These guy’s company, once valued at USD 250 million in June, 2006; after starting up with $ 6000 seed capital in 2004 was sure a success story back then. Only 6 years later, the company gets sold at less than $ 500,000 and one of the founders gets employed at Google (who had once offered to buy his company for USD 200 million).
Now, that’s the Story of Digg.
Most largely funded eCommerce companies in India seem to be going the same way. Cost to acquire a customer is Rs. 1000 - Rs. 3000. Average first gross sale per customer is Rs. 500 - Rs. 1200, net margin is less than 5%. i.e. Company gross earning per sale Rs. 25 - Rs. 60. Of this, company bares taxes, shipping charges, marketing costs, salaries, etc. etc. costs.
And yet, investors and entrepreneurs are bullish about these models to scale.
Oops! Does this make any sense to you? - No?!
Let me tell you how it makes sense to investors and the other folks (more investors).
Entrepreneur (E) starts a small online venture. Sells stuff for dirt cheap, even below cost at times. Obviously, customers flock to his store. Seeing the number of customers come in (traffic), an investor puts in a little money (assume Rs. 10 lacs) for E to advertise and get more traffic.
Assuming, E’s store advertises on Google and other networks, spending Rs. 20/click, he gains 50,000 new visitors. Since he sells stuff for real cheap, his conversion rate is high. That means, of 50,000 visitors, 5000 (10%) end up buying. The average sale per visitor is Rs. 300, yet, as the website is new and sells books, cd’s, t-shirts, etc. Total money collected is 5000 x Rs. 300 = Rs. 15,00,000/-
E tells the investor that of these 5000 customers, 4000 will shop again. This time, they will spend a bit more. That is, 4000 x Rs. 500 = Rs. 20,00,000/-
And, they will shop 4 times during their lifetime, that is 20,00,000 + 20,00,000 + 20,00,000 + 15,00,000 = 75,00,000/-
E also tells the investor, that each of these repeat customers will influence other customers. So, 4000 customers will multiply twice to become 8000 customers. That is 8000 will generate a sale of Rs. 1.5 Cr. in their lifetime.
Aggregating the entire business model, the E and the Investor on spending Rs. 10,00,000 have made a sale of Rs. 2.25 Cr!
Now the company earns 5% of 2.25 Cr = Rs. 11,25,000 of which Rs. 10,00,000 was spent in advertising, balance Rs. 1,25,000 of which part goes in shipping, packing, taxes, salaries and other expenses.
So, they put a value for each customer - 2.25 Cr / 12,000 customers = Rs. 1875.
With this value, they find another investor and tell him that if he invests Rs. 1 Cr. like the investor did of Rs. 10 lacs, he will have 12,000 x 10 = 1,20,000 customers, each valued at Rs. 1875. Can you imagine what his company worth would be?
So, if eCommerce companies in India, report a sale of Rs. 500 Cr to Rs. 1200 Cr per year, are they really making money?
Nope, it only depends on when and at what price do you exit. At some point, unless you own patents like Amazon does and other intellectual sources of income, your bread will always just be bread. It may get a bit sweeter, but will never turn into cake.
When we started HitPlay, we were one of the few startups that started selling products online and via catalogues. Last year, since we launched our online store www.hitplay.in, we’ve seen tremendous growth week after week.
Since starting up back then, we’ve worked with so many ecommerce stores and have supported plenty of startups. And, during this course, we’ve seen plenty of websites come and go. So, here’s what you should keep in mind when going online.
Do you shop online more or offline more?
Shopping online is quite a new and different experience. Have you done it? How often? What do you prefer?
Is this your full time job?
Or, is this something you wish to start on the side? We’ve seen most online stores fail as a side business. However, you may consider setting up shop on Amazon or eBay if you wish to get a feel of the waters, before diving in.
Do you have the money to start shop?
Just a basic setup for a good ecommerce store, in India, typically costs between USD 5000 ~ USD 20,000 depending on what your requirements are. And, it’s probably best to build it in phases, starting small and growing.
Do you have the expertise to create?
A great online store is 90% better than a good online store. The monetary investments are the same, but returns are way different. There’s plenty of planning, involvement and expertise that is required in making a great store. While most reputed website developers do a good job these days, the greatness comes from your involvement in the project. Are you a hands-on person? What do you know of designing a store?
Do you have the money to sell?
In offline retail, normally, you need more (or as much) money to buy as to sell. An eCom setup it typically the other way around. You need more money to sell and lesser to buy.
Do you have 100’s or 1000’s of dollars a day to spend, to sell? How will you make that money back?
Do you have the patience?
With the worldwide reach from a single place an online store can give you, no other business can. And, for obvious reasons, you’re not going to be Amazon in a day, month or even a year! It will take you a lot of money, time and learning before you start seeing the returns. Typically, longer than in an offline store. Especially, in India, to get all your paperwork done, can take months together.
For instance, we took about 2 months to get a payment gateway (PG) for Credit Cards, another 2 months before we could start accepting net banking transactions and then weren’t happy with the service, so another 75 days to shift our PG, another 50 days until they started accepting MasterCard and now about 60 days to get FedEx to start Cash-on-Delivery for us!
During course, we lost plenty of time, money and customers. How much can you afford to lose?