The saturation point

    The big e-commerce sites sell products at a price generally less than in the brick and mortar stores

In what seems another era, children played with playing cards. Not on a smart phone or computer screen, but the real cards. Not flash or rummy, but a whole lot of tricks that passed as magic. One such involved making the outline of a square with 3,1,2 and 3 cards in all four directions. They totalled to nine on all four sides.

                               3 1 2 3
                               2     1
                               1     2
                               3 2 1 3

The “magician” then asked his one-child-audience to add one more playing card anywhere in this arrangement. The magician then shifted a card, and voila! All the four sides again had nine cards each. This would continue, much to the wonder, astonishment and excitement of the child adding the card, and the thrill and joy of the “magician” who will wrap up then move on to another trick.

This trick came to mind in the course of a discussion on how the big e-commerce sites sell products at a price generally less than in the brick and mortar stores. And periodically, the prices would seem to be less than the cost price of the product. Would they be making any profit? Of course, we know that they save on the high rentals of Connaught Place or Khan Market in Delhi or Colaba in Mumbai or Brigade Road or Commercial street in Bengaluru. We are not even counting the cost of packaging and express delivery of products. Drones may soon be doing the dropping at our doorstep!

These prices, sometimes predatory, bring the e-commerce sites tens of thousands of customers every week, and they reach most nooks and crannies of the country that the regular stores don't. On their big-bang sale days, the websites crash because of the traffic. But the inventory is cleared, and best of all, customers have made a kill. And so the growth story of e-commerce.

There are also stories of the millions of dollars that Private Equity firms and Venture Capitalists are pumping into these. It has been reported that Soft-bank funded Snapdeal has been on a shopping spree after it received $627 million from the Japanese investor in October last. The company also raised more than $1 billion from investors last year.

The shopkeepers who form part of the "market place"—the business model that is popular at this point in time—would make some gains out of the huge volumes and reach.

In early days of online businesses, the mantra was, help the brick and mortar businesses make money, and keep a small share of it. But where is the share?

Makes you wonder? Wherefrom, with the next to nothing profit margins, will the e-commerce platforms pay back the loans? It does.

A knowledgeable and helpful person from business enlightened me. Profits don't matter, valuation does, he explained.

And valuation goes up with the size of the client-base, when the site acquired a brand-like-reputation.

When the valuation reaches a point where the entrepreneur has recovered his investments and made a kill, he simply sells it and moves on. He sets up the next venture and becomes a serial entrepreneur.

TaxiForSure in its less than 45 months of existence had raised $26 millions, as of December 2014. In January, they were sure they would not survive for more than a month. The competition, Ola cabs, slashed fares. If TFS had followed suit, they could never have made a profit or remained in business. They sold their venture to the competition. For $200 millions. Because they had valuation!

Like that boy “ magician”, wrapping up after a few cards have been added, the promoters exit by selling out when the valuation is good.

I forgot to mention. If that boy had asked his “audience” to add more cards, his trick would have flopped. There is a saturation point. Beyond that, you cannot shift cards and still count 9.

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Topics : #ecommerce | #opinion

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