So KK came up with this business plan (I feel bad for him, because he consults me on these multiple plans he has and I end up dismissing most of them! He must feel I am so full of myself!)
Lets buy bags from cheap production centers such as China and sell them in India
And how will we market them?
We will build a website!
The problem is that most people out there (and KK is surely far advanced than most already) feel that creating a website is equivalent to sales and recognition. Its like in BSchool, whenever the prof asked, “Ok, so how will the product sell?” the answer was invariably almost always “we will advertise”
Doesnt work! Well, mostly!
Most of Internet in India has been dominated by the business model of lead generation. Pick the bigger sites such as Justdial, Naukri, Shaadi, Way2SMS and all of them are making money from some form of lead generation. Shaadi is a cleaner model, because the lead generation is for the same audience that is on the website, so a simple subscription model will work. But for the others, it has to be actively going out and selling that will make the lead generation model work (similar to what Accentium does on Gaadi, StudyNation etc)
Now, taking the case of say the bag business case. Even if one operates at a 100% margin (buys for INR 200 and sells for INR 400), the Internet way of lead generation will not get anyone money.
Lets do the math
You create a website and start advertising on google (adwords) directing to the product page on your website.
Lets say you pay (a conservative) INR 10 per click for the keyword you bid on (more competitive the keyword, higher the bid. INR 10 will surely not get you the keyword “leather bags”)
If you have optimized your product page awesomely well from a purchase perspective, be happy if you get a conversion of 5% (from visit to final purchase, which includes droputs etc)
CPC: INR 10
Cost per sale: 10/5% = INR 200
Entire margin erased!
In reality, your conversion is likely to be lower than assumed and CPC to be higher. So most likely, you are loosing money on each sale!
One can argue though, that there is a long-term positive effect because of the remaining 95% visiting the website but not buying. They might come back again. Not denied, but in real life, people are more likely to either search again when they want to buy something or go to a site directly from where they have bought something before. This is where your differentiation comes in. Are you really getting the user to remember your brand and come back the next time. If you trying to buy bags from cheap locations and sell them at an arbitrage, probably not!
Same goes for websites that try and advertise on google and then make money off advertising on the site. Very rarely works. The arbitrage, if there existed any, will soon go away once people realize there exists one. Just like in perfect competition (Microeconomics 101). And trust the Internet to spread such ideas faster than you would them to!
So, what are the ways out?
1. Identify if there is anything viral about your product? Can you get people to share it, talk about it? That will lower your cost of acquisition.
2. Spend energies on SEO. Which is in 2 parts – invest in good quality content and invest in a good link building exercise (thankfully, if you do the first part right, chances are the second part is automatically taken care of, but it in the beginning nonetheless)
3. Try and up-sell/cross-sell/multi-sell to create an arbitrage. If you are spending INR 200 to generate a sale and your average ticket price is only marginally higher, is there a way to increase the ticket size? Or if you are generating your lead at INR 50 and selling it at INR 30, can you sell it to 3 players instead of 1 without diluting quality?
4. Spend your money and pray that the rest 95% come back for free!
The Internet looks simple because the entry barriers are virtually non-existant and one can setup a website for the same price that Reliance Industries pays as rent for its corporate office – per minute!! But that doesn mean that money making is easy online! Or let me rephrase
its not as obvious!