Forrester estimates that Indians spent around $1.6 billion online on retail e-commerce sites in 2012. The projection is for this number to reach $8.8 billion by 2016. Despite this potential, and the ongoing excitement, Indian e-commerce is not profitable. Almost 50 per cent of the e-commerce ventures launched in 2012 have shut shop.

Why isn’t Indian e-commerce profitable? What needs to be done?

There are four factors in Indian e-commerce today that cause significant profitability challenges.

High customer acquisition cost: Given the low Internet penetration and distrust around online buying, customer acquisition is expensive. Most sites spend between Rs 800-1,500 to acquire a customer. Considering that the average order size is around Rs 1,500, and that gross margins range between three to eight per cent, the customer needs to transact over 10 times for the retailer to recover the acquisition cost. That doesn’t happen a lot.

High inventory carrying costs: Most Indian e-commerce sites carry their own inventory. While this offers a better shopping experience (by giving visibility into availability), it causes a heavy drain on working capital due to unsold inventory and carrying costs.

Cash on delivery (COD) is expensive: COD has encouraged more people to buy online, but it is a fundamentally inferior payment mechanism for e-commerce.

COD transactions have a higher rate of product returns (incurring greater shipping costs), are more prone to fraud and lock-up working capital.

High cost of fulfilment: Most e-commerce sites have had to invest heavily in their own fulfilment network. This allows them to ensure predictability of delivery and a better experience. But it not only requires deep pockets to invest upfront, but also incurs greater operational costs that can further erode margins by five to seven per cent.

A win-win deal

Here I explore one important strategy that leads to a reduction in customer acquisition costs. For this however, e-commerce firms will have to make a fundamental shift in how they engage with consumers.

Most Indian e-commerce sites have seemingly assumed that e-commerce is nothing more than replicating the basic model of in-store shopping, but on the Internet — showcase the products, provide some product information, create a platform to carry out the transaction, and invest in branding. Nothing could be further from the truth.

Consumers typically do not first decide to buy a product, then fire up their browser, go to your Website and place an order. Consumers may make purchase decisions as they move in and out of TV and print commercials (some viewed online), a friend’s recommendation on social media, product information online, product reviews on a trusted blog and the best deals in their local store. It is a highly non-linear process. If you want the consumer to buy from you, you need to be accessible when she is close to making her purchase decision.

The easiest and most effective way, of doing this is by being part of the consumer’s decision-making journey. You engage with the consumer across all the places where she is likely to access information she needs, and then lead her to your site when she wants to buy. This is a practice that the world’s most successful online retailers effectively use. The key to doing this is engagement through content.

Engage with the buyer

Here’s what you could do:

Provide rich and relevant information on your site (like video reviews, or expert opinions) that the consumer seeks so she chooses to come there.

Engage her in an authentic and relevant dialogue in all the places she is likely to be as she moves through her journey, across online and offline platforms.

Consider net-a-porter.com, a premier online luxury retailer. It started as a hybrid between a fashion blog and a retail site, and became the leading destination for anyone interested in fashion. As people spent a lot of time reading about the latest trends, browsing photographs, and engaging with authors, it was natural for them to turn to net-a-porter to fulfil their desire to buy. In 2012, net-a-porter.com grew by 55 per cent.

Sneakerpedia is a highly engaging community site launched in 2011 by Footlocker, where “sneakerheads” share their personal sneaker stories, contribute to, and search for information on sneakers. Despite not being a shopping site, it is a preferred destination for anyone passionate about sneakers, and connects Footlocker with the sneaker culture. This engagement has served Footlocker well — in the year it launched sneakerpedia, online revenues grew by 22 per cent.

So what should Indian e-commerce firms do?

They need to create engagement by fulfilling their consumer’s emotional and information needs, and not just their functional needs.

Indians purchase durables through a highly planned and researched decision process, yet how many sites focus on providing rich information to enable this decision? Could social media be used to show which of my friends recommend the same product? Apparel shopping is driven by occasion, rather than functional need, but how often do you find e-commerce sites creating emotional engagement around festivals? What if a fashion retailer invited you to create your family album on their site before Diwali, and virtually dress those photographs with apparel available on the site, with the best submission getting the complete wardrobe free? Could it trigger desire, and cause an association between the site and your emotional need to celebrate?

The path to profitability for Indian e-commerce is long, and not for the faint of heart. But it exists. Indian firms need to embrace tested global strategies alongside their home-grown wisdom.

(The author is the India Managing Director and Co-Lead of Global Delivery at SapientNitro.)

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