Amazon – Platform Business Firms

FirstCry.com: Leveraging the power of offline

In my blog post last week, I wrote about how a hybrid online and offline strategy is useful for collecting small data. As a couple of my readers pointed out, what marketers and strategists call small data, ethnographers and sociologists call as thick data. Honestly, I had not heard of thick data. @fernandogaldino introduced thick data to me. I dug through the online references on thick data, and realized we are talking the same thing. Exactly the same thing. Thank you Fernando! So, I am going to continue using the term small data (that is what I have read academic articles about) with the caveat that small data is also thick data. Last week, I promised to delve deep into FirstCry.com and its online-offline strategy. Here it goes.

FirstCry.com

The firm was founded by Supam Maheshwari and Amitava Saha in 2010 as a pure online venture. By 2011, FirstCry.com opened its first offline stores. In an interview to TechCircle, co-founder Supam Maheshwari elucidated how a vertically focused ecommerce firm could survive and make money in a market dominated by horizontally spread competitors (you can read the interview here). He talked about replicating Quidsi’s business model in the Indian market, by owning a set of vertical markets like diapers.com and soap.com. In replication, firstcry.com has a sister website goodlife.com. The key difference, he said, between the Indian and the US market for baby care products was that, more than 95% of the products were imported. In fact, that was the seed for the enterprise – his own difficulty in finding good quality products for his child in India, whereas he could buy a lot of them during his international travels. That effectively makes this business inherently inventory-heavy. One needs to leverage economies of scale and scope in sourcing, hold inventory and invest in logistics to be able to service customers across the length and breadth of the country (read about firstcry.com inventory model here).

Omni-channel strategy

Here is where the omni-channel strategy helps. Instead of keeping inventory in dark warehouses, ready to be shipped, it was possible for firstcry.com to open retail outlets in tier II and tier III cities (where real estate was also likely to be cheaper), where ecommerce penetration was not as much as the tier I cities and the metros like Mumbai, Delhi, or Bangalore. The inventory holding was thus distributed across the various franchised retail outlets. The outlets also provided customers with the look and feel of the products before they bought them – you need to appreciate that baby apparel and shoes dominate the market, only to be followed by toys and diapers. Clothes and shoes … when was the last time you bought your own shoe purely online? Inventory provided increased footfalls to the store, created brand awareness, and inventory off-take. The decision to have the same prices between online and offline stores, coupled with large touch screen interfaces to shop online from within the offline store could have provided exponential growth in traffic and sales.

Promotion: The FirstCry Box

Firstcry.com began promoting using traditional mass media – television and online ads. They invested in Bollywood’s longest serving (possibly) celebrity, Mr. Amitabh Bachchan as their brand ambassador and launched a few television advertisements (see some of their ads on YouTube here). However, they soon realized that mass media advertising was highly expensive and yielded low returns for a niche range like baby care products. That is when the idea of the FirstCry Box was born. The FirstCry Box is a bundle of some essential products that the mother would need during the first few days of the baby and mother reaching home from the hospital. Firstcry.com has agreements with over 6000 hospitals, through which these FirstCry Boxes are gifted to the new mothers, congratulating them on the birth. These boxes also contained gift and discount coupons from major brands of baby products, that the parents could redeem at either online at firstcry.com or any of their retail outlets. This ‘welcome kit’ to parenting provided firstcry.com a significant opportunity to build brand equity and recall amongst the over 70000 mothers receiving these kits every month. Some marketers call this permission marketing (read about it here), or direct-to-parents strategy. For me, it is a wonderful platform, a two-sided platform mediated by firstcry.com. Parents, especially first-time mothers, are initiated into parenting with the help of these grooming products (basic diapers and lotions) and the gift coupons for free. The new mothers as a subsidy side is being financed by the brands that provide the products and coupons to be included in the box and act as the money side in the platform. For the brands, this is highly targeted sampling of their products, and most mothers would stay loyal to quality brands/ retail stores in baby products. In the entire transaction between the mothers and the brands, firstcry.com benefits significantly in three ways: (a) store loyalty resulting in increased sales, (b) small data about how these mothers use these products, the basket, frequency of purchase, and willingness-to-pay for quality; and (c) good quality prediction of demand in specific geographies, leading to efficiencies in inventory and supply chain management practices.

