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What is the Future for Indian Internet-Based Commerce?

Jan 11, 2021 12:42 PM 4 min read

As 2021 rolls in, and the interest around Indian consumer markets remains as high as ever, attention to the future of e-commerce businesses refuses to abate. The pandemic and the consequent lockdowns saw significant adoption of new-age businesses even as unit economics remains a topic requiring more work. 


What Do We Mean By Internet Commerce?

For the purpose of our discussion, let’s define internet commerce businesses as the ones that exist online right from the product discovery to the transaction phase. While internet-based businesses include a slew of service providers, for this discussion, we will limit ourselves to companies that sell physical goods.

E-commerce 1.0 was all about marketplaces. We have seen significant businesses scale, while Indians got used to shopping online. The market saw the rise of many marketplace startups that eventually consolidated with the market and generated a few notable players.

As the search-based transactional e-commerce marketplaces matured, the next phase of social e-commerce players emerged. E-commerce 2.0 has seen iterations of QVC/HSN/Ruhnn take shape on the Indian internet. As opposed to the transactional and search-based marketplace model, e-commerce 2.0 has been more interactive, especially using video as a medium to engage consumers.


What's on the E-Commerce Horizon?

Even as e-commerce 2.0 plays out, the question is: what's next? Is there an e-commerce 3.0? More importantly, what is e-commerce 3.0?

One advantage of being early in the technology businesses is the advantage of having access to a market right when the market is ripe for disruption, the quintessential first-mover advantage.

But as with Mr. Market, everything evens out.

First mover advantage also means that significant investments are required to create new consumer habits. E-commerce 1.0 and 2.0 players have done a lot of groundwork in getting Indians to buy online. Building infrastructure, but more importantly, trust in online transactions is no trivial task. E-commerce 3.0 players will be late to the game; however, they do learn significant lessons without the capital outlay. What they lose in market-entry timing they make up through what is common knowledge today.

Even as e-commerce 3.0 plays out, one crucial question is: can e-commerce 3.0 afford to be just "e"?

To understand this further let’s learn a few quick lessons from the Indian telecom sector. For all its upheavals, the survivors of the telecom stack have some crucial lessons on the scale and expansion for those building the internet infrastructure businesses in India. In India, the telco stack for all its issues shows the three essential qualities that are needed to be on the winning side of business in an Indian context: (a) scale to cover for relatively low ARPUs, (b) deep physical distribution, and (c) mega-scale.


The Physical and Long-Tail Aspects

So, how does one deal with physical aspects when the model is long-tail?

By long-tail what one means is that e-commerce as a business is built by the aggregation of “infinite” supply for a consumer to access at one single point on the internet, something physical retailers (constrained by physical space) were unable to do.

The above discussion begs the question as to why does deep physical distribution matter? It does not matter to the extent that the average variable cost per order for an e-commerce business is below a certain percentage of the final pie that allows e-commerce businesses to generate positive free cash flows.

However, in a country as deep and dense as India, managing average variable costs per order is a crucial component that determines whether the businesses have positive free cashflows eventually. However, regardless of the Lifetime Value (LTV) and the number of orders, a relatively low Average Order Value (AOV) is something that will hamper the ability of e-commerce players to create free cash flows. Till AOV picks up, generating positive cashflow businesses will be a challenge.


The Play Between Fixed Versus Variable Costs

In the start-up world, having variable costs over fixed costs has often been touted as a great advantage. However, are variable costs always better than fixed costs?

The short answer is no!

Starting up variable costs give flexibility, however, as businesses scale, being able to switch variable costs into fixed costs matters, especially when average variable costs do not reduce dramatically with scale. Operating leverage or the rapid collapse of the Average Fixed Cost curve is essential towards creating profitable and free cash flow generating cash cows.

To develop significant free cashflows from a pure commerce play, the holy grail of lowering Average Variable Costs will be needed. But, when AOV doesn't rise fast enough, average variable costs are too high as a percentage of the final pie. Therefore, the problem of high average variable costs per order is one E-commerce 3.0 businesses will have to solve.

Simply put, how does one switch variable costs into fixed costs as one scales is at the core of the problem. Finding solutions to the problem mentioned above will separate the winners from the losers. In venture capital terminology that would be “doing the hard things”.


The Indian Optimism

Despite the pandemic, capital inflows into India clearly show that its billing as the last great global consumer market remains unblemished. E-commerce 3.0 should get both investors and entrepreneurs excited for the rest of the decade.

(The views expressed in this article are personal and that of the author. The author heads Three Thirty Fifth Industries. You can contact him at


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