A Venture Capitalist's Mantra For Building Sustainable E-com Venture In India

25 Apr, 2012

The e-commerce wheel doesn't seem to be slowing down in the country in spite naysayers screaming bubble valuations. But the entire industry acknowledges that the key to future growth essentially depends on how to build a sustainable model. During a presentation at IAMAI's digital commerce event, Bejul Somaiya, managing director of the venture capital firm Lightspeed Venture Partners India, shared his insights on how to make e-commerce a sustainable business proposition. Here's a quick look at what he has to share:

According to him, the real problem lies in unit economics. For example, an average order value of Rs 1,000 usually carries a gross margin of 20 per cent or Rs 200. Now, the bulk of it is shaved off by coupons (Rs 100 or 10 per cent of order value) and an equal amount is deducted for shipping/packaging cost. Then there are costs related to cash on delivery and payment gateway that he pegs at Rs 30, leading to Rs 30 or 3 per cent loss or the negative contribution margin on total order value.

Add to it marketing (by which he means customer acquisition cost) expenses of Rs 500-700 besides reverse logistics, inventory write-downs, customer service, content cost, etc., and he makes a point: Volume does NOT fix the problem!

Somaiya adds that all these things mean e-commerce is easy to get into, but difficult to scale. And his mantra of sailing through the storm is to increase what he calls customer lifetime value (LTV), which would include aspects such as average order value, contribution margin and customer retention or repeat orders. At the same time, the other lever has to be pulled, aimed at reducing customer acquisition cost (CAC) where he suggests measures like think 'social'.

The key, according to him, is going by the rule of the thumb that LTV should be three times the CAC.

A few ingredients that should do the trick are good products that customers love, having a unit/customer economics that works, passion, patience and above all, good execution skills. His parting shot is, "Scale Something That Is Working, Not Broken."