By the way, such welcome kits are not entirely new – a lot of employers have been on-boarding their employees with such welcome kits. I first heard/ saw such welcome kits when I was part of a team that delivered a customized training programme for the ITES service provider ADP India, a few years back. It was fascinating to see how the entire family was on-boarded into the firm! Not just ADP, a variety of other new age firms, I see have adopted this practice (read this article on how some Indian organizations welcome their employees). I wish I was welcomed like this by my employers!

Are hybrid models here to stay?

I would say, yes. We saw how Amazon was opening stores in our blog last week. We also discussed how Amazon.in was using firms like StoreKing to reach the Indian retail hinterland. I read last week that their Indian competitor, Flipkart.com was also opening offline store to reach users in small cities (Flipkart to open offline stores as well). And in vertical markets like baby products, it has become all the more important to target your promotion very narrowly, and focus on the backend (inventory, supply chain, and logistics) efficiencies, while at the same time achieve scale.

Is vertical ecommerce a winner-takes-all market?

Three industry conditions define a platform market as a winner-takes-all market: presence of strong cross-side network effects, high multi-homing costs for the users, and the absence of special requirements. The baby products retail market is dominated by imported brands, is a highly fragmented industry, and the brand owners are dependent on their retail partners to promote their brands. The demand for these products are relative price inelastic, and consumers would be willing to pay premiums for sustained quality and reliability. An aggregator platform like firstcry.com would significantly aid in establishing and reinforcing the cross-side network effects between the brands and consumers. Second condition – the quality and reliability concerns of the parents would ensure significant store loyalty and brand loyalty. As long as there are no serious concerns, consumers would be loath to switch; and when the fill rates are high (there are no stock-outs of items that they want to buy) in their preferred stores, would not multi-home. In other words, consumer switching costs for brands are high, and as long as these brands are available with their favorite retailer, they would not shop from multiple outlets. And most infants have the same needs – diapers, creams, lotions, oils, and basic toys. Special preferences begin showing up only when they ‘grow up’. Some of them don’t ever grow up, but that is a different matter!

Firstcry.com and BabyOye merger and further consolidation

Given the industry conditions of geographically distributed year-round demand, operational efficiency and leveraging economies of scale and scope become key success factors. Consolidation is inevitable to achieve both backend (sourcing, inventory, and supply chain/ logistics) efficiencies as well as frontend scale (online and offline stores distributed across the country). That is why we would see waves of consolidation in such strong vertical markets. Like how firstcry.com and BabyOye merged their operations, I agree with Supam that this market will see more and more such mergers (read his interview here).

Lessons for enterprises focused on vertical markets

Based on what we have discussed over the past few weeks, I would urge enterprises focused on vertical markets (like firstcry.com) to (a) seriously consider your business model to include online and offline consumer touchpoints … for instance, online furniture store, Urban ladder is ‘pivoting’ to offline stores (read the news here) and are positioning their offline stores as customer experience centers; (b) invest in collecting and analyzing small (or thick) data through these omni-channel (or hybrid) business models; and (c) critically evaluate if the market conditions favour winner-takes-all dynamics.

Hope my readers from India and the diaspora had a great deepavali festival! Greetings from Bangalore.

Disclaimer: I am in no way related to FirstCry.com, Goodlife.com, its investors, or its founders.

Building your brand

This is not a post about marketing, though it may sound so. This is a post about how entrepreneurs and leaders communicate. This is relevant for brands and firms as well. Read on.

I listened to a very insightful TEDx talk by Simon Sinek on inspirational leaders. Listen to it here. He talked about how inspirational leaders focus on the inner most ring of what he called the golden circle. In the inner circle is the why, followed by the how, and then the what. He cited examples of ineffective communication, when firms and brands and individuals focused on the what to drive the how and why, and how successful people and brands and firms focused on the why first, before highlighting the how, and what. If you have not listened to it yet, please do so, before you proceed.

As we see a tramline of enterprises biting the dust, liquidating/ selling off to powerful competitors/ selling off at a fraction of its past valuations to firms in complementary businesses, this message is becoming far more relevant. Couldn’t resist this contrast …

Yahoo is a guide focused on informing, connecting, and entertaining our users.

https://about.yahoo.com/

Google’s mission is to organize the world’s information and make it universally accessible and useful.

https://www.google.com/intl/en/about/company/

Just take a look at how these two pages are organised – Yahoo’s page flows like this – a statement of what they do – inform, connect, and entertain; how did they start, how is it to work for Yahoo, and what does it offer for developers, advertisers, partners, and research. Google’s page begins with the company overview (that includes their history), who they are (culture and locations), what they believe, and then what they do.

