Age Of The Department Store

1 May, 2012

Over the next few years successful e-commerce companies in India should end up looking like the department store, selling products from various verticals. I cautiously make this claim backed by 20 years of  entrepreneurial experience as well as an investor in over 15 startups many of which are in e-commerce. Entrepreneurs venturing into e-commerce need to understand this point and make a business plan accommodating their expansion plans into other categories of products before seeking an investment.

The Rationale

Through my experience I have learned that entrepreneurs always tend to underestimate the cost of customer acquisition. Currently customer acquisition is not cheap and may even get more expensive as your business attracts more competition. Through a survey of the companies I have invested in and my own businesses, the average cost per customer acquisition is currently at Rs1,500 ($30). This is after SEO, adwords, social, viral and various other forms of publicity which help bring down costs.

Now, if you are an e-commerce portal selling products online in only one category, for example, mobile phones, where your average profit margin per sale amounts to Rs 300, you would need to sell at least five mobile phones (1,500/300) per customer to break even on your customer acquisition costs. If we take 12 or 18 months as life time value (LTV) of a customer, then you can well imagine that recovering your cost of acquisition through mobile phones alone will be next to impossible.

Hence, the need for selling to that same customer subsequently other products like, phone accessories, MP3 players, televisions, gaming consoles, music downloads, etc to be able to make more than the Rs 1,500 you would have spent within a year. Together with targeted re-marketing and a strong loyalty process, this is entirely possible.Lets look at the well known story of Flipkart.com. The company launched in 2007 selling a low margin product, books. Then as the company burnt through money to acquire users to their online store, they soon realized the need to increase the lifetime value per customer. Hence in 2010, the year they broke even, they increased their categories and began selling CDs, DVDs, mobile phones and accessories, cameras, computers, computer accessories and peripherals, and in 2011 pens & stationery, other electronic items such as home appliances, kitchen appliances, personal care gadgets, health care products etc. Further in 2012, Flipkart also added A.C, air coolers, school supplies, office supplies, art supplies & life style products.

Getting your LTV strategy right is critical to your business. Think through from the start what the additional categories will be. Think beyond the current vertical. Think in terms of competencies you are developing: In Flipkart's case it's sourcing, availability, warehousing and delivery competencies. Then come up with your brand name; your loyalty program; your team building strategy, etc. If your name is limiting from the start, you may find it tough getting into new categories.

The Exception

If you are selling products that have high profit margins and potential for high frequency purchases then you need not worry about selling products in multiple categories.  Apparel is one such category: people buy frequently enough in a year that if you offer a strong range of apparel, you will be able to realise good LTV through apparel alone.

Shersingh.com which sells apparel under their own brand, offers a complete range. This is a good strategy because they are selling products with high margins and high frequency of purchase. If they spend Rs 1,500 (as estimated) to acquire a customer, they need to sell approximately 4 to 5 garments a year at Rs 799 to break even. If the customer is satisfied with his experience and the product range is strong, she/he will keep coming back every few months to shop various garments. The likelihood of selling higher value products once you have customer satisfaction is entirely possible as we have seen with Flipkart and we will probably see with Shersingh.

Key Take Aways

-Always be prepared to launch products in other categories to optimize your sales.

-Pick an e-commerce business niche that has the potential for high frequency purchases and high margins on products (apparel) or launch a platform that sells in multiple categories (best example, Flipkart.com).

-Budget for high and ever increasing cost of customer acquisition.

-Think through your LTV strategy from the start.

-Try and acquire customers with low-ticket-low-margin products, but subsequently sell them high-ticket-high-margin products.

(Rehan Yar Khan is the founder of FLORA2000.COM. He is also an active angel investor and has invested in Shersingh.)