Revenue Model for Online Retailers in India

The marketplace e-tailers in India operate on a commission-based model, under which they receive a fee for listing plus commission on sales depending on the category.

“These portals are not retailers but technology companies and are built on sound technology platforms. Being pure technology companies, their platforms are well integrated with their back-end” says a senior executive of one of India’s largest retail chains.

Commissions are usually a function of Gross Merchandise Value (GMV) — the value of goods listed (note inventory is not carried by the companies) and sold on these portals. In a hybrid model, the revenues are more conventional as far as the e-tailers own inventory goes. GMV is one of the benchmarks that Online Retailers use for equity funding. But the GMV is seldom reflected intheir books of accounts due to either the holding structure (complicated in the case of Flipkart and Myntra) or because revenue recognised is purely commission based (Snapdeal). However, numbers do talk and the numbers of some of the players talk more and give us an interesting insight into the operations of the sector.

Why GMV is Grossly Misstated Value in Online Retailing ?

GMV is before all discounts, couponing, vouchers, and taxes. So when we read about a GMV of Rs 100mn in a day or Rs 1bn, it is the gross value of products before discounting and couponing. Indians follow MRP – Maximum Retail Price methodology. Discounts are offered on MRPs. But then, one company may choose to compute GMV on MRP while another may compute GMV on the list price (MRP minus discounts that the brands/seller offers). While MRP is relevant in most consumer products sold anywhere in the country, it’s the least relevant in electronics. When was the last time anyone sold a mobile or a television or home appliance at MRP? Since electronics form nearly 50% of the e-tail in India, it is natural that the GMV calculated on MRP will be skewed. GMV is reported on the current run rate rather than the achieved figure. So GMVs for Flipkart and Snapdeal could be misleading given the high mix of electronics.

Apparels / Fashion have the maximum margin. Interestingly, GMV includes the value of vouchers/coupons as well, which means it is calculated before any coupons are offered to the customer. As one of India’s largest retailers puts it, If it were net of any of these discounts then it should be called net merchandising value not GMV.

Indian e-commerce is rapidly evolving as consumers embrace technology and lap up products available online. While consumers would continue to benefit, offline players seem to have been caught off-guard in most categories. Like any new development, e-commerce has disrupted the market and many players have branded it as an agent of chaos that is

It does come with its share of Challenges such as – Customer Acquisition Cost and the Logistics Cost which are very high in the nascent online retailing space.

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