If your communication focuses on what problems you solve (why you exist), and then lead towards how you solve those problems, and therefore what products and services you offer; I am willing to listen to you. On the other hand, there are entrepreneurs and firms that begin with what they do. For instance, early this week, I heard someone talk about building the Uber of Indian tractors for farmers (if the one who talked about this is reading this, don’t take it personally). I had to probe deeper and deeper to understand what problem was being solved and why did Indian farmers needed a mechanisation solution in the lines of Uber.

Virgin’s Richard Branson also wrote today (11 August) about why successful entrepreneurs should seek problems, and create solutions (read it here). Begin with the problem and the opportunity; the business model and the solution will follow; and thence products and services.

So, whatever brand you are building – of yourself, your firm, your products/ services, please begin with the why, the how, and then get to what. Build a robust brand that stands for something, signifies why it exists, and speaks to the ecosystem on why it exists. Remember the arrow that connects A and z in the Amazon.com logo? Everything from A to Z.

And in today’s world, as firms simultaneously diversify and depend on a cluster of complementors to provide (each others’) customers with unique value, it might not be out of place to conceive of your brand as a platform. A simple platform (like how the automobile companies use the word) upon which your complementors and partners could build on, customise, co-develop, co-innovate, and co-create. Brian Monahan’s post titled “More than a promise: Brands are platforms” (read it here) develops this argument very well. Brian’s primary argument is that brands transcend the promise and should allow for other firms and its partners to shape the consumer experience. Imagine brand Android!

Borrowing the idea from Simon Sinek’s talk, leaders communicate why more than the what. How is your brand communication structured?

Would love to listen/ read/ hear about your brand stories.

Flipkart Ads – Is there a shift in online advertising economics?

Yesterday, I read an interview with Sanjay Ramakrishnan, Senior Director & Head – Business development & Marketing, Flipkart Ads in Advertising Age India (read it here). It set me thinking, why is Flipkart into advertisements? Is it competing with Amazon or with Google, Facebook, and Apple as well?

Though I am tempted to label this development as the advertising market becoming a contestable market, I will refrain from doing so. Let me first explain what is a contestable market (in simple terms, of course, let me try; and in the context of platform business models), and then proceed to analyze if the success of Flipkart Ads is a source of worry for other platforms whose principal business model is based on advertising revenue.

The theory of contestable markets originated from the works of Baumol as early as 1982 in this seminal paper (available through JSTOR here). He (and his co-authors in subsequent papers) defined a contestable market as one with absolutely free entry and costless exit. Which implies that such a market would be vulnerable for a hit-and-run entry, i.e., by any competitor with no need for any specific assets, process capabilities, or differentiation.

A key characteristic of these markets is that the new entrant takes the prices prevailing in the market (of the incumbents) as given, and enters with the same price. In a perfect competition, any new entrant will increase the supply in the market, and should lead to a reduction in prices. Even when the market shares of incumbents and new entrants change, the industry price levels should ideally fall with increase in supply. In contrast, in a contestable market, the new entrant could enter the market with the same price as the incumbents. The justification for this assertion could be based on two arguments, that the new entrant enters the market at such a small scale compared to the incumbents that there is no visible change in the total market supply to warrant a price correction. The second argument is founded on the thesis that the incumbents cannot retaliate with sufficient speed to counter the threat posed by the new entrant, due to their systems and processes that bind them to a particular cost structure and a positioning in the market. In such a case, the new entrant could enter the market with a prior contract, preferably a long-term contract, at least as long-term as it takes for the incumbent to respond. In perfect competition or monopolistic competition, incumbent firms will adopt limit pricing strategies (if profitable for them) to keep new entrants at bay, i.e., as the incumbents sense the threat of new entry, they would reduce the prices to a level where it would be profitable for the incumbents and not for the new entrant. Take for example, when cola firms entered the bottled water market in India, the incumbent, Bisleri International embarked on a strategy of keeping market prices so low that it took a long time for Coca Cola Company, and Pepsico to break even.

