Originally published at www.thugstart.com

Discounting Debacle in the Indian E-Commerce Space

Suppose you want to buy a mobile phone or perhaps a TV, what do you do? Definitely, you will first take advice from your friends and family, and will also do some research online. I am sure you will check the prices on Amazon, Flipkart, and Snapdeal before you head out to the nearest Reliance Retail store, Croma, or some other local electronics showroom. If you come across the model of mobile phone you are looking for, and if it is at the same price as it was being offered on e-commerce sites, then the decision is pretty straightforward. Buy the mobile phone at your nearest store as you won’t need to wait for the delivery. And again as Indians, we would always want some physical entity to take hold of if the product does not work properly. So if by buying on these e-commerce platforms, there is no significant benefit, why would anyone purchase it online and wait for its delivery? As the discounts have started to decline from the start of this year, online sales have fallen for all kinds of products.

Discounting in e-commerce has been one of the main pillars in the Indian e-commerce story. There is no doubt that the Indian e-commerce sector has expanded in the last few years as a result of growing middle class, and the increasing disposable incomes. This has been a well-accepted reality, but the real question here is how sustainable are these loss-making e-commerce business models?

The past decade has been all about coupons, sales and cash backs for attracting the online shoppers. People have become quite familiar with the annual mega sale events, such as the Amazon’s Great India Sale or the Flipkart’s Big Billion Day. It is a known fact now, that unless online products are cheaper or have any additional benefits, Indian consumers won’t attempt to make the purchase online. Customers may probably indulge into an online purchase for smaller and everyday goods, but when it comes to making a bigger purchase, they will take their sweet time to compare the prices and visit the retails stores near them. Yet discounting is not a sustainable strategy for the online players.

Usually, discounting is used as a pricing tool rather than a strategy. However, once the Indian e-commerce companies started getting funding, they assimilated that for using towards discounts. Even though there is a difference between strategy and tools, Indian e-commerce seems to view them to be the same. Discounting as a tool must be used to incentivize the customers for making purchases within a limited time period, which results in increasing the sales. But when you use discounting as a strategy, things may not turn out so great. If online discounting means you increase the price of the product to maintain the margins while you give discounts to your customers, then that might increase the sales momentarily but on a longer term, it would definitely be a failure.

What’s even more surprising is that many venture capitalists that fund several e-commerce companies, believe discounting to be a great strategy and are somehow fine with losing money, as long as the revenue is increasing. They are banking on the short-term goals and probably have no long-term strategies for sustaining the business. It is not a surprise when the companies continue with their discounts when in reality their investors think that is the best plan. Indian e-commerce companies must rethink their customer acquisition strategies, especially if they are relying only on discounting for the reason that it is definitely not sustainable. If reducing prices alone are bringing in the customers, then they will never be your long term customers. If the impression of your brand is that you always offer discounts then customers are definitely going to expect that to be always true. Some of them are still burning cash and trying to impress investors with annualized gross merchandise value (GMV) targets.

Indian e-commerce companies must embrace this reality where discounting cannot be a sustainable business strategy as it can’t help you make profits. You may definitely increase sales for a short term, but sooner or later you will end up shutting down your business if you keep relying on it.

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Nomad | Early Stage Investor | Wannabe Anthropologist | Technology Evangelist | Curious, Inquisitive & Experimental Entrepreneur

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Abhishek Shah

Nomad | Early Stage Investor | Wannabe Anthropologist | Technology Evangelist | Curious, Inquisitive & Experimental Entrepreneur