PUBLICATION
VCCircle
DATE
Monday, April 8,
2013
HEADLINE
Getting the vertical game in ecommerce right
GETTING THE VERTICAL GAME IN E-COMMERCE RIGHT
BY GAURAV SARAF,
In a niche business, the entrepreneur has to be even more judicious in business modeling and
customer acquisition.
There has been a proliferation of businesses online focused on niche verticals such as fashion
accessories, baby products, home décor, and several others. From an entrepreneur’s perspective, it
is imperative that he/she understands what it takes to build a sustainable and profitable business
when catering to a niche vertical. I like to use the analogy of a shooting range to illustrate the
differences in strategy for horizontal and vertical e-commerce.
In a vertical play, the marksman (entrepreneur) is shooting at a target (market), which is only a small
fraction of the horizontal play. However, the requirement for ammunition (funding/resources) may
not reduce in the same proportion because the probability of striking a smaller target is also much
lower. Therefore, in a niche business the entrepreneur has to be even more judicious in business
modeling and customer acquisition. This, by no means implies that horizontal businesses are easier
to run, but that they have different challenges relative to niche businesses. Entrepreneurs would be
well advised to think carefully about the following when building an online business in a niche
industry.
1) Value Proposition
A vertical-focused online business must provide consumers adequate motivation to move their
purchasing preference to the web. In other words, if you are contemplating a business, say, selling
groceries online, you must enrich the buying experience in a concrete and sustainable manner so
that consumers can discern the value in buying from you rather than from a kirana store. I would
also caution here that many entrepreneurs think of value as being synonymous with deep discounts.
My view is that discounts may not be sustainable in the long run, and so, there must be more to your
value proposition than just that (unless you have figured out an ingenious way to offer discounts and
still be cash positive in the mid to long term). If you study how Amazon created the book business
online, you realise that while discount was a major driver, additional features such as, consumer
reviews and recommendations are a significant motivator for consumers to favour buying books on
Amazon rather than from bookstores. The value proposition should, therefore, be evident to the
consumer by bridging a gap in the buying experience itself.
2) Customer loyalty
Customer loyalty is the holy grail of ecommerce businesses. However, given that competition in
niche verticals can be high due to lower barriers to entry, customer loyalty tends to be elusive. Let’s
assume a scenario where customer acquisition costs are Rs 800-1,000, average order size is around
Rs 1200 @ 20% gross margins after all variable costs. In this example, a consumer must revisit your
store organically, at least, three additional times for you to be profitable. In a business where
competition is high, acquisition costs can increase further more. Therefore, depending on the
category you choose, this math will change. However, the fundamental principal is common - you
must ask the question as to how you can increase customer loyalty and lifetime value. Unlike a
horizontal play where there is a wide array of products for which a customer can re-visit the online
store, a category-focused business must create a strong pull to keep the consumer interested. This
requires offering an experience to the customer, which is not only unique but also compelling. Some
businesses I have met are attempting to enhance customer lifetime value by bundling product retail
with related information, thereby winning the customers’ trust. For instance, companies retailing
healthcare products are attempting to create stickiness by including content from healthcare experts
on their sites, to keep fitness aficionados interested.
3) Innovative business model
One of the strategies adopted by entrepreneurs to boost customer loyalty is rolling out innovative
business models. In a category-focused business, if the model can inherently attract the customer to
make frequent visits, and maintain high capital efficiency, then a large part of the battle is won. For
example, HomeMint, which is an e-tailer of home décor products, creates personalised catalogues
for its customers and also curates its inventory by partnering with experts and celebrities such as
Justin Timberlake. This model compels customers to frequently visit them, as their catalogue is
updated by iconic personalities on a regular basis. In addition to this, their inventory remains
manageable because they focus on fashionable products approved by their experts, rather than on a
wide variety. One of the most interesting spins on fortifying customer loyalty through an innovative
business model is that of Shoedazzle in the U.S. The company requires women to become members
by paying about $40/month. Members fill out a style profile, based on which the company
recommends different fashion accessories to them each month. They can purchase one item each
month in exchange for their fee, and if they do not wish to, they can simply choose to not pay the
fee that month. Such novelty in the business model must be considered depending on the nuances
of your product category and target market. The objectives here are to increase lifetime customer
value, control working capital requirements and offer a compelling buying experience.
4) Vertical integration
Many categories being sold online have low margin structures. To combat this, entrepreneurs can
vertically integrate their business, by bringing design, manufacturing, branding and distribution
under one roof. This model popularly referred to as private labels, disintermediates the supply chain
thereby improving margins. Vancl, which is in the fashion e-tail business in China, has shown
tremendous success through vertical integration. In India, Zovi and PrettySecrets are some examples
of companies, which have adopted this approach. This model has its own challenges, of having to
own design and creating a brand from scratch. This approach is usually wise to adopt only if the
founding team has domain expertise in the sector.
(Gaurav Saraf is the founder and director of Epiphany Ventures, an early stage fund, with
investments such as Cartrade.com, Brattle Foods and iLevel Solutions.)