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Offline strength greatest determinant of online success

I remember once a long time ago when the brightest kids from Pakistan used to dream of being stockbrokers in New York-a time that preceded the global financial crisis of 2008. Financial services has in my opinion lost some of its luster as the go-to profession for bright young minds both in Pakistan and abroad-some of the intelligent graduates coming out of business schools are now as likely to choose a career at the likes of Google, Amazon, Facebook or Apple as they are at prestigious global banks. As the internet has taken over our lives it is now no coincidence that tech companies are now employers of choice for young go-getters and upwardly mobile millennial.

In Pakistan this has been echoed in the migration of bankers towards e-commerce companies and the clout of CTOs in the management committees of multinationals and domestic companies in many sectors-all companies are now tech companies and the correct degree of automation in business processes can determine your success.

Within the trend of tech companies gaining prominence is the tremendous curiosity & press coverage of the e-commerce trend in the country with focus on online shopping. Black Friday spread so far this year that pizza companies were offering deals and traditional shopping malls saw enormous footfall-stealing some of the market share away from online platforms that had started the trend in the first place. In addition to curiosity and media coverage lays a coterie of investors who are willing to plough capital into online shops with a view towards profitable returns-is the euphoria real? Perhaps-but does it have solid foundations? What sort of qualities determines the success of an online shopping operation?

There are three sorts of business models who make up the majority of online shops with the first among them being manufacturers-they are doing well owing to their complete control of the value chain right from inception of product design till completion of manufacturing-it enables them to be in control of product quality which is offered to online shoppers at competitive prices. Clothes and shoes manufacturers for example are doing well in this segment because of how they are in complete control of margins-many of these entrepreneurs tend to be 2nd-3rd generation scions of a business family who have setup online selling subsidiary as a means to diversify revenue streams-hence positioning themselves as a financially viable non-core asset within a manufacturing setup. Being made in Pakistan also enables these manufacturers to engage in cross border e-commerce activities with clientele in overseas markets and deliveries being catered to through the likes of United Parcel Service (UPS). Established names such as Khaddi and smaller setups manufacturing clothes and shoes are worthy of note for their success in selling their products online.

A second business model which an effective means of selling online is through wholesalers who(like manufacturers)sell competitively priced products — the difference is that while manufacturers sell products online which have been made locally the wholesalers tend to sell products online which have been imported from abroad-doing so at healthy margins that cover their costs. So much so that wholesalers who sell online are even able to afford expensive television advertising through professional media planning-budgetary freedom has enabled them to use this medium as a means of reaching clientele. Rather than building an online platform to become a wholesaler these enterprises have been wholesaler’s first and online sellers second-meaning that the attraction of going into e-commerce is the higher per unit margin they earn from selling directly to consumers as opposed to being stuck in B2B cycles. Since the online shop is a non-core asset within a larger business group it enables them to leverage of the existing offline strength from a parent company.

A third business model of online shops is the pure play digital retailer-who exists solely for the basis of selling online. They do not have the history of an established business group + hence have to build their wholesale strength from scratch-hence supplier relations assume critical importance. The ability to negotiate healthy margins with partner companies and stimulate consumer demand for them is of critical importance-with no love lost between supplier and online shop it is the latter’s ability to boost sales for its supplier that will stand it in good stead. This in turn will lead to more deals + better margins which if executed will lead it towards entering ‘the golden cycle of e-commerce’ with higher sales resulting-it is worth noting that many of the world’s most prominent online shops are pure play digital retailers-namely Amazon(US), JD.com(China) and Lazada(Indonesia)and this is the case in Pakistan as well-rather than concentrate on profitability the game plan is to concentrate on building customer bases which can give it higher enterprise value. JD.com for example had never turned a penny in profit but yet managed a $25bn valuation at the time of its public listing in 2014-the finance and professionalism of such setups hence can dwarf those of manufacturers and wholesalers because if the core function of a pure play digital retailer is to sell online then all of your people, assets and infrastructure will be focused towards that and effectiveness in being a commission agent.

As part of my job at TCS, my mission has been the creation of an entrepreneurial ecosystem for the growth of e-commerce in Pakistan-a sector that is a buzzword about the new economy. Ironically however it’s still the old stuff that will create a winning formula-product quality at competitive prices.

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