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Will cashbacks amd deep discounts to lure customers sustain
The Economic Times, December 11, 2018

As if Diwali was not enough, the seduction starts again in December. Flipkart claims its offers har na ko haan mein badal de. Amazon too will make sure Christmas comes early this year and continues into the next.

Splurge on half-priced electronics or shoes. Kitchen and home appliances will be shipped to you at a 75% discount, with free installation thrown in. You can also ‘claim’ a fancy iPhone or Apple Watch at the special shopping fest or simply ‘grab coupons’ and spend at the ‘carnival’ that in any case, will be offering bargain basement prices.

And in case you missed the fine print, certain credit cards will also give you cashbacks.

In reality though, these bumper selloffs are becoming a round-the-year phenomenon.

Over the course of your average workday, you streamed your chosen music and got credits into your account when you used an e-wallet to pay for those downloads. A gourmet meal ordered over an app came with mouth-watering cashback offers and your movie ticket was bundled with free snack options. All the mobile data you consumed for all of this was also free. You only paid for some premium offerings such as live TV or a Netflix subscription. Actually, pretty much every transaction, including buying your next car from a suburban auto dealership, came at a far lower cost than the rack rates.

Some call it habit creation, others mind mapping. Some dismiss it as a race to the bottom that first burns cash and then businesses all together. Yet, fast fashion, groceries, pharma retail, ride-hailing, financial services and even fine dining have huge discounts, subsidies or teaser payment plans that have changed the rules of engagement forever.

Traffic too is getting exponentially bumped up as is penetration beyond the top 8 metros.

In January-August, fashion etailers recorded a spike of 417% in orders during special sale events that lasted for 26 days in those eight months, says a 2018 report, How India Buys Fashion Online, by ecommerce solutions provider Ace Turtle.

Flipkart alone clocked $1-1.1 billion in gross merchandise value (GMV) in five Big Billion Days, up from $660 million last year. Clearly, deal-drunk consumers — many of whom are stepping on to the consumption ladder for the first time — aren’t complaining about this great discount bazaar.

“It’s great for consumer psychology. That is how they tell themselves they are smart buyers,” feels Abraham Koshy, professor of marketing, IIM-Ahmedabad.

“Seasonal discounts have always been there,” says Sanjiv Bajaj, managing director, Bajaj FinservNSE -0.33 %, a retail-focused non-banking finance company. “It’s just become more obvious because of large scale advertising by major brands, online marketplaces and their fight for growth.”

Winner Takes All

Some businesses in the aggregate economy — financial services, ecommerce or travel — thrive on scale and make money only after. “There is no fun and no point in building small scale profitable businesses in the technology space. We know that in the long term, costs and power to reduce prices on the supply side will be so much that we can pass on those discounts in the future,” Flipkart cofounder Sachin Bansal told ET recently.

For them, short-term discount is a kind of marketing cost to drive volumes. How short that short term should be will depend on market size. Drawing parallels with WhatsApp, Bansal argues that it doesn’t make money and has started monetising after reaching a billion users. “That’s how you build large businesses.” Food tech or ecommerce are still to reach that inflection point.

The sources of capital chasing these cash machines are also doing so to support market leadership and domination, which they believe will eventually turn into a bonanza.

Paytm, for example, is serving about 20,000-plus pincodes and gives discounts to first-time users. “They are an important factor for a company to expand scope,” feels Amit Sinha, chief operating officer, Paytm Mall. “Most people shopping online for repeat items want discounts. This isn’t always the case for lifestyle and fashion products. Less than 50% of our products are discounted.”

Discounts do win brownie points but it’s temporary. First-time users are arguably not loyal. Travel site ixigo spends less than 1% of funds on ads and repeat loyalty is high. With over half the population not connected and only about 100 million transacting users, it’ll be at least another 4-5 years until it’s a 100% customers market.

“If discounts create irreversible customer behaviour, it’s alright. But if they don’t, maybe it’s not (necessary),” Sriharsha Majety, cofounder, Swiggy, admitted in an earlier chat with ET. “There should be value for consumers. How we do it, discounts or otherwise, (it doesn’t matter).”

Singe, Burn and Char

It actually does. Remember what happened to Snapdeal when it tried to edge past Flipkart with unplanned freebies? It simply sank. The Future of Discounts Neeraj Roy, managing director, Hungama, which has various streaming services, has a unique take on unit economics of online businesses.

He says that by 2023, there will be 500 million Indian consumers who should be willing to pay about Rs 100 a month for entertainment. This could come in the form of micro-transactions, potentially adding up to Rs 60,000 crore a year. “This is equal to the size of the entire broadcast industry as it stands today

“If one ecommerce company gives a discount, the other follows suit. That is a race to the bottom. Companies put up an average product experience,” says Sandeep Murthy, partner, LightBox VC, early investor in InMobi and InfoEdge.

Peers Airtel and Vodafone Idea retaliated in kind. They slashed prices and started bundling value added services such as time-bound subscriptions to Amazon Prime and Netflix. “The customer thinks freebies and discounts are great. They are, but only in short run, as service quality, investments and innovation will all suffer,” warns Balesh Sharma, chief executive, Vodafone Idea.

Specialised sub sectors have always been relatively easier to manage and scale up. There are enough examples — be it furniture, fashion, eyewear, mattresses or early morning delivery platforms. “Segments are opening up where growth is not crazy and they have arguably better aggregate capital deployed because they can be built more efficiently.

Some would still insist today’s burn is for posterity. “You are burning $3-4 billion today but creating infrastructure, logistics and changing consumption habits forever.

Nobody questions Mukesh Ambani on why he spending over $25 billion on Jio. They are creating a backbone they can milk for the next 2-3 decades,” argues a founder whose company has just recently joined the rarified unicorn club. “Ambani’s refining business is his cash cow. For SoftBank, it’s their stake in Alibaba or Vision Fund’s petro dollars. But for the moment, every consumer is benefiting. Then who are we to play God?”

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