An Ecommerce Ecosystem is Emerging in India

(Source: Zen)

[Published in Medianama]

Ecommerce in India has gone through a cold spell, but there is hope for warmer days ahead. There appears to now be a clear focus on contribution margin and sustainability versus the previous race to buy topline. As Bejul explained in his post, customer lifetime value is a metric that Lightspeed believes is critical to measure and optimize.

The ecosystem is a key enabler of sustainability for an industry. For example, it is unviable for all ecommerce players to build end-to-end logistics and payments/wallet capabilities internally. Certain ecosystem trends are emerging which may help ecommerce businesses become more viable over time:

Capabilities of logistics service providers aren’t static

Logistics is where rubber meets the road, and ecommerce glamour meets the offline reality filled with dust, sweat and lost/wrong/delayed shipments. Some ecommerce specialist players now provide:

• End-to-end ecommerce solutions, including inward, racking, picking, packing, shipping and collection.
• Transparency into logistics company’s processes through APIs, which can reduce returns (and costs) and bring predictability.
• Variable warehousing bills (per order shipped) that help manage costs at lower scale, and a projection for reduction in per unit cost with increasing scale of the ecommerce business.

There are several new and old companies worth calling out:

• Dedicated ecommerce divisions within traditional players like Bluedart, Aramex, etc
• New ecommerce logistics specialists such as Delhivery, Holisol and Chhotu. These companies and teams tend to be more hungry, innovative and nimble than their traditional counterparts but are still building their capabilities. Also interesting is Mudita for bulk inter city shipments.

Payment gateways/aggregators are trying to address pain points

Payment gateway failure horror stories are common, with failure rates as high as 35%. This continues to be a lost opportunity, and a very expensive one, as it costs up to Rs 1,000 to get the customer to that point.  Here are a few improvements/innovations that are coming up:

• Wrapper technologies that work with multiple banks to minimize probability of transaction failure.
• Deep analytics and visibility into customer’s intent to buy: For example, ecommerce companies can track a list of failed transactions (with customer and cart details) so that their teams can follow-up and close offline.
• PCI/DSS compliant widgets which simplify the payment experience for consumers.
• Capability to handle payments originated over mobile web.

There are traditional names like Billdesk, CC Avenues, EBS, who are incrementally adding value but the new teams that are coming up quickly are Citrus and PayU, in addition to GharPay which collects cash from consumers’ doorsteps when no physical delivery of goods is involved (e.g. tickets, collection in advance of shipping).

The industry is maturing

Some of the more recent trends I see are:

No-poach agreements: After the initial land grab in the OTA space, Yatra, Makemytrip, Cleartrip got into such arrangements. Leading ecommerce players are now discussing these. It is good from a talent pool perspective too, as people apply themselves to fix hard problems versus moving to the next job.

CoD Blacklist: CoD is a key part of Indian ecommerce. However, high CoD return rates (upto 25% in some categories) cause operational challenges and working capital burden. Some players are discussing creating an industry wide CoD customer blacklist – this can drive significant efficiency for ecommerce / logistics companies and a better experience for genuine customers.

Trust from OEMs/Brands: Brands/OEMs are putting more trust into ecommerce now. Eighteen months back ecommerce was not strategically important to brands/OEMs, but brands are now launching their own ecommerce platforms, and/or have a clear strategy for ecommerce as a channel. Senior executives with years of core category experience are now excited about ecommerce and are considering opportunities in this retail format.

These trends are still in their infancy but if they continue the situation will be very different a few years from now. The key question is to what extent and in what time frame will these developments move the needle in making ecommerce sustainable.

Some thoughts for ecommerce entrepreneurs

My thoughts for entrepreneurs building ecommerce companies are to:

• Assess if you can derive value out of any of these services / trends: For example, compare if your current logistics / payment provider (in-house or outsourced) is competitive with the changing environment or revisit if you can bring in top talent from the domain into your team.
• Step forward to support the ones you find relevant: For example, you would take risk when you test a new partner in your order flow (logistics or payment), or when you commit to not hiring from competition, but these partnerships can pay off very meaningfully in the long run.
• If you are a new startup, identify and focus on your core competence: Logistics and payments contribute significantly to direct costs but they are only necessary and not sufficient for success.  So unless you plan to differentiate on these, leverage the ecosystem.

This list is by no means exhaustive, so please feel free to add more names / trends / thoughts in the comments section.

