Many online business models are failing because of their business model

Why Online Businesses Fail

Over time, as I have written about startups and my various perspectives on them, I have voiced my concerns over some of the business models that I have seen. And now as I read about some of the food delivery startups closing down, or grocery e-com players being under severe stress, I am almost tempted to say, “I told you so”.

However, this piece is not about “I told you so”, but to fundamentally look at the challenges of some of these business models, and why they are more likely to fail!

Internet businesses offer some splendid opportunities to save costs, disintermediate, generate economies of scale, reduce wastage, etc. compared to similar brick and mortar businesses.

An online business model that demonstrates how they are going to exploit such an advantage, and due to which reason, they will cut some flab in the supply chain to the end consumer, and which they will either keep for themselves, or pass it on to the consumer, and then they will do it at scale, and that is the secret sauce, is an online business model which is viable.

Even if this model then requires a sustenance period, or a few years of time to get to scale, before they start making money, that is fine. There will be investors who will be willing to fund that period. But fundamentally, there needs to be a demonstration of the saving of costs or other efficiencies being brought in, and which is the reason for the opportunity.

For example, an Uber is exploiting the unutilised hours of the taxi (and its driver) and finding the consumer need of a taxi at the same time, and by making this match happen, it is adding value to both of them. Keeping the taxi billable for more hours (hence more efficient) and of course, providing immediate taxi service value to the consumer (who is then willing to pay for that value).

Or for example, a Flipkart is using the fundamental 40-50% gross margin (minimum) in a typical end user price of a product, then building scale of business by delivering to all corners of the country without needing to set up shop, and thereby getting better rates from suppliers and also being able to work on lower margins, which are made up by higher volumes. And the value offered to the consumer (across metros, small towns, etc.) is being able to deliver to their homes, products that may not always be easily available in nearby stores, and making this entire experience happen smoothly and seamlessly.

There is economic value for Flipkart in the economies of scale opportunity as described above, and there is stickiness from consumer’s side, because of value that he receives (no matter that Flipkart is continuing to lose money – that is the time taken to acquire market share – but ultimately, as long as there is a fundamental economic opportunity, they is money to be made!).

Now contrast this with a grocery delivery service.

First of all, they compete with local kirana stores, which are found everywhere.

Secondly, the kirana store DOES typically stock up on the requirements of its loyal patrons. So what one typically wants, is usually found at the nearby kirana store.

Most products in a kirana store are commodities, and are sold at 2-3% margins. The kirana is also banking on the customer walking in for those commodities, but being tempted by other items on the counters and buying some of those too, which are really the high margin ones, for the kirana.

Now, when this goes online, the online business has to match or make the pricing lower than the kirana. Unlike apparel, jewellery, books or cosmetics that a Flipkart sells and which have higher gross margins built into their pricing, the grocery was already at low, low margins. And now the online business has to further discount it, then account for delivery charges, and manage their own expenses.

AND unlike the walk-in customer at the kirana, who can get tempted to pick up a fancy chewing gum, or a newly introduced deo (both higher margin items for the kirana), online, the customer comes to pick up his list, and does not need to browse around that much. And also, temptation is far more with a physical product as you stand in the queue at the kirana store, than a banner trying to tempt you at the shopping cart online!

So the shopping cart may continue to be skewed to the low margin items, on an online store, and which have already been discounted to make a customer buy.

So unlike the cases of Uber or Flipkart referred earlier, in this case, the online grocery store does NOT seem to have any serious savings of costs, or wastages to remove from supply chain. Then, where’s the money coming from? The business model can’t be that “I’m going to take the grocery market, shave off 5% of the costs, funded by me, and then acquire market share.”

The business model HAS to state where that money is going to come from ultimately. What is influencing the saving of costs, if any.. !

Take the case of home delivery of food, again. Considering the numerous restaurant options available, and an integrator attempting to deliver all of it, from a particular restaurant, a particular integrator is picking up a limited number of meals. They are not likely to get significant cost reduction against these few orders. Then to fund the cost of running a call centre, delivery charges etc., there does not appear to be adequate money being saved anywhere, to leave room for making money! Which is where the pressure is.

In fact, few years back, had come across a similar model which thrived on food stalls in the malls. Which on working day weekdays, and especially in the afternoon, during lunch hours, are NOT very busy. Then for an integrator to use that spare capacity of the food stall, and negotiate a good deal from them for providing business during those hours, and then going on to offer working people, in the area, an integrated food service, and ALSO getting the merchant (the food stall) itself to take up delivery, can make for an interesting business model that brings efficiencies and allows for good margins.

Not sure if anyone is working on this kind of a business model or not.

Broadly speaking though, what I am suggesting is that one looks at fundamental gross margin opportunities coming to the business, on account of the model exploiting some advantage.   Executing such a model efficiently, and scaling it, can ensure success!

This article was originally published here.

Sanjay Mehta

Sanjay Mehta is the Business Owner and Jt CEO, Mirum India (formerly Social Wavelength). Evangelizes Social Media in the capacity of a speaker, writer, entrepreneur.

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