Tuesday, July 31, 2012

Indian e-commerce's next big challenge - Pricing sanity

The first challenge faced by Amazon-like "all things for everyone" e-commerce stores is to get people to buy from their site.  One principal technique employed by e-commerce stores to make this happen is to price items much below the printed price so that the online offers are too good to miss out for the buyer.  While this is a good initial strategy, it is definitely not a sustainable one.

I believe the Indian e-commerce industry has reached a stage where the usefulness of this strategy is near its end.

Let us take a look at what is happening in the area of book sales to try and understand the kind of pricing strategy prevalent today:

A typical publisher gives anywhere between 20% to 40% discounts on the printed price of the book to the book shop.  40% discounts are extremely rare and usually reserved for the authors (when they wish to buy their own books).  Best sellers and fast moving books are discounted less (20%) while the books that sell less get a larger discount (30% - 35%). With this in mind, let us look at a few books and see at what price they are selling across different e-commerce stores in India.

1. Steve Jobs: The exclusive biography. Actual price: Rs. 899/-.  Seller's discount (25%  - my guess)
IndiaPlazaRs. 512   43%
IndiaTimesRs. 531   40%
InfibeamRs. 584   35%
BookaddaRs. 610   32%
LandmarkRs. 611   32%
FlipkartRs. 629   30%
CrosswordRs. 692   24%

2. Fifty shades of grey. Actual price Rs. 350/-. Sellers discount (20% - my guess)
IndiaPlazaRs. 200   42%
BookaddaRs. 234   32%
FlipkartRs. 245   30%
IndiaTimesRs. 245   30%
InfibeamRs. 252   28%

3. Brief history of rocketry in ISRO. Actual price. Rs. 450/-. Sellers discount (35% - my guess)
InfibeamRs. 346   23%
IndiaplazaRs. 360   20%
Homeshop18Rs. 360   20%
BookaddaRs. 431   4%
FlipkartRs. 450   0%

As you can see from the above most of the e-commerce sites are selling most of these books at a loss (if my assumptions regarding the discounts are right)  And remember, we have not even taken into consideration all the other costs that these companies incur including cost of running the site, salaries and the cost of free home delivery!

Obviously, this is not sustainable.  At some point in time, and pretty soon, prices will have to go up if these companies have to survive and grow.  But, with Indians being so price sensitive and sites like indiabookstore.net making it really easy to compare prices across sites, it is not going to be easy.

Indiaplaza.com and infibeam.com have been around for a long time and obviously some of their categories and their other services (infibeam also generates revenue from their buildabazaar.com offering) are profitable and so they may be able to delay raising their prices for a while.

Companies like homeshop18.com and IndiaTimes are backed by big corporates and since the big corporates have various other sources of income, they may be able to swallow any losses for a while longer.  In addition, they have access to a lot of media time from within their network(Network18, Bennet & Coleman, respectively) which is likely to give them serious access to cheap(er) advertising, leading to less burn.

FlipKart, on the other hand, is probably burning quite a bit on advertising and is probably most in need of bringing in some sort of pricing sanity at the earliest.  But if they are the only ones to increase prices, the chances are that a significant portion of their client base will flee to their competitors.  It's all down to their investors' appetite now.

Something's gotta give.  We'll have to wait and see who blinks first!


Raj Bhatt said...

The discounts are off MRP. Usually the retailers procure the books at 25-40% below MRP.

I know that Indiaplaza has better procurement prices than most other new retailers. Also they leverage their suppliers to deliver the product.

The others will have to figure out how to price profitably.

Raj Bhatt said...

Sanjay: Also, I forgot to mention that I feel that the Indian e-commerce industry needs to move from mass discounting to customized CRM marketing. Why give a discount to someone who will willingly pay a higher price for brand-name service and assured delivery within a few days?

'Customized database marketing' for Indian e-commerce is the topic of my next blog article. I'd love to guest blog here.

Sanjay Dattatri said...

@Raj: Yes, I did mean MRP when I mentioned printed price (price printed on the book).
Also wrt books, I am not sure publishers offer different discounts to different bookshops (unless it is volume based).

Sanjay Dattatri said...

@Raj: You are most welcome. Be my guest!

Roman said...

I am still not able to understand why do the online bookstores selling the books at a loss ? Is it just because they want to show the sales and grab the investor money ?

What is the logic in selling something for a loss ? Can someone please explain....