Beyond Discounts, How Companies Can Survive The E-Commerce Boom (And Fierce Rivalry)

Posted on July 5, 2016 in Business and Economy

By Ishan Arora:

The Indian e-commerce industry is likely to be worth USD 38 billion by the end of 2016. By 2020, this industry is likely to touch a whopping figure of USD 119 billion. In terms of users, it is already the second-largest internet market globally with three internet users are added every second. Internet penetration is likely to increase from 35% in 2016 to 59% by 2020, which means around 320 million online shoppers. M-commerce, i.e., shopping using mobile devices is likely to contribute up to 70% of the total revenue generated by various e-commerce websites. And given the aggressive online discounts, rising fuel prices and a wider and abundant choice, significant growth is expected.

Why Is There A War? What Is The Fuss All About?

It is evident that the Indian e-commerce industry offers tremendous growth. With such a promising growth and so much at stake Flipkart, Snapdeal and Amazon are fighting for their survival in the e-commerce industry. All three big shots want to maximise their market share and are implementing different strategies to attract more customers. These include offering huge discounts, tightening the refund period, faster delivery of products etc.

In 2015, Flipkart was the market leader with 43% market share. Snapdeal had 19% market share whereas Amazon had only 14%. By March 2016, these figures completely changed. Flipkart’s share fell to 37%, for Snapdeal it was 14% and Amazon was able to gain 23% of market share.

So, what led to a change in these figures? It was the customer experience these companies were providing to their users and the discounts they were offering. If you see the image below you will notice that the revenue generated is directly proportional to the loss incurred by the company. Which means that companies are generating revenues but at the cost of their profits, i.e., they are trying to attract customers by offering more discounts which is not a good way of doing business. And by doing so companies will attract only the price-sensitive customers who are likely to leave them in case these users get a better deal on other sites. So, is it the right thing to do and does it guarantee a long-term growth?

chart comparing revenues and losses of Amazon, Snapdeal and Flipkart
Data source: Techcircle.

How Does It Benefit A Consumer?

With increasing rivalry among these players, the bargaining power of customers is increasing as now they have a lot of options to choose from. Also, companies are offering huge discounts and, as a result, customers are getting the same quality products online but at a much cheaper price.

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Strategies For Sellers

1. Account Reputation:

Every seller has an account on an e-commerce website and the reputation of the seller depends on factors like shipping speed, returns and cancellation, positive and negative feedback etc. It is important for a seller to maintain a good account reputation because it not only increases its sales but also enhances the brand of the seller and minimises the product returns (due to quality issues).

E-commerce websites should keep a track of the all the sellers. They should incentivise the good sellers (so as to motivate them to do well) and bar all the bad sellers from doing business on their platform.

2. Study The Competition:

It is very important for sellers to study and analyse the competitors selling on other marketplaces and accordingly they should formulate their own strategies. A seller has to decide whether he wants to sell more at a lesser price or sell less at a higher price. Say, for example, seller A is selling a camera for Rs. 3,000 on Flipkart and competitor B is selling the same product for Rs. 3,200 on Amazon. Now, seller B sells 10 units of cameras in a month and, due to lesser price seller, A is able to sell 15 units. The cost of the product is same for both, i.e., Rs. 2,500. Therefore, seller A makes a profit of 500*15= Rs. 7,500 whereas B earns 700*10=Rs 7,000. Hence, it is up to sellers whether they want to sell more at a lesser price or sell less but at a higher price.

3. Follow A Loss-Leader Pricing Strategy:

A loss-leader is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. It allows the sellers to build a database of customers and increases the opportunities for positive feedback.

Promotion Strategies

1. Right Merchandise Mix:

E-commerce websites should regularly analyse their business using Google Analytics and forecast the future trend. Categorising the products into categories of ‘High Sellers’, ‘Regular Sellers’ and ‘Slow Sellers’ would help them design the right merchandising mix.

2. Split Catalogue Into Four Categories:

a) High Traffic: High Conversion (Star products. Always keep them in stock. Less advertising. Increase inventory.)
b) High Traffic: Low Conversion (Adjust price. Improve product description.)
c) Low Traffic: High Conversion (Advertise and increase visibility.)
b) Low Traffic: Low Conversion (Discontinue.)

3. E-Commerce Discounts:

Discounts play a vital role when a customer is in a mood to make a purchase. Today, customers want to shop from a website offering more discounts rather than a website offering no/less discounts (even if it offers a lesser selling price). So, companies should follow a high-low model of discounting, i.e., initially (when the product is introduced or is in the growth stage) they should keep the prices high and offer heavy discounts (to get the attention of its customers). As the product enters the maturity stage, they should eventually decrease the price.

Conclusion

The e-commerce industry is a very lucrative industry and is expected to grow manifold in the near future. It is evident from the fact that despite heavy competition a lot of investors are willing to invest money in this booming sector. But to succeed, companies will have to think beyond discounts because discounts will give them only price-sensitive customers and not brand loyal customers. So, if a company is able to provide a better customer experience, good quality products at affordable prices, value for money etc. it will definitely capture more market share.

Banner image credit: Hemant Mishra/Mint via Getty Images.

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