eCommerce: The Path Ahead

(recently published article)

Now that the ecommerce funding party seems to winding down, everyone is staring at each other to determine who danced with whom, and who will get invited to the next party! And what a party it’s been! 2011 saw $600+ million invested in a $10 billion market with 10 million customers. While there are already concerns of bubbles, consolidation and non-existent margins, the truth is that now is the time that real businesses are being built. It no longer matters how few days it took to close your round, or how many VC hearts you broke ;-). With eyes back on the real game, here are a few factors that we’ve learnt matter – in India as well as globally.

Let’s start with the prize – what might it take to IPO, assuming that most ecommerce companies dream of going public one day. Consider DangDang, the Chinese multi-category ecommerce company that IPO-ed on the Nasdaq in 2010. At that time, the company had 1.6 million daily unique visitors, 28 million registered users, 78% revenues from repeat customers and offered Cash-on-delivery in 750 cities in China.  Product offerings included 590,000 book titles and 460,000 SKU’s of general merchandise products – from beauty to apparel and electronics.  Truly aspirational numbers, but how do you get there?

Let’s start at the top – how to monitor your traffic. Two good metrics to consider are conversion and bounce rate. Bounce rate is the percentage of people who come to your site but leave without viewing any other page. So if your bounce rate is 25%, quarter of the visitor who came to your website left after viewing only the first page on which they landed. Bounce rate hurts especially when your paid traffic has a high bounce – you essentially paid for clicks that never converted. Cutting your Google Analytics data by source should help uncover and optimize the non-performing sources. Conversion is the % of users that eventually transacted on your site, a great end-to-end look at your business. While we see typical conversion rates of 0.5-0.8%, sites such as ProFlowers in the US have 30% peak monthly conversion rates! So examine your funnel closely, and try to understand where and why any drop-off might be happening.

Traffic is good, but revenue even better. Most sites monitor overall and per customer revenue closely; however looking at revenue without the corresponding costs to get that revenue is obviously misleading. So unit economics – or looking at profitability per product - makes it apparent what was spent to earn a dollar. Amazon has a “CRAP (Can’t Realize Any Profit)” program – where they measure cost of each shipped product. They used data to realize that a best-selling folding chair was taking 20 minutes to pack thus obliterating all margins. Getting the supplier to send pre-packaged chairs solved the issue!

Cultivating your users to become loyal customers is the final piece of the puzzle – it’s no coincidence that DangDang had 78% repeat revenues, or that Amazon reportedly has a 65%+ repeat rate. It’s one thing to get someone to buy once, another to get them to come again and again. So check your cohorts by month – are you seeing a steady increase in per user buying behavior?

Off to the races!

Brave new world...

Think about what role the mobile operator has been playing to-date:

1. They own a pipe to transmit information (voice + data)
2. They own a touch point to the customer (and hence impact the choices I make)
3. They own a mechanism to charge the customer - either stored value or monthly billing

Long-term which of these will be critical? The pipe is a commodity - as I mentioned in the last post, we have 5-10 such "pipes" floating around at any given location in the country. The touch point is critical, to establish the connect between customers and the network - however once customers are connected, there is a resentment toward anyone limiting their choices...customers prefer the "chaos of choice" over a "curated calmness".
#3 here is the most critical, and in my mind, the lasting value-add of operator -- enabling me to pay. Why is this one lasting? Because customers themselves need someone to play this role, and who better than someone who already has a billing relationship with me, someone who has thousands of retail points across the country. Add to that the fact that customers are unwilling to use plastic, and I think operators are all set as the mobile payment enablers.

Now think of a new world where the operator magically accepts their new role, and transforms a broken industry. For the app creator, their side on the revenue share equation switches to give them majority ownership of the value created. With this new viability, the pace of innovation on mobile apps accelerates...leaving CBRT far behind :). Operators start providing open access to all apps created instead of this sorry excuse for an app store! ("Spicy Jokes", anyone?!). And while we're at it, all of Gurgaon's roads get repaired and Delhi doesn't flood during the monsoon!

But seriously, the reality might be something like this - starting from the current single player VAS world, 3 different providers emerge:

• Traditional VAS: The legacy players hum along, supported by their legacy (but declining) businesses, while searching for new stream of revenue - both new products and new geographies. Smaller one die out as they're unable to cross the unexpected chasm. If you look at one of the public VAS player's quarterly revenues, the entire focus is on International, while India continues to decline due to "lower quality of users and reliance on the operator". Tough times!

• App Economy: With 10+ million smartphone shipped in 2011, there are enough app hungry users today to dream of building a viable apps-based business. So everything from music and videos to location services and mcommerce will see action this year. Payments remains a roadblock, so while that piece gets figured out, businesses will focus on driving adoption and engagement - monetization to hopefully follow soon.

• Hybrid Player: How do you (mildly) twist the operators arm and force them to share? Build a direct connect to the customer and effective remove them from the coveted middle-man position. App developers create and the user votes with his downloads. Continue to use the operators infrastructure, but since the operator no longer markets, they are relegated to a payment providers role and corresponding revenue share. Undoubtedly this is non-trivial - so companies with some kind of existing customer connect, either offline or through other media like TV, will be able to play here. But for the near future, this might be the most exciting mobile space...

Comments welcome...

Setting the mobile context...

India and "mobile" have been synonymous for as long as I can remember. To the extent that most of us have forgotten what the acronym PCO stood for, let alone see one in our part of the woods! We all complain about SMS spam, ineffective call blocking and poor network coverage. Some of us have also starting tinkering with apps, 3G and 6 inch phone screens. The broader reality of course is very different.

Looking at the commonly known metrics, starting with the biggest numbers -

• 894 million mobile subscribers
• 15 mobile operators
• 85% revenues from voice
• $4 average revenue per user per month - among the lowest worldwide!
• ~97% connections are pre-paid

Read the numbers carefully and you should start to get some sense of the market. Cellphones are everywhere, especially in metros where penetration in greater than 100%. More operators => high competition => cheaper services (I pay $8 for an all-you-can-eat national data plan!). 85% voice revenues means either we talk a lot here ;-), or we don't have much going on in terms of non-voice services. And the low ARPU and pre-paid connections are closely related as well - but let's look at VAS first.

Value Added Services - operator marketed, billed services started with BSNL's wake-up call services back in the old days. Since then, mobile operators have been hawking everything from callerback ringtones to wallpapers - both telling me what to buy, and enabling me to complete the purchase through my mobile account. For this "amazing" service, operators have kept 60-70% of the revenues from consumers! The rest is split up between VAS providers and the poor guy who developed the content. Not a pretty business to be in!

So in this world where the developers make pennies (or paise!), there really hasn't been much passion to innovate - why bother when someone else will keep 80% of the value you create! One of the operators VAS page really gives you a good idea what kind of products we're dealing with here - this in a world of apps like Pinterest and Instagram.

Why not sidestep the operator and go directly to consumer, especially with platforms like Android and iOS? Payments! Across multiple sectors - eCommerce to mobile - lack of payment mechanisms continues to be a roadblock. While ecommerce seems to have found a Cash-On-Delivery band-aid, no such luck (yet) for mobile. Add to that our tiny mobile ad market - $25 million last year - and really few monetization options left for a direct to consumer approach. So most of us remain at the mercy of the operator and VAS providers to choose apps for us.

With this context, allow me to present a view of what will happen in the next few years...in my next post.


mea cupla: this post is 4 months late, I have a thousand excuses - but will spare the bs and try to write more regularly.