Funding-India

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The startup ecosystem in India has come a long way in the past 15 years. Internet penetration has gone up, number of online transacting users has gone up, the size of the digital economy has gone up and so on. These numbers are well known and all of them show an upward trend. But all of these numbers remind me of the quote:

Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital

Sure, these numbers are all on an upward trajectory, but is this growth fast enough? Could we have gotten here through a different path but at the same pace? What qualitative behavioural trends of the Indian consumer’s mind don’t these numbers reveal? Here are some thoughts on this topic, illustrated through the examples of three main waves of startups that India has seen. Hindsight is always 20/20 and I write this without the knowledge of why the entrepreneurs back then took those decisions that they did take.

The Origins

India’s e-commerce market is estimated to be about USD 50-60 billion as of 2018-19. Internet penetration is expected to go to 829 million in FY2021 from 636 million in FY2019 on the back of low cost data and extremely affordable data plans. The latest wave of these users are internet virgins, who are discovering the alluring world at their fingertips just now. So transacting online is going to happen steadily over the course of the coming years, as they get familiar with the standard path of discovery: communication -> content consumption -> knowledge -> transaction. Most access starts with communication, on a messaging app, most typically WhatsApp. Content, especially in the form of entertainment, is then the next easiest to access over free OTT apps, YouTube and thousands of websites in English, Hindi and vernacular languages. This then progresses to gaining knowledge for personal betterment, internet businesses, product content and so on. The final stage of maturity is when they get comfortable and confident enough to buy products. Startups such as Meesho are trying to short circuit this process by providing ability to transact while still at the communication stage, through trusted resellers who you already know in real life. These customers are also not very tech savvy, but extremely aspirational and hungry for good products and content.

But if you look at the earlier generation of transacting e-commerce customers, who transacted on the first wave of platforms such as Indiaplaza, Flipkart, Amazon, Snapdeal and Shopclues, their behaviour is on a completely different trajectory. All of these companies applied the traditional lessons of ‘platform thinking’ where conventional wisdom says, to get the market place flywheel moving, you need to incentivize supply and then demand. While most of these companies were able to onboard sellers, or create their own seller entities to control the product quality and shipping experience to build the supply side, the demand side was not growing fast enough. So the industry took the path of demand generation through discounting. This worked very well and the whole flywheel took off, with this artificial force giving the much needed initial turns.

Consumer Behaviour Shaping

What did happen though, is that a whole generation of e-commerce customers has been corrupted, to expect discounts as the primary benefit of e-commerce

Talk to an e-commerce customer in the US and the benefits listed are a wide selection of products, convenient home delivery, and of course lower than retail prices since there is no expensive retail footprint. The same discussion with an Indian e-commerce customer will elicit one major benefit – discounted products. The other benefits are almost not valued in the minds of customers because they have been steadily fed on a diet of deep discounts funded by the market places and then by the brands and sellers. While the movement of this flywheel increased the e-commerce market size at a rapid growth, the percentage of growth is nowhere near what was expected when the discounting started, nor is it a sustainable growth without the discounts. It resulted from the arms race born out of the winner-takes-all thinking where the companies scrambled for the largest land grab of consumers possible, thinking that whoever acquires them will be the last one standing.

But e-commerce, especially horizontal e-commerce, is an ultra-marathon, which involves habit-forming repeat purchases, loyalty to a platform when there are other tempting choices available, and the ability to nurture profits over multiple transactions. Acquiring one customer did not really result in the kind of behaviour that was expected. The purchases of a single consumer was split across multiple platforms, building an extremely fickle online behaviour with no loyalty to any platform, based on any sustainable benefit. For every 100 customers acquired through unsustainable discounts, only a percentage would remain active transaction making customers, and therein lies the rub.

The Cycle Continues

One would think these lessons would be picked up by the next wave of consumer companies that got built. But unfortunately, the next wave of companies that got built in mobility (Ola, Uber) and digital finance (Paytm, Gpay, PhonePe) have repeated the cycle again. The same mad rush to ‘acquire’ customers, the same discounting propped artificial demand and the same losses.

The new wave of vertical e-commerce startups (e.g., direct to consumer brands), the new wave of mobility startups (e.g., Bounce, Yulu) are all facing the brunt of this corruption of the mindset of that wave of consumers. It will be a generational timeframe before they get used to seeing other kinds of benefits, and further, the new growth will come from the aforementioned internet virgins, when they get ready to transact.