The e-commerce industry in India is growing at an estimated CAGR of 30-40 per cent according to analysts. One reason that is fuelling this growth is the aggressive discounts being offered by e-retailers to entice shoppers and, more importantly, first time online shoppers. Over the past few years, we have seen discounts as high as 80 per cent, which is especially true during the festive season.
For the longest time, e-retailers in India have been playing a volume game rather than a strictly profit driven outlook but this might be set to change say e-retailers and analysts we spoke to.
One reason why e-retailers have been able to thrive better than their traditional counterparts is because they do not need investment in real estate or sales staff, but this doesn’t mean that they don’t have costs to consider.
“E-commerce is enabled by technology that can scale with minimal cost. There are multiple reasons for discounting and there are different models in which discounts get shared by the brands and the seller. Since e-com is relatively new there are many customers who tries for the first time based on offers and deal available. However selling below COGS even to acquire is not sustainable,” agrees Praveen Sinha, Co-founder and MD of Jabong.com.
Sundeep Malhotra, Founder and CEO of HomeShop18 also feels that profit and growth should be considered together and not at the cost of the other. Just relying on price discounts to attract customers is short-sighted. “The Indian customer is price sensitive and driven by ‘value for money’ and hence to keep them engaged, many virtual commerce companies offer ongoing discounts or propositions that attract the customers. Having said that, along with discounts it will be important to strengthen and differentiate product offerings to attract customers in the near future,” he said.
Will we see rationalization of pricing in 2015?
Sinha feels that this could be the case pretty soon. Paresh Parekh, Tax Partner (Retail & Consumer Products) Ernst & Young also feels that the large discounts that are being offered by e-retailers cannot continue indefinitely and there will definitely be a rationalization that comes into the e-commerce space next year. There are reasons why this is likely. For one, considering the pace at which e-commerce has been growing, the initial hurdles of attracting customers and making them comfortable about shopping online has been achieved. At the recently concluded Google Online Shopping Festival (GOSF), many e-retailers and Google partners reported traffic that was 4-5x and even 8x more than 2013. Also, if the likes of Snapdeal and Flipkart plan to launch an IPO next year as has long been rumoured, then they cannot continue to follow a volume game.
“Big discounts cannot continue but dynamic pricing will. Next year we will see a shift. What we saw this year was extreme and driven by everyone fighting for the top sport but the change is not far,” said Parekh. According to him, one approach could be through products which are guaranteed to make money and other products which you offer on discount to woo customers.
“I see a need of stabilization in terms of pricing and discounts in the e-commerce space. E-commerce players will always be able to pass on better value to the customer however, the discount level will need to stabilize and will depend upon product category. E-commerce market in India is growing and hence focusing on profit at the cost of growth does not make a perfect strategy. However, company should keep growing while improving business metrics towards path to profitability,” further added Sinha.