E-commerce Startups – Generic Analysis

Mobile revolution has emerged as primary driver of economic growth of individual as well as large scale industries and a potential driver of amazing startup concepts. Reduction in cost of smart phone and the availability of affordable network infrastructure has made a lot of entrepreneurs to think of website or app based startups. E-commerce has materialized as an attractive way of selling products by enhancing the reach of the local business model to the entire world.

“E-commerce” at first glimpse seems exceptionally simple and massive profitable concept, get some product, prepare a website, do some marketing and wait for the rain of money. The overall show is not as simple as it seems.

There are thousands of small vendors available in the city, have you ever thought why they have chosen to sell their product on a famous big platform rather than managing their own online store.

Let’s understand the basic models of e-commerce:

Model A – Market based where your role is of aggregator

Model B – Inventory based where you control the entire supply chain

Model C – Inventory and market based mixed model.

All three models are good enough in terms of profitability, depending on the level of execution. Profit margins are more in inventory based model but it requires huge investment to manage the inventory. In case of market based model, profit margins are moderate as you get the commission per sale but it’s requires less resources to manage the entire business model. A combined model is good enough in terms of large product catalog as well as profit margins.

FS Labs E-commerce Startups - Profit Margins

“Though we are using word profit margin too much, it does not mean that founders start making money from day one after launching an e commerce marketplace portal. Gaining profit is a 10 year or so type of long journey. It’s all game of pumping the discount to the “sale” obsessed consumers, gaining a loyal customer base, timely funding and finally trimming down the discount in long run. More than paying attention to profitability at the beginning, attention should be given on providing better service and delivery experience to customer.”

Here is FS Labs analysis on first cut planning of e-commerce startups How the simple stuffs become complicated?

1.Product Selection – The basic need of any of the e-commerce business model is product that you want to sell through your website/app. The product selection is critical as it decides the market volume based on the affordability and acceptability limits of the consumers.

The advantage of inventory based model is that the quality is completely in your control as well as the profit margin is high. The main drawback of inventory based e-commerce models are huge capital blockage, requirement of more resources, proper management, and limited product catalog.

Market based e-commerce business model gives the advantage of large product range, less requirement of resources, less capital blockage but the dependency on third party raises the issues of quality control and limited commission margins.

A mixed model is suitable enough as it provides the advantage of both of the e-commerce setups. So product should be selected that can be managed by self-owned inventories as well as third parties.

2. Market Volume Estimation–To estimate your targeted market volume is essential for your startup as it helps in deciding the marketing strategies and in estimating the level of competition in the market. Say if you are selling electronics items on your e-commerce platform, the targeted market volume depends on the affordability limit, age limit, gender limit etc.

The next step is to estimate the level of competition that you are going to face. So analyse all the players of e-commerce that are working in same domain, their strength and weakness, level of competition that they are going to give, their business strategies to capture the market etc.

3. Vendors Selection–Vendor of products are always required irrespective of the e-commerce model type. Monitoring of vendors of e-commerce business model is less in case of inventory based model while it’s critical in market base model. So, choose the vendors that are within your defined cost, quality limits.

If your model is inventory based, you need vendors to procure your inventory level. If your model is market based, you need vendors that are capable enough to deliver the order as per consumer need.

Cost and quality are the two major factors that need to be defined in the initial stage of vendor evaluation and selection. Ultimately it’s you whose name is going to get affected if someone is not performing as per the expectations.

4. Logistics Management–Logistics is the heart of e-commerce business model. Let’s break the entire process into small steps:-

  • Consumer places the order
  • Payment is done either beforehand or at the time of delivery
  • Vendor packs the shipment
  • Logistics need to deliver the product to consumer
  • Cost on delivery needs to be sent back to aggregator or vendor
  • Reverse logistics of the shipment if the consumer rejects the product
  • Further shipment for the reverse logistics as per consumer terms/agreement

Logistics is involved in all the steps of delivery process, so a proper channel of product flow, forward as well as backward, should be developed for on-time execution.

5. Website / App Design–A user friendly website or app is necessary where consumers can easily browse the products and place the order. So the development of website or app should be done parallel to the initial planning.

Getting domain name and circulating the cards among all the vendors do the initial stage marketing.

FS Labs E-commerce Startups - Generic Analysis

6. Payment Methods–Payment security is one of the biggest issues for the reputation of e-commerce website. Following are the major techniques of payment –

  • Credit / Debit Card
  • Net Banking
  • Payment Wallet
  • Cash on Delivery

Every consumer has his own choice of choosing the payment method, few prefer to use credit/debit card while few prefer to go with cash on delivery. So to incorporate all of the methods become essential for capturing all type of market base.

7. Marketing / Promotion–Marketing is always required to let the people know about the new development in some particular domain. Based on the type of product and targeted consumer base, suitable marketing strategies needs to be developed.

8. Supply Chain Management–Supply chain management is the management of flow of product / service. It includes the flow of goods from starting point to end point. So a proper management channel is required to plan, execute, monitor and control the supply chain.

Communication flow is the essential part of supply chain management as the contact points are more in both the cases; inventory based model as well as market based model. Customer, aggregator, vendor, logistics controller, payment controller are the major contact points of e-commerce supply chain. Hence extra care should be done while doing the planning of supply chain management.

Read here more about the communication planning.

9. Reverse Logistics Management–Reverse logistics is the most difficult task of e-commerce management. Faulty product, customer rejection are the main reasons that drives the need of reverse logistics.

Reverse logistics is difficult as the product needs to be picked up from the customer and return back to the original point, and then the further action should be taken place as per the consumer demand. The establishment of reverse logistics is necessary to maintain the customer satisfaction level

Why choose famous platform–Unless you have big scaling plans for your startup, it’s not sensible to create, maintain and expand the separate online store. It requires a lot of background work to keep the online store in demand. The major benefits of choosing an already established e-commerce platform are as follow-

  • No risk of establishing a new portal
  • Access to already settled infrastructure
  • Less operational cost
  • Reach to large market volume

The other risk associated with the new e-commerce setup of similar domain is that the recognized players would definitely not allow you to penetrate into their market base. Also, the probability of standing against “cash burn” techniques of established startups is quite little.

So, if you are planning to work on an e-commerce startup, FS Labs advises you to go through the complete analysis of your competitors, who are already in the same domain or who has high probability of getting into the similar domain once you start capturing the market. One of the most common misunderstandings that occupies the thought process of new entrepreneurs is that settle down one particular setup and big giant would come to acquire you. If you analyse the acquisition trends of Flipkart and Snapdeal, you will identify that their trends of startup acquisitions is getting shifted from verticals to value addition.

Read here more about the acquisition trends of Flipkart.

Read here more about the acquisition trends of Snapdeal.

Read here about the betterment of Flipkart.

This was the first cut planning of any of the e-commerce platform. Wish you luck for your startup. Stay tuned for more updates.

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