The E-commerce Start-ups in Emerging Markets
By: Amit Bhushan Date: 6th June 2016 The valuations of some of the start-ups with sky high valuations made news in markets. The news media went into a tizzy and suddenly painted picture of a start-up land. Then came in the tapering off such valuations. With that news media again initiated itself to paint a picture of gloom. Basically what is happening with most internet ventures is that they are in online aggregation or affiliate business. Both these models are based on the E-commerce operators not carrying inventories but servicing client business needs on-demand.The need to reach out to various cross-sections of society or communities is the flavour of the season since it can be done much more efficiently online. So the power of internet is being leveraged and a consumer portal which can hook potential customers seems to be up and running and the campaign around it seems to be gung-ho. The discounts/coupons etc. for customers including cost for launch of new products and bringing in new vendors/fulfillers on-board to keep up interests of the customers seems to be a cause of "cash burn". Needless to say that the investors do not like cash burn but are keen to see revenues which is a cause of current consternation.
In an Affiliate business model, the E-commerce firm is managing orders, handling packaging, shipping and handling payments. In this arrangement, a website concentrates on a relationship with a very specific group of individuals as its core competence. It develops and continuously upgrades content and services to attract and retain the patronage of this group. Once it has a sizable number of regular visitors, it can generate revenue by carrying ads or links to merchants with products that its visitors seek or are interested in. The business model that enables a firm to generate revenue streams on hundreds (even thousands) of items without carrying inventories which is left to associates for whom it provides business services like bringing in customers etc.
In the Aggregator model on the other hand, E- commerce player collects (aggregates) information on goods and/or services from several competing sources at its site either directly or through content providers.The firm's strength lies in its ability to create an 'environment' which draws visitors to its website, and in designing a system which allows for easy matching of prices and specifications or in other words easier selection for customers. This business model allows the firm (that does not produce or warehouses any item) to benefit from advertising, grading/rating of services/service quality, easy matching of pricing and specification, lead generation and support for e-commerce like facilitation of buying or order placement and support for payments processing.
When the competition in market increases in both the models, and there is not much differentiation basis content i.e. the E-commerce players have same product categories, pricing and service models as other competing similar companies, then player start feeling challenge. In a more mature/saturated market, the response of the players would be to focus upon customer experience in order to build loyalties which can result in greater overall purchase value by customer or improvement in ticket size of such purchase in order to push high value/higher margin products.
In nascent emerging markets still in experimentation stage, they need to respond to such challenge either by opening up a new product service line and ingratiating customer to nurture his loyalty as one way to build such value for investors. New sellers who bring in new products /services / user experience with changes in price points and/or pre- and post-sales service level/points, help the market place unlock itself to new customer markets, where hitherto it wasn’t present.
This may sound like continuation of the existing "cash burn" strategy, though a bit different since the E-commerce marketplace is not recruiting more of the same type of players but focusses on new players with something different to offer. Setting up a limitation by business on type of merchandise or client segments may only limit the potential of the technology to unlock value to customers and in turn value to investors. Unidentified or non-strategic recruitment of sellers on the other hand, may cause some more of cash burn without a rise in overall gross sales for the E-commerce site or help enhance loyalties.
It is however reaching out to new buyers, which is a considerable challenge after an initial class of buyers have been acquired. It is here that market can be segmented in a multitude of ways and an outreach strategy can be defined in conjunction will sellers for whom the market can be of importance in the brand development/sales outreach. Several new product companies in the manufactured product area setting up shops/plants may want to tap opportunities provided by some of these hitherto untapped segments. They may view it either as consumers like agri-related goods say a veterinary food supplement or medicine for milch-animals or new pesticide etc. or else may want to collaborate with producers like honey collection, forest produce or some rare herbs/spices etc. Emerging markets are new hunting grounds for many bio-technology ventures looking new germ-plasm amongst some other interesting business offering meant for rural areas which may not be prime target for most other sellers like those selling high end widgets.
Among the various sub-section of E-commerce customers are these early adopters who tend to be those who have very little issues about access (of internet) in terms of cost or quality as affordability of the cost of access may not an issue. They tend to be savvy about brand of goods as they may have already experienced the stuff and tend fiddle with multiple sites on their bargain-hunting mission buy the identified widgets cheaper. These are generally urban centric, while-collared workers with rather good English language skills with a relative high disposable income. Catering to this market can help ramp up the gross merchandise value for the market place but with a high cash burn rate due discounts sought by the group which may also be savvy about associated service levels.
The next sub-section of customers, who may be shopping for a different reason i.e. they do not get such stuff easily in physical market places due to distribution/inventory holding issues especially in upcountry locations. This is the well-educated and better placed (professionally) people in semi-urban centres with good English language skills but which may not be high on the radars of newly set up companies or MNCs due to low capacity of the overall market to absorb these widgets and justify cost of maintenance of distribution channel. Such people may have issues about access (of internet) in terms of cost or quality though is able to afford some of their demands which speak about their mature taste and refinement. Many sellers including newly set up MNCs may actually want to address this set of aspirational market in order build long term value of their brands. This is also amongst the fastest growing segment of market in most emerging markets who may still be attracting global capital/investments.
The next sub-section of customers is the blue collar urban worker with limited skills in English language but having access to internet. The access could be because of office or factory in which he works or homes of executive. Such customers have exposure to city life and can possibly afford some refinement although may generally have small transaction size. This market can however be a champion if the brands catering to this market want to spread-out into the vast up-country or semi-urban/rural segments because of high influence of this segment in those areas. A very good segment for second’s market or also for low priced SKUs for certain goods or used/refurbished goods market.
The market is yet to respond adequately to this section of customer through vernacular website, special SKUs or promos of trial packs and low cost delivery which could be by consolidation several such orders from a locality. This might be next fastest growing segment and a beneficiary of new age e-commerce like drivers, delivery boys or blue-collar job-seekers benefiting from upsurge in jobs as well as net based services and thus may harbour positive notions about E-commerce and has exposure to some modern payments and delivery methods.Then we have the vast population in the rural hinterland which is geographically spread out.
A majority here may have issues with cost and quality of access of the internet and would have negligible English language skills. These markets can have vast diversities in terms of income levels which gyrates wildly and impact on the needs/demand of different people, can have variety of languages prevalent and therefore high linguist barrier. Technological savviness to access internet itself may also be at a nascent level and therefore its use for buying/ordering for widgets basis information on internet and payments might be perceived differentially as compared to urban centres or amongst better literate customer segments. Although internet may be the best available tool to club the communities and address needs however due to several associated problems, this may have been left to government to address the issues rather than private players taking up the challenge here.
Most internet E-commerce sites may just be focussed upon the initial 3 segments of customers, although tapering of valuations of some companies show that penetration of some of these sites amongst their target segment has already peaked and customer loyalties are slippery. What is the segment level offerings and outreach of these sites in different segments and findings in terms of market potential may still not be known. The vernacular end of the market may still be out-of-bound for many players as the segment may need to be target with a different product and promotions approach and similarly the sites may also need a lot more efficiency in their approach to reach out to the educated class in suburbs.
The online general stores E-commerce models (followed by most well-known players) only tend to capitalize upon the generic benefits of internet based model (Affiliate or Aggregator) and tap customer basis mostly standard promos which may be common across segments. There might be a need for a lot more specialized players in different category segment for all segments including the vast rural hinterland in order to tap the opportunities in market more effectively since specialized players in each product category segment remain much more in tune with what may be happening in physical market places and respond with buzz and promos in accordance to nurture their online business models.