Rajdeep Endow, managing director India and co-lead of global delivery,

SapientNitro is more scathing and says most Indian e-commerce firms have gotten the role

of advertising in online purchase wrong — while the current round could bring in some first-

time price-sensitive buyers, in the long run this price-led approach would be a poor model

for retaining customers.

Some of the reasons that make Indian e-commerce, especially e-tailing, currently 

unprofitable include high customer acquisition costs, high inventory carrying costs, cash on

delivery offer, and high cost of fulfillment, and for the business to be sustainable they have

to be rationalised. At this point, most e-tailing brands are financing customer acquisition

through venture funding and in such a scenario the marketing needs to work that much

harder.

To give the devil its due, this is an industry with a long gestation cycle and hence the initial

investments are bound to look pretty high. E-tailers and their investors may find solace inthe popular tale of Amazon. It started in 1995, went public in 1997 and recorded its first

profit in 2004.

Lessons to learn from Amazon

 At what cost?

For many operating in the internet space, words like boom, bust, bombed, dotgone, and

their ilk are forever associated with the events around the year 2000, a particularly 

tumultuous time.

Back then, dotcom firms were young, hungry, and flush with funds, ready to build brands.

But things went wrong and how. So what has changed? The dotcom bust of the early 2000s

ought to have nailed home a handful of important lessons for e-tailers especially, no?

However, while some seem to be more judicious, there are still quite a few who seem to be

falling into a familiar trap.

 A mistake, advertising and media agencies are not willing to pay for. "E-commerce is seeing

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another surge in activity led by e-tailers with ad spends increasing almost 50% year on

 year," says CVL Srinivas, CEO, GroupM South Asia.

"However, the industry is still nascent from the point of view of profits and value creation.

 Agencies have been circumspect after the last dotcom bust. For this category more than any 

other, protective measures are taken on the payment front. There are only a handful of players who seem to have got their act together. The sector is riding on hope."

 All the advertising in the world will not be able to prop up a fundamentally flawed business.

 Warns Pranay Chulet, founder and CEO, Quikr, "Given the magnitude of media spends

today, it could be tempting to just give in and use a whole lot of money to attain short term

goals and think about the long term later. That's not a great idea!"

If the current crop of Indian e-commerce brands have one lesson to learn from the likes of 

 Amazon who not only survived but thrived, it is that current levels of spends cannot be

sustained. Seema Gupta, assistant professor -- marketing, IIM Bangalore, points out that Amazon and eBay spend 3.5% and 21% of their revenues, respectively, whereas the

marketing expenses of Indian counterparts such as Flipkart is 20%.

Live within your means

 A regular hour of TV viewing is bound to throw up at least a few rounds of commercials

urging viewers to buy everything from books to booties online. But at the end of the day,

sites like OLX,Jabong, Myntra, Yebhi, Baboye, Flipkart and Quikr, among others, are

destinations. And destination brands are built virally and organically, according

to AlokKejriwal, CEO and founder,Games2win.

Most e-commerce sites don't sell what they make. They sell what others make. Non-

inventory led e-commerce sites, for instance, provide no value added service and yet have

higher marketing expenses than companies in the inventory-led segment.

Furthermore, India is not a mature e-commerce market. It's just the potential that makes

everyone salivate since internet penetration is still low. According to Raghu Bhat, co-

founder, Scarecrow, all players are trying to create brand awareness, acquire customers and

also change consumer-buying behaviour simultaneously.

"The number of people spending on needs (travel, food, clothing, durables) and wants

(gaming, porn) will only increase. If the net offers cost and convenience advantages, a fair

percentage of people will shift online. That's the big bet. The advantage is that internet has

 very low real estate rentals. But the challenge is — it has to be top of mind at all times since

it's not present physically. This requires money but again the margins are low." So while it

might be tempting to splurge on glossy television commercials keep in mind the business

has to stay afloat long enough to be bought or at least start turning a profit.

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However, another cause for concern is that fundamentally e-commerce brands are built

through the consumption experience not national TV campaigns, which send customer

acquisition costs to stratospheric heights.

Says Chris George, founder and group CEO, EBS Worldwide, "The insane levels of funding

that has gone into the sector is nothing short of a poker game. Everyone is doubling down, waiting for the other guy to blink or perhaps for Amazon to waltz along and buy the brand

 with the highest decibles. I could be wrong, but I don't think Amazon really thinks like that.

Customer acquisition costs for e-commerce companies in India range from Rs 500 to Rs

1500. How the hell are you supposed to make money to fund this?"

 Advertising is no child's play 

In and around 2000, most hoardings in the city of Mumbai were bought out for two years by 

start-up internet companies. According to Kejriwal, what hasn't changed since then is that

most are still indulging in "irrational advertising."

This particular behaviour trait is largely driven by three factors, he says, next round of 

funding (a strategy to buy investor delight or release investor pressure.) Second, outspend

and crowd out the competition. But that would work if there were two or three not 23

companies in the fray.

 And lastly, the misconception that advertising builds loyalty. "They would be better off 

spending the budget on delighting customers. Rather than advertising on TV, imagine if a

Flipkart spent some of that budget sending its customers a surprise gift with a purchase. It

could be anything, a pizza even. That will get them loyalty better than some cutesy film

featuring kids with adult voices," says Kejriwal.

Don't get them wrong, who doesn't love discounts, but service matters too. Says Professor

Gupta, discounts will slowly have to be reduced once more and more customers adopt e-

commerce and move online for convenience. Differentiation should come from service.

E-tailers could learn a thing or two from the home-grown travel portals. Beginning with air

tickets, it's moved on to hotel bookings and much more. The top three players —

Makemytrip, Yatra and Cleatrip — have a combined 90% market share. Cleartrip did an

interesting TV campaign 'It's All Clear' video stamps, where the idea was to provide visibility 

for the brand, done through 10-second crisp videos. Shares Noel Swain, vice president -

marketing, Cleartrip,

"We are big believers in television, but with a strong customer acquisition strategy." Views

Sharat Dhall, president, Yatra, "The burst of advertising can get people to the retailer's site

 but the overall customer experience has to be good for them to stay, purchase and come

 back again."