Why my eCommerce startup failed...
It was in the summer of 2009, having worked in the industry for almost 10 years, when the startup bug bit me. I had the know-how of technology and also had a reasonably sufficient bank balance (or so I thought). Having seen the success of Flipkart, Myntra and others, the mood in the market was on an upswing. I thought it was time to strike; and strike I did.
I have been an enthusiast and good at sports since my childhood. Most of the goods that we buy at marked price in Bangalore and comparable cities can be bought at a massive discount to the tune of 40-60% in Sadar Bazaar(Delhi). This is where I used to purchase my sports equipment for personal use.
At that time, there were not many online retailers in market dealing exclusively in sports' equipment, and that is true even today. The ones present were not passing on the discounts to the customers. So, my business model was set, and it was to pass on more discounts to the end customer, grab more customers and scale up.
I come from a business background, so I had done my calculations and they seemed absolutely spot on to me. I'd be able to save 15-20% on each item that I'd sell. I had calculated 3-4% expenditure on packaging and 8-10% on delivery charges. I had also assumed 20% returns which I had planned to sell at a further discount in my home town Panipat, where my cousin brother operated a small brick and mortar shop. And yes, I had accounted for the payment gateway charges as well. Also accounted for, was the salary of two employees who would buy and ship for SHOPORTS.COM. My calculations promised gross margins of 15-20% after passing on a good 20% to the end customer.
So, the idea was simple and noble, to buy items from Sadar, pack them well, ship them through a third party and make some money. By the way, items from Sadar are cheaper unless bought in bulk (we are talking truckloads) from Meerut or Jalandhar.
Having finished the planning, it was time to start running. Bought an oscommerce template from one of the template vendors and obtained economical hosting from a hosting service provider. All that was left was to create a logo and customize the template. We did it. It was a great feeling. I had started a fully functional ecommerce business single handedly on a shoestring budget. We were in business! SHOPORTS.COM was born.
But what was supposed to be a roller coaster ride on papers, turned out to be a rush hour drive through Bangalore - full of bumps and pitfalls.
First hiccups: we weren't getting enough orders. Few advertisements in pamphlets/locals and some SEO work done to ensure good ranking in google and we started getting orders. Still the number of orders that we were getting weren't enough. This was when I spoke to my well-wishers in industry and suggestion was to go for cash on delivery as well. This added extra 6-8% on delivery as cash-handling charges. Remember, this was not calculated in the initial calculations that I had done so immaculately. Now the sum total of delivery charges stood at 18-20%.
Second hiccups: the returns were not 20%. There were in the range of 30-35%. Many of them were used products, which I could do literally nothing of. I placed an extra quality check at the shipment and it brought it down to 20-25%. But, it also added to the cost. I had to accept the returns, because if I didn't I'd not be able to sell. If I did, I'd lose money. Now, the per item delivery expenditure, including returns calculation, stood at 50%. Could I make money? No way, right? But I thought, I could. Only if I could sell more. Heard of it before, right?
I ran SHOPORTS.COM for two years and loss stood in higher six digits in INR. I had sold goods worth more than thrice of the loss or my loss was almost one third of worth of goods I had sold. Even though the losses had come down to less than at linear scale compare to sales, I had starting realizing a bit more that my bank balance was not enough and the discount business model was not for me. No wonder, the most etaliers are not making money. Everyone seems to be waiting for others to disappear. The selling and distribution costs for brick and mortar stores is substantially lesser than etailers, provided the right technology is used in the stores. Brick and mortar stores have their own share of problems, they just have no idea of their inventory. They are just about 40% accurate about it. Let us talk about it some other time.
At this point, I had the choice of continue running it by putting it on life support and burn even more money.
My big mistakes:
1. Discount model - this business model is a flawed one because, you can't compete with the ones who have money. Do NOT rely on discounts to sell more.
2. Miscalculation of returns - be ready for more returns, especially if you are a new player. Be ready for anywhere between 30-35% returns. Plan for them.
3. Supply chain - create a more robust supply chain which doesn't just rely on ecommerce. Should find better ways of consuming returned products.
So, we should be profitable provided we fix the above. I doubt that, as the Indian customer is discount savvy. One buys it from any player which is providing higher discount. What do we do when we want to buy a mobile case or a pair of shoes or anything: we log into all major ecommerce portals and buy from the one which is providing more discounts. One thing that most etailers are missing is to figure out how to win Indian customer's loyalty. What works in US, may not necessarily work in India. Discount based model cannot win loyalty. Should we try something else for e.g. aggregated cashbacks or surprise packages after a customer has crossed a threshold? Should the etailers pass on more cashbacks to those whose returns are least? Should the etailers start taking interest in finding the life changing events of the customers and come up with appropriate deals for e.g. when someone gets married or has a kid or is pregnant? I'd even look at leveraging the 'user-base' by creating an advertisement platform. Should they invest more in creating an overall better shopping experience for e.g. the delivery boys turning up at appropriate times, multiple items should be delivered together etc? Should the etailers create a brand that the sellers and buyers feel proud to be associated with?
As for me, I have started advising startups not to make the similar mistakes. I also advice some procurement companies to avoid wastage. And I am doing it with as I do my regular day job. Some of the companies are billez.in (building next generation Point of Sales) and Panchanan International (distributors of apparels to most of the large etailers in India). I am also involved in solving the inventory, supply chain and shrinkage problems for brick and mortar stores.
Sometimes I wonder if I should think of it as just a failure; or a successful failure...