Online retail stores digging their own graves with discount strategy

Online retail or e-commerce in India is growing very fast and currently there are more than 1500 websites selling products online. Out of these, there are only three to four major players and the remaining are all small time startups aspiring to make it big in the online retail space., They pin their hopes on the new-found aspirations of the middle class Indian to embrace technology and shop from the comfort of their homes.

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Though the growth is phenomenal and it is encouraging to see that many young Indians are coming forward to take the entrepreneurial plunge, riding on the back of their online retail store, they are missing out on some key points to consider before setting up their online business.

There is a difference between opening a website and opening a business where transactions will take place everyday. Most of the retail websites that are offering some feature or another to lure customers, are actually ending up doing the same thing as any other website . All of them are actually giving the same features like price comparisons, free delivery, discounts and more discounts.

Now it might be a good manipulation technique to attract new customers to their website by giving heavy discounts (some are even selling lower than the cost price of the product), but how long will this trend last? If the customer is used to low prices and discounts throughout the year, then he or she will immediately switch to the next online store when the first one stops giving discounts. And, a day will surely come when the investor’s money stops coming in and the site will have e to attract traffic though other means and not by giving heavy offers and rebates.

Online retailers are basically creating a commodity business where the product or service has no value and only the price matters. With so many options available online it’s hard for any one player to create brand loyalty in the current market conditions.

The discount game can only help the online retailers in getting repeat business but will not create a loyal customer base who will ignore competition and keep buying from the same retailer over and over again because of their product quality or service. The only way the websites can survive in the future is by selling more and increasing their volume of sales, but that would be tough, given the rate at which new sites are coming up every day and the cut-throat competition in the space.

We are not challenging the fact that heavy discounting will not work but the question is how much price is the business willing to pay for the money it will make. Over a period of time the gains will only be be lower and the cost will increase for the online retailer providing discounts. Some current examples: Snapdeal reported a loss of Rs. 264.6 Crore, Yepme portal, posted a net loss of Rs 45 crore on net sales of Rs 61 crore, while the net loss of Shopclues was at Rs 38 crore and higher than its net sales of Rs. 30.5 crore.

Coming down to the advertising and marketing strategies, the tricks employed by new entrants are again very similar and focused on discounts. Some of them are trying celebrity endorsements, and some are giving exclusive offers for a few hours every day and calling it a “Flash Sale” thereby making the user feel the urgency to buy something so that they don’t miss out. But retailers don’t seem to realize that the user is now matured and addicted to discounts. They know that if the item is not available at a lower price in Site A then it would be available in Site X for sure, and when their time and internet connection is unlimited then there is no harm in constantly looking out for discounts till they get one. The online sellers have successfully dug their own graves and now the user will surely move to the next big site if they constantly find the prices of products higher on a particular site. The online store that’s out of investor’s cash will not even get a second chance to grab the attention of the buyer, as they don’t have a physical presence,  and therefore no advertisements that the customer can stare at along his or her commute or just stop by to window shop.

Today’s online sellers have to think creatively and gradually move away from discounting. Now is the time for small e-tailers to think hard and think fast on how to create value for their customers and attract them to their sites without just relying on heavy discounts and offers. If this addiction is allowed to last any longer, it will definitely lead to bursting the e-tail bubble and that will eventually explode and wipe out all small e-commerce websites along with it. Then only the big sharks will monopolize the market and continue doing business. to do the business and monopolize it.

About the Authors:

Surajit and Ashis are entrepreneurs and technologists, and are avidly curious about the human psychology. When they are not breaking the code or designing business cases in their Toronto office, they devote their time to “Nexhop”, their entrepreneurial brainchild scheduled for a launch in India in mid 2015.