The market has evolved a lot since then. Marketplaces such as Shopo and Craftsvilla have gained traction. There is significant competition to MartJack in the form of Zepo, Shopnix etc. Several payment gateways such as PayU, PayTM and CitrusPay have really taken off. Payment solutions provider CCAvenue has introduced a small-business friendly starter plan. Logistics providers are improving.
Here is a look at what it is like to setup an ecommerce business in India now.
The ‘business plan’ below is based on real-life experience from expanding an eCommerce operation from Shopo to Shopo + Zepo.
At the outset, let me clarify a few points:
» This article is not a commentary on either Shopo or Zepo or any of their competitors. [We have been pretty happy with both, if that helps]
» A storefront set up at a marketplace doesn’t necessarily have to be ‘Basic’
» A store set up with a SaaS provider doesn’t necessarily have to be ‘Small’
» The model outlined below would work best for products that are fairly unique or not widely available. E.g. designer apparel or handicrafts.
Most importantly, this is just a superficial model that considers only the ‘e’ part of eCommerce. The ‘Commerce’ part is the row highlighted in red. This is domain specific. Success or failure will depend on how well you manage your sourcing, operations and marketing so that it costs you less than Rs 500 per order while creating value worth more than Rs. 1000 per order for your customers. (The numbers are just examples).
|Scale||1 person operation out of home. Either as a hobby or as a side business||1 -2 person operation. Likely as a primary source of income||Serious business|
|Indicative Turnover||< 1 Lakh /month||1 – 10 Lakhs / month||10 – 100 Lakhs per month|
|Ave no. orders per month (@ ave size of Rs 1000)||50||500||5,000|
|Typical IT infrastructure||Online marketplace – E.g. Shopo, Craftsvilla||SaaS – E.g. Zepo, Martjack||Self-hosted on AWS, Rackspace etc. Software could be Magento or a similar product|
|Legal status and formalities||Proprietorship:PAN card, VAT / CST No.||Proprietorship:PAN card, VAT / CST No.||Pvt. Ltd. / LLC:VAT/CST, Accounts, Audits, Payroll|
|Payment Gateway||Not needed||Economy / Basic Plans – PayU, PayTM||Premium Plans – PayU, PayTM, CCAvenue, EBS|
|Shipping / Logistics||Retail rates||Small business account with negotiated rates||Discounted rates|
|Employee count (excluding founders)||0||< 5 (mostly temp / ad hoc skills)||5 – 10 (including professional skills – tech, marketing, accounting etc.)|
|IT infrastructure||0||0 – 25,000||100,000 – 200,000|
|Office space (Assuming Hyderabad)||0||15,000 – 30,000||30,000 – 60,000|
|Payment gateway||0||0 – 6,000||20,000 – 40,000|
|Operating capital – (3 month fixed operating costs + 15 days variable operating costs)||Rs 20 – 25K||Rs. 3 – 4 Lakhs||Rs 34 – 38 Lakhs|
|Total initial investment||Rs. 30 – 35K||Rs. 3.25 – 5 Lakhs||Rs. 36 – 42 Lakhs|
|Ongoing fixed costs (monthly)|
|IT infrastructure||0||1000 – 10,000||5,000 – 10,000|
|Office rental||0||5,000 – 10,000||10,000 – 20,000|
|Utilities (Power, Internet, Maintenance)||0||2,000 – 5,000||4,000 – 10,000|
|Payment gateway||0||0 – 200||200 – 1000|
|Total ongoing fixed costs||0||28,000 – 45,000||520,000 – 550,000|
|Ongoing variable costs|
|Sourcing / manufacturing
(Assuming 100% markup)
|Shipping||100 – 150 per order||60 – 100 per order||30 – 60 per order|
(~ 5 orders / product)
|0 – 100 per product
0 – 20 per order
|200 – 500 per product
40 – 100 per order
|200 – 500 per product
40 – 100 per order
|Marketing||0 (Assuming the marketplace handles this)||250 per order
(Assuming CPC of Rs 10, Conversion rate of 2%, 50% paid traffic)
|125 per order
(Assuming CPC of Rs 10, Conversion rate of 2%, 25% paid traffic)
|Transaction costs||150 – 200
15 – 20% charged by marketplaces
|50 – 70 per order
5 – 7% charged by payment gateways. CoD & Paypal not considered
|20 – 40 per order
2 – 4% charged by payment gateways. CoD & Paypal not considered
|Total cost per order||750 – 950||900 – 1050||750 – 850|
|Gross margin / order||150 – 250||-50 – 100||150 – 250|
|Operating margin / order||150 – 250||-100 – 50||50 – 150|
|Total profit||7,500 – 12,500||-50,000 – 25,000||250,000 – 750,000|
|Summary||» Zero fixed costs means risk of losing money is low.
» Margin is not highly dependent on order size (within certain limits)
» Hard to scale since you will not be spending money on SEO / marketing (if you plan to, you are better off building your own website)
|» Average order size of less than Rs 1000 will most likely mean losses for new sites where proportion of paid traffic is high.
» This can be overcome if the sourcing costs are low (E.g. if you are selling your own paintings) or markup is high (E.g. designer wear)
» Marketing cost will come down after 3-4 months as you build a base of loyal customers
|» You are in business if you have reached this scale.
» Fixed costs are mostly salaries. Need to plan your hiring well.
About the Author
Haribabu Thilakar has been in the software services industry for 17 years, and has worked for Infosys, Kanbay and UnitedHealth Group. His current focus is on Data & Analytics. Ecommerce is a side interest of his which was first ignited while he was managing a large program for a retail giant, and flared up recently while he was helping his wife set up her online store