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.
Lately, I’ve been hanging out at TiE meetings coming across entrepreneurs. Most of them, do things differently. Someone sells property in a different way (like groupon does), another advices businesses, a team of 3 co-founders sell restaurant discount coupons and so on.
What’s common between most of these entrepreneurs is they proudly bank on earning big bucks by “doing things differently”. I feel most people are missing the main point. In a global market today, you cannot be different, there will be many others like you that you’re not aware of. You’ve gotta be exceptional and ahead of the game to stay in the game.
IndiGo, Blue Frog, Amazon, Starbucks, Virgin are just not different. Are they?