Recent investments in the e-commerce space have triggered creative instincts of several investors and entrepreneurs. Both are going after the next big ‘idea’ in the online space. The objective is to become the first mover to capture the ‘great Indian consumption story’ across all categories – electronics, financial services, food, office supplies etc. The yardstick for success is the speed of raising money and exiting at good valuation. Only a handful of businesses actually generate cash from operations. I am not considering the excel model projections, since ‘goal seek’ justifies any underlying assumptions.
The primary question that entrepreneurs try to answer is – how to raise money. Inadvertently they gravitate towards a business design that is palatable to the investor rather than sound economics. Few months ago I met an investor, who was excited about Insurance. He had a prescription for success.
“Setup an exclusive motor insurance portal and offer products from all insurance companies. Since the product is the same across insurers, price is the only decision factor. If you offer a good comparison, customers will queue-up for the cheapest product. It’s a perfect product to be sold online!”
Yes, the concept makes sense. But the business does not generate money! If one resort only to cheapest form of digital marketing, the cost of each acquisition is around 10,000.This is more than twice the average premium itself! The intermediary margin is only a fraction of that. The hope is that large scale and repeat purchase would make them profitable in the ‘long run’. But a Chartered Accountant and baniya within me says otherwise. If you can’t even recover the direct costs today on each transaction, betting on the future is only wishful.
The investor wanted to invest in an online insurance business. Hence, he chose a product that can be sold online easily, not something that will actually make money. He like many others are force-fitting the business model to package it as pure online venture. The buy-in from investors is directly proportional to degree of automation. It is true that automation facilitates scale-up, but that cannot be the only consideration. Unfortunately, people are pushed to make business for the internet rather than using internet to serve their business.
As I reflect on successful e-ventures, Naukri and Justdial seem to have got it right. They are in the business not only to make money on trading multiples but generate real value. They are very different from each other, but have some common themes going. I could list three such factors. Each of these solves major problems that e-entrepreneurs face today.
- Go B2B: Naukri attracts free listing from job seekers (individuals) and bills employers (businesses) for access. Justdial attracts free listing from vendors (business), enquiries from consumers (individuals) and then offers paid leads to vendors (businesses). In either case they don’t focus on getting money from individuals. This solves the big problem of cost of acquisition, which is unviable for low ticket size. So a job seeker, who is deriving great value in the process, is not even asked to pay 100 rupees for listing.
- Fulfill offline: If you want to get an employer subscription on Naukri, you leave an inquiry online. A well-trained sales person will come to your office and explain various offerings. Same with Justdial. Indian buyer wants to meet (or at least talk to) a person before concluding a sale. He needs an individual relationship manager, who could be called in case of an issue. This makes it people intensive but still not people dependent (i.e. sales in not driven by individual relationships). The system has been made full-proof. You can hire an average profile, put him in a 1-week bootcamp to make him market ready. I have used both these services, so know first-hand that the deal-maker was not the sales-person but the strong back-end service offerings. It is not driven by star salesmen. Customers will transact fully online only if the alternative is severely painful e.g., IRCTC. Else they would compare with the off-line and buy online only if it is significantly cheaper. Such price-sensitive customers are hardly loyal.
- Scale-up IP: When I inquire about plumbers on Justdial, I get details of 3 nearby vendors instantly on my mobile. I love it! The company is not insecure about asking me too many details, so that they can chase me later. They give me what I want. Similarly on Naukri, I can search for various skills and look at indicative profiles. If I need access to any profile then I buy the service. The system is easy to navigate and reliable. The comprehensiveness ensures high customer loyalty. Not just the system is scalable but with size its efficiency increases. So larger you become the more difficult it is for competitor to replicate. Scale is not critical for survival but huge entry barrier. It is not as if the above is the only way to go. There might be other ingredients that could work for an online model. redBus for instance might not be B2B. It does have variants of the other two factors. It leverages another big element i.e., Access. Bus ticket counters are not available everywhere. E-commerce is but a business and it should be thought through likewise.
Guest Author: Abhishek Bondia, Director, SecureNow Insurance Broker