We have seen it all in India. Ecommerce business essentially means getting a consumer with a smartphone to buy stuff online. As this market is nascent, most ecommerce companies rush to make people ( who would otherwise buy offline) to buy online through discounting. The ability of the consumer to quickly decide and buy online vs the time taken to buy by visiting multiple stores has changed the game in favor of Ecommerce players. Why has this convenience not resulted in profits?
The standard answer that most ecommerce players give is that they would want to scale and then look at profitability. The simple approach has been to get money from investors, compensate the sellers / vendors while offering deep discount to buyers. The cash burn results in deep losses as per the filings with the Registrar of Companies.
We recently have been discussing with few ecommerce companies which can set up a ‘time bound profitability’ as a goal, instead of sheer revenue focus. The result is a deep dive into every financial element – credit periods, payment terms, product mix, pricing, category sales, market segmentation analysis – which will push a reasonable topline growth with a timebound achievement of positive bottomlines. This experiment, we realize is tough – as it goes against the tide.
But old school logic says that if we can achieve profitability at the end of the ‘control timeline’ – say a quarter or two, then it is easy to review and plan the next steps. Iterative planning is key in the initial years, and that is key for success. Now, there are business models where a particular revenue size needs to be attained before the breakeven happens. In such cases, the focus is to race to BEP as early as possible, then work towards profitability.
And here is what we heard from an investor who was part of this brainstorming ‘if you cannot establish control over your numbers within a time period’, you are putting both the business and cash-burn into a rollercoaster.’ We agree, Mr. Investor.
Ashok Subramanian is Director at WiseLane Ventures Pvt Ltd., and a Business Strategist.