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E-commerce Startups: Are You Facing The Marketing Roadblock?

Krithika Nelson
17th May 2012
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Road Blocked

Two roads diverged in a yellow wood and sorry I could not travel both

And be one traveller, long I stood

and looked down one as far as I could

to where it bent in the undergrowth;

- Robert Frost

Every startup’s marketing team, at some time hits a roadblock. Or should I call it a fork on the road?

On one side, is the Quick Fix road! This almost looks like the obvious option. It is full of lush green promises and ones that will give sweet fruits right away, in exchange only to money…

On the other side is a road that looks empty at first glance. And then you see a little glimmer far away and you realize this is what they call the Long term road. One where you need to walk a distance before you could start enjoying the fruits, which they say never stop coming afterwards!

Alright! Let me stop being all poetic and elaborate! There are two ways a startup can look at marketing.

  1. High Spend with Quick returns.
  2. Low Spend with Slow & Steady returns.

High Spend with Quick & High returns.

The first option is not all that new to anybody here. The marketing plans start from Rs.400 an Acquisition and there are quite a few agencies out there, some doing phenomenal jobs at this. These are confirmed registrations that you pay for, and within a month, you are probably looking at almost one lakh registered users. The traffic also surges immediately and conversions are okay. Most startups use this method and it does work to a large extent. A high spend on Google adwords, by itself shows huge spikes on the traffic graph.

Low Spend with Slow & Steady returns.

The second option is where you depend predominantly on organic marketing – Social media (sans advertising) Press, SEO, blog networks, and other strategic partnerships, and the spend is only towards catalyst marketing (FB ads for pages for example) as I like to call it, in improving the reach of the organic media. The spend here is very very less. Almost close to zero, if you can work it around smartly. The only hitch is that the returns here are slow, but steady! There shall be no sudden spikes in the traffic, and it will definitely take a lot more time before you hit a lakh registered users. Thing is, the people who you do get, tend to be quite loyal and become returning users if their first experience is good!

For few cases, the choice is pretty much obvious! If you are doing an event for example, it is a short stint that you are looking at and the high spend quick returns idea might work out best! But the difficulty in choice comes when you want something to work on the long term!

Lets try working out how the high spend plan works for a hypothetical e-commerce company:

  • We do a 400 per acquisition deal, and acquire 1000 registered users.
  • The spend for this is Rs.400,000 (not including taxes and other fringes)
  • Being generous and assuming 20% of the registered users convert into sales, that is 200 sales.
  • Lets be generous again and assume that the average ticket price is Rs.500 for our company.
  • So, with 500 X 200, we have made Rs. 100,000 in sales.
  • Let’s be generous again and assume the profit margin is around 25%. That gives us a sales profit of Rs.25000.
  • And then, comes the shipping charges. The least in the market, (for 500 gms and shortest distance) being Rs.15. So for 200 packages, shipping costs come to Rs. 3000.
  • So basically, we have made Rs. 22000 in the whole deal, after spending Rs. 400,000… So total loss is Rs.378,000
  • And this is in an ideal case scenario, calculating with least numbers, and totally ignoring other operational costs, salaries and the rest!

Now this is just the scenario for the first 1000 subscribers. Make a mental calculation of a long term spend this way, and imagine where this could lead!

Another big issue with this method is that, stopping the campaign will lead to a sudden drop in the traffic. By almost 10 times sometimes and that essentially means, if you want to keep up the traffic you have shown as long as the campaign has run, you essentially need to keep the campaign going, though it bites your bank balance in every possible way!

However, think about this. In the initial days, a good traffic graph is almost essential for a startup. Without decent traction, the investor presentations could actually end up looking really flat.

Also, with all the eyeballs generated by the initial campaigns, if you are able to keep up a good end user experience as well, you might end up getting some pretty good word of mouth leads, and added with the right amount of social and organic marketing methods, and smart strategies, you might be able to figure a way out to decrease the marketing spend!

With the Low Spend method, you really can’t do a calculation like we could do for the High spend one.

Not getting into a specific strategy plans, and specific creative strategies this is one way this method could work over a month approx.

  • Good PR coverage (2-4 articles a month on print, about 4 online)
  • 2 Mentions in Blogs in related topic
  • Heavy Social media promotions
  • Catalyst campaign – Rs. 1 lakh on FB (the cost per fan works out to Rs.5, and this will mean 20,000 fans.)
  • SEO improvement (If outsourced, might cost approximately 50k for the first month!)
  • Innovative newsletters, every alternate day
  • So in total, we have spent around 1.5L on this so far.
  • With a really good Facebook presence, about 0.05 to 0.1% of your fans convert into sales. So in this case, (with the higher number of course) we will have around 20 sales.
  • With the previous Average ticket price of Rs. 500, we have made a sale of 10,000.
  • From my personal inferences and understanding from a few other companies that use this method, Facebook works out to be the source of around 20% of the total sales in the initial days. Which means, our total sales is approximately Rs.50,000 over 100 total sales.
  • With our previous 25% margin assumption, profit is Rs.12500
  • And then, comes the shipping charges. The least in the market, (for 500 gms and shortest distance) being Rs.15. So for 100 packages, shipping costs come to Rs. 1500.
  • So with a total spend of 1.5 lakhs, our total loss is 139,000 (12500 – 1500 – 150,000)
  • Again, this is in an ideal case scenario, calculating with least numbers, and totally ignoring other operational costs, salaries and the rest!

But think about this for me! All content that is generated from the second method – be it the blogs, social media messages and write-ups stay online, for a very long run. Their lifetime is almost forever, without you having to spend anything more on them. The ads run in the first method however, last only a few moments! To keep the ad running, we need to keep paying!

The biggest downside to this method however is the time it takes for the traffic graph to rise. And if not executed well, the second method can only mean a very early demise of the startup!

But, when you think about how many e-commerce portals have had to shut down or be forced to sell out in the last few months, not being able to deal with the losses of heavy marketing and operations spend, it makes you second guess a whole lot of things!

At the end of this super long writeup, I have still not made up my mind on which is a better method! Or maybe a hybrid method? I have my favourite yes (Which probably is a little obvious by now), but both methods do have their pros and cons. And that’s precisely why the dilemma!

Again, I might totally be missing out on certain things, or maybe totally wrong in many of the numbers that I have taken for my approximations above. Feel free to point them out!

But before that, Which one do you think is a better method?

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