31 Mar 2016 13:32 IST

Curb on discounts will be a real test for e-commerce players

Online marketplaces will now have to focus on value-added services and improving margins

E-commerce in India has now thrived for almost half a decade and that too largely by way of offering huge discounts to buyers. However, the latest move by the Narendra Modi-government, restricting e-commerce marketplaces from directly or indirectly influencing the sale price of goods or services, may turn out to be a litmus test for these players.

While, the Department of Industrial Policy and Promotion, in its notification on Tuesday, has not used the words “discount” or “predatory pricing”, the new rules indicate that companies such as Flipkart, Amazon or Snapdeal cannot sell anything below the selling price. This means, the companies will have to either stop offering discounts in any form or go back to restructure their business models.

It is a known fact that the discounts offered by the online marketplaces today are funded by burning cash that comes from PEs/VCs, something which offline players are dead against as they have not been able to compete with the online retailers.

Industry experts and evangelists are of the view that in the coming months, the industry will get clarity on whether the consumers were buying from online players for the discounts being offered or for convenience.

Advertising strategy

Vikram Gupta, founder of early-stage venture fund Ivy Cap Ventures, said that the advertising strategy for these companies will now change as they can’t acquire a customer on the basis of discounts or cash-backs. E-commerce players may have to focus on more value-added services to stay ahead of the competition.

Paritosh Sharma, Head, Channel Partnerships, PayU India, was of the view that the marketplaces will have to fight hard to gain “consumer trust”. However, this will not reduce consumer interest because most of the e-commerce companies have anyway been reducing discounts since the past one quarter. “Everyone is now moving from a crazy customer acquisition model to a more sustainable business. I think customers now will have more broad based choice at competitive prices. Price monopoly always looks sexy in the short term. But a business or a few businesses influencing pricing does not create a healthy business ecosystem,” he added.

‘Curbs unacceptable’

Meanwhile, angel investor and consultant Ajeet Khurana said that the Government’s move to curb discounts was unacceptable. “If I have a marketing budget then I can use it the way I want. What role has the Government to play in this?”

While, the debate on the impact of no-discounts continues, larger e-commerce players have less to worry as they have burnt enough cash in the last few years to acquire customers. These players will now fight a bigger battle on convenience, better cataloguing, faster delivery of goods and after-sales services, among others.

“It is in fact a blessing for the bigger players who earlier had to further discount products because of some new player offered better prices. The new or smaller players will, in fact, have to bear the burnt,” Khurana said adding that the bigger players can now safely focus on improving their margins and work towards becoming profitable.

According to the notification, e-commerce entities providing B2C marketplaces will not be able to directly or indirectly influence the sale price of goods or services and shall maintain a level playing field. “This creates a level-playing field since they were participating in B2C retail trading with heavy discounts from their coffers,” said Kumar Rajagopalan, CEO, Retailers Association of India. According to the notification, an e-commerce firm will also not be permitted to sell more than 25 per cent of total sales from one vendor or its group companies. This will prevent marketplaces from behaving like pseudo retailers and ensure that they stay true to their claim of being ‘technology platforms’.

Pragya Singh, Vice-President, Retail at Technopak, said, online retailers will also have to broad base their vendors with the DIPP placing a cap on the goods/service that can be sourced from a single vendor. This is good news for the many small vendors who have been losing out as large e-tailers source much of their stock from few select vendors.

E-tailers may also feel the heat as the new guidelines may not go well with their PE/VC investors. On one side, while they will save money with lesser discounts, on the other they may lose revenue.

Recommended for you