It rarely works because there is always someone else who has more funds and can sustain losses much longer.

Why the Last Man Standing strategy of Indian ecommerce will not work
Atom Ecommerce Thursday, July 20, 2017 - 17:28

Online shopping offers customers several key benefits like (a) huge selection, (b) the store is open for business 24×7 and (c) the convenience of home delivery.

These benefits are clear, concise and easy to communicate but here’s the problem—customers do not find these benefits compelling.

Take the factor of selection. Large offline bookstore chains like Landmark and Crossword typically stock around 50,000 unique titles in their flagship outlets whereas an online bookstore would have a catalogue of several million titles. It sounds compelling to tell a customer to buy books online because she can choose from a massive selection but in reality browsing through hundred thousand titles on Chinese history or fifteen thousand options on plain white socks for men can be cumbersome and sometimes selecting from just a few options is more convenient.

Take shopping hours. Online stores constantly promote the 24×7 feature by announcing that shoppers can shop online at their store at 2 a.m., which you cannot do at an offline store. This sounds persuasive but customers do not shop at odd hours. Once, I was talking to some students of a top management school, and I was going on and on, ad nauseam, about shopping at odd hours. After a while, a student got up and stumped me: ‘But why would I shop at 2 a.m? I would be fast asleep.’

There’s the convenience of home delivery but the reality is that customers value the convenience of home delivery as long as it is free.

In other words, the only real benefit e-commerce firms can use to attract shoppers is a price benefit. Right from the early days of e-commerce, companies like Amazon.com and Ebay.com have used price as a benefit to attract first-time customers, hoping that over time, once customers get habituated into shopping online, other benefits like huge selection, anytime shopping and convenience will override the price issue, and they will continue to shop online even without discounts. However, more than two decades later, online stores continue to use price and deep discounts as the key attraction because customers have not yet found the other benefits compelling enough in isolation.

Unfortunately, since most e-commerce firms use deep discounting and low pricing as a strategy, it cannot be a differentiator. Low pricing works only if:

1.    The low-priced product or service has inherent cost advantages over competition and low prices can be sustained for long periods or

2.    Low pricing creates a demand for subsequent profitable follow-through sales like razors and blades by Gillette or consumables like cartridges or toners by Hewlett-Packard, Epson and Canon for their printers.

E-commerce firms are mere traders between brand owners and customers and provide neither a unique nor low cost service; nor can they create follow-through sales. The only way they can compensate their deep discounting is through repeat sales generating higher positive margins and to achieve this, they follow a business strategy called the Last Man Standing (LMS).

The LMS is a very impressive model.

It will not work.

Last man standing

I love watching Bruce Willis’ movies, especially Last Man Standing. There’s gripping drama, unbearable tension, edge-of-the-seat action and, after a while, everything ends perfectly. But I digress.

Most hyper-funded Indian e-commerce firms retail items at a loss to acquire customers. These loss-making deals are aggressively promoted through expensive advertising, increasing losses further. The strategy is based on the hope that over time all other competitors, unable to sustain losses any further, will slink away from the market, tails between their legs, leaving them alone to increase their prices later.

This is the LMS strategy. It rarely works because there is always someone else who has more funds and can sustain losses much longer. And if that someone else, like Amazon and Uber, also have a superior technology, stronger brand value and offer much better customer experience, then the LMS strategy starts unravelling rapidly.

This is an excerpt from the book ‘Failing to Succeed: The Story of India’s First E-Commerce Company’ by K Vaitheeswaran available on Amazon

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