The Big Burn E-Commerce Game- Sustainable Business?

E-commerce is the buzzword today and e-tailers (or the more politically collect marketplace/ aggregators) are the cynosure of all eyes, the darlings of venture capitalists, the public and very often the media. And all for good reason. After all e-commerce is here to stay and grow, penetration of internet and smartphones is at an all time high and still increasing, and people are shopping online like ever before. However this silver cloud does have a black lining! Though one can quibble mathematically and economically how much is too much, the fact remains that the obscenely high valuations and spends of these businesses do not need a management guru to point out that it is multiple times of what would normally be acceptable as per traditional business norms. One may argue that these are disruptive and market driving forces and therefore traditional rules of business would not apply. Fair enough. But there still has to be some sound fundamentals guiding the business strategy.

There are many issues which can lead us to question the sustainability of this whole new game. But the one which is most telling for me is the use of the term “Burn” to connote the marketing expenditure undertaken by the e-tailers/aggregators et al. When these firms undertake a major advertising blitz, they do not call it ad spend or investment in brand building but instead use the terms “TV burn”, “internet burn” etc. When they offer discounts (which is almost all the time) it is not promotional expenditure but “promo burn”! It is very interesting this use of the term burn and is a very telling revelation of what they are actually doing. Not making a sound investment with a certain expectation of returns but merely burning money to create light and smoke and nothing much to expect in return. The bigger the fire the better to outshine competitors with! Remember how in colloquial language we use the term “burn money” to connote sheer wastage!! You may well question then, is advertising/promotional expenditure a wastage? Of course not? But unwarranted, disproportionate advertising or promotions without a commensurate return on expenditure could well be! In the initial stage of the brand life cycle there is definitely a need to create awareness and incur marketing expenditure to build the brand. It helps to create hype and awareness and gain customers and market penetration. The sales will be low in the initial stage and therefore revenue is likely to be less than expenditure with profits non-existent or negative. But sound business also entails that there should be some proportion and time limit to this revenue-expenditure gap. Further not only should results be measured in terms of absolutes of customer acquisition, GMV, etc, but equally importantly the efficiency of spends needs to be tracked along with incremental gain per additional rupee spent.

The next question is that if short term losses can help expand the market and grow the business exponentially then why is it not a good thing? And further if promotions and discounts benefit customers, why should we question it? Sure, short term losses for longer term gain is a valid strategy but then short term needs to be short term and should not become the default business model. Sure, discounts to customers and rock bottom prices are great for customers but is it great for sound business?

Let us go back to the very fundamentals of business and marketing strategy. Businesses need to create value for customers and thereby for the organizations and various stakeholders. If value is only artificially created through price discounts without lowering of costs, this value is not sustainable. Consider the launch of Reliance Mobile which changed the entire game and brought mobile telephony at unheard of price points making it affordable to the masses and expanding the market exponentially in the process. the rock bottom prices offered here were a result of an entirely different sourcing, distribution and marketing approach which combined with the immense scale expectations made the penetrative pricing possible and sustainable.  Now consider Kingfisher Airlines which launched a low cost Airline with low penetrative pricing but high value added services. Low prices without back end strategy to lower costs cannot fly for long and nor did Kingfisher!

The aim of the  e-tailers is to get more and more customers and sell more and more and ramp up their gross merchandise value (GMV), but the more they sell, the more would be the losses they make and that will eventually hurt the business even if is someone else’s money. If the e-tailers are able to bring about greater efficiency through their scale and technology, lower logistics cost, build low cost suppliers, change the value chain by eliminating non value added processes, and then as a result of the savings thus achieved they are able to offer significantly lower prices to the consumers it will be a win-win for all. But otherwise, it is only a distortion of the ecosystem artificially kept alive and in the long run it will be a lose-all because it will impact the viability not only of the e-tailers but also of other competitors and manufacturers.  Combined losses for e-commerce companies such as Flipkart Ltd, Snapdeal (Jasper Infotech Pvt. Ltd) and Paytm (One97 Communications Pvt. Ltd) last year stood at $557 million, as per a recent report released by CII and Deloitte Touche Tohmatsu India LLP (Mint, 25/4/16).

In international business dumping as a pricing strategy is frowned upon and countries can legitimately take steps to block dumping (pricing of goods below cost of production). What the new crop of e-tailers/ aggregators are doing is akin to dumping. The aim seems to be to kill competition so that the firm who can hold out the longest amongst mounting losses may survive and once this bloodbath is over, the profits can start but perhaps only for one or two large firms because the smaller ones would have perhaps gone down under by then. What then happens to free competition and consumer choice?

The fundamental goal of marketing is to provide value to the customer. That has to be the focus of the business- how to truly differentiate and create value in a sustainable manner. Doing it better than competition will help create differentiation and preference but killing competition cannot be the sole aim of a “for profit” business. If the chosen strategy is to be price competitive, then lowering cost and improving efficiency has to be the focus.

The recent government policy preventing aggregators from price interference is perhaps not such a bad idea. If we are advocates of market forces, let the market forces rule. Why use  the “burn money power” to distort the market completely. Of course online aggregators like mall owners in the offline world, need to have some say and free hand in promoting their market place and offering consumer promos to drive footfall, but then this cannot be a disguise for a distorted business model! Ultimately only true long term value creation for the customer, the marketplace and the sellers/manufacturers is what will drive the growth.