We read about Flipkart buying out Myntra, Snapdeal getting $100 million funding, Amazon launching aggressive 1 day delivery scheme and so on. The online retail industry in India is really hot with investments pouring to this sector in a big way.
The market potential
According to CRISIL, the Indian retail industry is worth Rs 25 billion and online retail has a 0.3% share of this relative to 6% share in China. The potential of this market is huge. As rural India is also starting to emerge with better literacy and internet penetration, this market can explode further. The consumers are still having misconception on the genuineness and security on commercial transactions, but all factors apart, this industry is firmly on a growth trajectory.
Few factors that led to the flourishing of the online retail industry in India are
- Increase in the income earning young and middle aged population
- Penetration of internet on desktop and mobile
- Higher usage of credit/debit cards
- Collaboration and Competition with global firm like Amazon and eBay
- Focus on product portfolio and innovation
- Niche players focusing on specific product lines hitting the margins of top players
The market differentiation game
With the incoming play of global firms, the kind of innovation and quality of service has really improved. There are many players like Jabong and Myntra which came into limelight as niche players focusing on specific segments within the online retail industry like fashion and lifestyle goods. Initially it all started with adding more and more product categories, the competition was driven by the depth and breadth of product portfolio. Category managers were hired from even top institutes like IIMs to aggressively innovate on the range of products offered but also to make sure they are promoted aggressively. In fact online retailers have become one of the most aggressive talent hunters in the retailing industry.
Now top players like Flipkart, Snapdeal, eBay and Amazon are finding it difficult on differentiate on product categories. Hence they are moving away 1 ‘P’ to the other 2 ‘Ps’ – which is promotion and pricing.
We are seeing many aggressive promotional schemes being launched by players committing 24 hour delivery and next day delivery. There is significant increase in ATL and BTL spending through TV ads, Mobile coupons etc. Now to offset the fear of security and genuine delivery, they even launched cash on delivery and also instant return schemes too.
Heavy discounted pricing is the other strategy these players are resorting to which seems to be hitting the smaller conventional brick and motor stores badly.
The Predatory pricing!
Coupon discounting is being adopted as a tool by many online retailers for ensuring that products offered on their platform are attractive enough to keep the customers engaged and spend on them only. This is where pricing practice may turn predatory, where some products could end up being priced at unfair levels just to beat the competition from conventional stores, wholesalers and other online retailers. The online firms are even trying to offset the margins for sellers by co-funding the discount offered. For example there are reports that one product line is offered 18% discount on online store as compared to normal 7% market discount. The conventional stores are slowly becoming showrooms as consumers now go and check out the products in these stores, but then buy them from online stores at heavily discounted rate.
How can online retailers afford such discounts? Well, some are just giving emphasis to market share and leadership than profitability. They are forcing merchants to cut the price just leveraging the reach they have now among the young Indian consumers especially for fashion, lifestyle and electronic products. Some of them reimburse merchants for offering such discounts too. Since there are less intermediaries in the online retail value chain, they can afford to absorb some of the price cut too without impacting the merchants.
Is this a fair differentiation strategy?
Now the question is can online retailers keep on differentiating by this aggressive discounted pricing strategy? If no, how do they differentiate in the market? How can brick and motor stores as well as wholesalers compete with this? Good case to study and explore further. We welcome your thought and views around it.
[message_box title=”Disclaimer” color=”red”]The case is prepared based on secondary data and the purpose of this case study is to just bring out the key marketing strategies and techniques deployed by different firms from our perspective.[/message_box]