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(Source: kenteegardin)

We have been thinking through how to start and build large mobile B2C businesses, with an eye toward the megatrend of mobile that is slowly building here in India.   Megatrend-wise, the number of mobile internet users in India has grown rapidly (60-100M mobile web users depending on who you believe in) and that trend is likely to continue.

While this megatrend is creating an opportunity to build mobile-first B2C businesses, the lack of monetization methods is a big problem. Stumbling blocks include lack of depth in micro-payment platforms (outside of telcos) and a rather small mobile advertising market.

I believe that mobile-first startups need to keep gross burn low while iterating fast toward product-market fit –  there are two key metrics which I feel need to be optimized early-on and are lead indicators of the value that a business in this space can create:

  1. Customer acquisition cost (CAC) associated with a fast growing user base
  2. Engagement within the acquired user base

How to drive lower customer acquisition cost:

Low B2C CAC for a quickly scaling user base can mean one or more of the following:

  • You have hit a need gap that might have a large market.
  • Your product cuts through the clutter and provides an offering much better than competition / substitutes.
  • Strong virality or word of mouth referrals which come from a wow consumer experience and/or a well designed social product.

Typically, cost of acquisition needs to be compared against the revenue or lifetime value of a user, but given monetization will take longer in India, absolute low customer acquisition costs are important for the business to grow and sustain. Dhingana, a Lightspeed-backed music streaming service on web and mobile, for instance has spent a minimal amount on above-the-line marketing and has reached several million monthly active users.

What if your customer acquisition costs are not low?

  • Initial customer acquisition costs for new products are typically high. As you refine the product, channels and communication costs should improve.  So have a plan for driving down blended (over non-paid and paid channels) CAC.
  • Explore acquisition channels that are opening up now: A key driver of TripAdvisor’s success was its understanding of Google SEO much ahead of competition. Social and mobile channels are opening up now and some aspects aren’t yet saturated or very well understood. Take advantage of such channels. For example, Facebook recently launched its in-stream advertising and provides an opportunity because it isn’t very popular yet.
  • Think about alternate channels for customer acquisition (E.g. offline retailers for local oriented apps, banks for financial services, publishers for media content, etc.). However, ownership of the customer is always an issue with such channels.
  • Figure out monetization sooner, rather than purely growing the user base: Easier said than done, but you might want to identify market segments where there are customers that have a higher willingness-to-pay.

In essence, low customer acquisition cost is a key indicator of a large future user base.

How to drive higher engagement and retention:

After user base growth, engagement and retention are the key indicators of a business’ sustainability.

Poor retention is like a leaky bucket. There is no way you can create or hold value if your service is unable to retain customers. Retention (% of users that continue to use your service) after three months of activation is a widely accepted engagement metric. Flurry recently reported an average retention of 35% after three months of registration across a large base of apps. If you don’t know which side of this average your retention is, you are blind to one of the most important aspects of building a mobile business. A few points to keep in mind when using the above average as a benchmark:

  • The nature of your business impacts retention. Flurry’s own data shows the extremes, such as finance apps which average retention of 10%, while news/sports could be as high as 50% after three months. This does not mean you should change your business, but have the perspective when you are benchmarking your business.
  • If your user base includes a large mix of older platforms like Symbian (especially in India), then expect your average to be lower than the global average, which has a large mix of iOS that is likely to have better experience and thus retention.
  • Finally, this retention number is from developers who cared to install such a measurement tool. Many developers who didn’t would likely be at a lower retention for their applications.

More frequent use of your service makes it more valuable. Flurry reports average usage frequency of ~4 times per week within its sample. The use of game mechanics and notifications are approaches to building engagement. Foursquare is perhaps one of the leading examples in driving engagement through gamification. Tools such as Urban Airship, Badgeville, Bigdoor and Xtify could be useful to use here.

Start tracking engagement metrics as soon as you launch your service. Use tools such as MixPanel, Flurry, Apsalar, Kissmetrics to measure funnels and cohorts. Define core, casual and inactive users, and measure movement between these categories against weekly and monthly targets.

Delivering on these metrics will lead to monetization and sustainability over time:

Drive high engagement today to create valuable users for future: Eventually, a portion of users who you engage could pay for the service. If the service is providing enough value, people in India jump through quite a few hoops to find a way to pay. IRCTC (~20M monthly transactions) and online tax filing (15 M in 2010-11) are great examples of at scale online transactions.

Focus on building engaged user base for better ad-monetization: Overall, there is far more mobile ad inventory in India than there is demand from advertisers. Thus, a business that stands out in terms of user engagement and has an identity within its user base will attract ad budgets. For instance a strong sports-oriented platform could find youth-oriented brands as its takers. iPad has a strong identity and engagement within its user base and ads on iPad in India go at ~Rs 1000 CPM and there is always demand for more. On the contrary, if you are one more provider of mobile inventory, then you are likely to be used for performance campaigns with poor fill-rates and low CPMs.

Good performance is self-sustaining: Your performance on app stores as well as likelihood of getting featured on one improve if you have organic traction (low CAC) and have high engagement. Android for instance optimizes search results based on retention metrics of apps.

More monetization options are becoming available, albeit slowly:

Existing VAS business models are being challenged: While the above two metrics don’t apply as sharply to existing mobile VAS businesses that are monetizing through operator relationships, the wind  is certainly blowing in the direction that they would need to start thinking about these metrics as well (TRAI’s regulations and TDSAT’s recent ruling in TRAI’s favour).

Payments through telcos is a matter of time (could be long though): Given the circumstances, telcos are opening up to being a payment channel (and getting paid like one) where the mobile business is responsible for customer acquisition. Vodafone is already selectively allowing B2C businesses to keep 60-70% of the revenue that is being collected by Vodafone from users that were acquired directly by the B2C business. More on this in Dev’s post.

More payment options are opening up: There are more efforts underway at app-stores (Rupee payments at Google Play and iOS App Store, OVI/Blackberry integrating with Airtel/Vodafone billing gateways). There are also other ongoing efforts like mobile/online wallets and integration of telcos under a single payment solution which will all lead to a much more favorable payments ecosystem for mobile B2C businesses as they come into market.

Mobile advertising is getting organized: The mobile advertising ecosystem in India is firming up with multiple players from ad-networks (InMobi, Komli, Vserv) to media-buyers (Ad2C, Madhouse) setting up dedicated teams for the Indian market. Brands are already experimenting with mobile even though the budgets are small today. It is still a long way to go, but if smartphone penetration continues to grow, then mobile could very well be the largest targeted digital rich media platform available to a brand manager.

These are still early days and it is a long haul, but if you are building a mobile-first B2C business and focusing on the metrics above, there is a path to meaningful value creation.

(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.

Naveen Surya, founder/MD of Itz Cash, spoke about the idea behind Itz Cash. Here’s the video:

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