Mobile Rev-Share Changes Might Spark a Fire

(Source: Andrew Bolin)

[Published in Medianama]

I attended the Founders Forum event in Mumbai, organized by Rajesh Sawhney, Brent Hoberman and Jonathan Goodwin, as well as the Nokia Growth Partners Mobile Internet event.

Jonathan Bill of Vodafone spoke at both these events about upcoming changes in Vodafone’s offdeck rev-share regime in India.  This change, along with a potential broadband data plan price war and growth in smartphone users could result in a real transition in mobile data usage over the remainder of this year, charting a way out of the slump that I discussed in my last post.

Vodafone will start to offer more favorable rev-share deals to those direct-to-consumer mobile apps/services companies that will not rely on Vodafone for promotion and customer acquistion. In other words, developers will keep 70% of the revenue from their applications (at a scale of Rs 1 cr+ in billings; 60% below that), as opposed to the 25-30% currently prevalent here.  70% is more in line with what Apple and Google offer to developers for iOS and Android apps respectively as well as what operators are offering in the US, Europe, China and Japan.

The bet here is that the smaller operators like Aircel and Tata DoCoMo follow relatively quickly and then the larger ones like Airtel and Reliance may be compelled to follow suit – in aggregate, these greater offdeck rev-shares will drive more innovation and more revenue for developers.  Nokia, among others, is citing a 3-5x jump in conversation rates when operator billing is enabled for paid apps and in-app purchases.

I don’t think mobile operators are risking much in the short- to medium-term by tring this since this change in rev-share would only apply to offdeck billing and not to the majority of revenue that these operators get through whitelabeled services, data plans and p2p SMS that they already offer.  In the long-term, though, whitelabel services will suffer from competition from D2C apps/services – also, ARPU from data plans will come down in price wars although overall data plan revenue should go up with significantly higher numbers of data subscriptions.

I don’t expect these changes to break open the eco-system overnight.  70% rev-share to developers was offered in the US for several years prior to the iPhone being introduced in 2007, yet the eco-system there did not break-out.  Why?  Because there is lots of other friction in the eco-system as well, including multi-step transaction flows for consumers, 4-6 month payout periods for developers, reconciliation issues, no standard app discovery methodology (although app stores are starting to be offered by most operators today), no offdeck billing aggregator in India, fragmented platforms, lack of customer trust, and limited success/availability of multiple business models like paid apps, in-app billing, in-app advertising etc.

However, assuming this change from Vodafone comes through in the next couple of months, here’s some of what could ensue:

• In anticipation of other operators following through with the same model, I expect to see the formation of many new teams with strong consumer acquisition, engagement and retention DNA.  Hopefully, with funds freed up for product and marketing, there should be a greater focus on building brand and acquiring customers directly on what will be the leading platforms in India in the next few years: mobile Web and Android (in my opinion, not SMS, USSD, J2ME or iOS).  I am bullish about the prospects of some of these D2C categories, especially related to entertainment.

• Mobile ad networks (e.g. Google, InMobi, Appia, Getjar) will benefit from some increased performance-based ad spend from developers.  As we have seen in other countries, mobile content providers (music, ringtones, apps) with direct revenue models have been the earliest adopters of mobile advertising because they have been able to tie marketing spend directly to revenue.

• Existing whitelabel MVAS vendors will launch consumer brands or start pushing their nascent consumer brands more aggressively.  In other geographies where the D2C eco-system opened up, whitelabel vendors have struggled tremendously with building consumer brands and have mostly failed.  Impediments include trying to maintain relationships with their mobile operator customers while competing with them in their D2C business and not having the consumer DNA in the team for user acquisition and retention.

• Other mobile operators might slowly start offering similar rev-shares although I think they will wait to see the results of Vodafone’s new initiative before risking their arguably miniscule offdeck billing revenue streams.

• We may see a carrier payments aggregator emerge once enough operators have changed their offdeck rev-share percentages.  InMobi (with Smartpay) and Opera are already moving this way in India as announced at MWC.  Boku, Zong, Paypal may come this way over time.  There should be a space for a standalone Indian carrier payments aggregator, along the lines of what Qpass did in the US a decade ago.

So, I see a much more vibrant and larger MVAS eco-system emerging over the next few years.  Now is a right time to start direct-to-consumer companies in mobile – we are seeing a ton of founders with exciting new ideas.  Bring it on!

(previously published on Nextwala blog and Medianama)