The second aspect of contestable markets is the absence of any sunk costs whatsoever for both the incumbent and the new entrant. If any upfront fixed costs were to be incurred by a competitor either prior to entry (including in studying the feasibility of making money in that market) or at entry (like setting up manufacturing and distribution capabilities), the costs of entry will prevent this market from becoming contestable. Let me provide an example. In today’s world, setting up an online store entails no sunk costs for any retailer. The domain registration and hosting, website design, payment gateways, and fulfillment are all functions that are unbundled and offered as independent services (as SaaS) by different vendors, which makes all of them variable costs, rather than fixed costs. Such costs are neither fixed nor specific – one could use the payment gateway for any other online transaction, should this venture fail. Such markets with no sunk costs result in no barriers to entry and exit and therefore, are contestable. Contrast this with our previous example of Coca Cola Company and Pepsico entering the Indian bottled water market – this is a market that requires significant bottling and distribution capabilities. Though the cola firms enter this market with significant synergies from their core business, there were certain unique capabilities that the bottled water market required – sourcing of good quality water and plastic bottles, bottling lines that were specific to water, unique branding, and wider distribution networks.

The third characteristic of contestable markets is that the products are absolutely non-differentiable. That means, the new entrants can enter the market and imitate the products/ services offered by the incumbents at the same costs or even lower, and therefore maintain the same price levels. It is also possible that the new entrants enter with lower prices, and offer the same ‘standard’ products or provide additional features at the same or lower prices. Such standardization is highly visible in the context of platform services, like a C2C marketplace. In the absence of any product differentiation between competitors (any new feature is imitable quickly and is almost costless to do so), Quickr.com and OLX.in entered the market and took market share from incumbents like Sulekha.com or asklaila.com.

In summary, a market can be (or become) contestable when either of these conditions are met – no changes in prices (no limit pricing by incumbents), no fixed sunk costs, and no differentiation in products and services offered.

Is digital advertising becoming a contestable market?

For digital advertising market to become (and be) a contestable market, it has to allow for costless entry and exit, no sunk costs, and no differentiation. In the case of Flipkart Ads, I would argue that it would have cost Flipkart next to nothing to build the platform. The ecommerce store was in any case dealing with sellers, and all that they had to do was to extend the relationship to brands. And remember, in the Indian market, a lot of the brands had their own ecommerce retail operations and some of them were already on Flipkart as sellers. For instance, when I searched for the Prestige brand of pressure cookers on Flipkart, I found about 40-odd sellers including TTK Prestige, the brand owner.

And when Flipkart entered the digital advertising space, did Google and Facebook respond with limit pricing? I am not sure they did. A Feb 2015 LiveMint article that announced Flipkart and SnapDeal’s entry into online advertising space gave Google ad revenues as US$55bn compared to Amazon’s US$1bn (read it here). Given these sizes, it is unlikely Google and Facebook would have felt the need to respond to their entry by lowering prices.

Developing the advertising platform would possibly not involve any sunk costs for Flipkart. There is sufficient traction in terms of relationships with sellers and brands, the technology platform costs next to nothing to build, transaction costs are variable (including cloud storage and payment gateways), and even brand building is costless (as they are extending the same brand – Flipkart Ads).

It is the third condition of contestable markets that protects the online advertising market from becoming a contestable market, i.e., lack of differentiation. In the case of online advertising market, differentiation is created and sustained by superior targeting of advertisements to the right users. Measuring and monitoring engagement of the audience is the key in data collection; deep understanding of the consumer behavior and decision-making process is critical in analyzing this large volume of data; and close relationships with a wide variety of advertisers is imperative to ensure narrowcasting of advertisements to specific audience profiles. Here is where the product differentiation kicks in – the kind of browsing habit data that Google has access to is very different from the ‘buying intent’ that Flipkart can derive out of its customers’ behaviors. And especially in the context of mobile apps, the Flipkart app has access to other information like the person’s location, WiFi/ data connection information, and even his contacts; all of which could be useful to provide targeted narrowcasting (or even unicasting) of advertisements. Such shrinking of segments and the ability to serve what the marketers call ‘the segment of one’ customer can differentiate the new entrant, Flipkart’s services from the incumbent ‘Google’ and ‘Facebook’.

So, what are the implications for entrepreneurs?

First, evaluate if your market is indeed contestable, or is likely to become contestable. If there is a likelihood of your primary market being or becoming contestable, consider one of the following options:

Change your business/ business model (pivoting is a fancy word these days in the startup ecosystem)
Erect barriers to entry and exit – use regulation if you must (see how Airport Taxis in Bangalore are competing with OLA and Uber)
Differentiate – even if it is not the most significant of your product offerings, focus on those value creation opportunities that involve sunk costs
Wait for a new entrant and bleed him to death with limit pricing (you better have easier access to capital than the new entrant)!
Wind up, sell out, and take your family (if you have one) on a holiday to Seychelles! And don’t forget to thank me!

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