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If a startup is hoping to open up shop in the sprouting Indian E-commerce market, the way to go is vertical. India is a culturally and historically complex market to do business in. The many years in which India lacked investment left the country with poor infrastructure and extreme wage disparity. Now, as the country rapidly evolves into the online space, a budding middle-class evolves with it. India’s relatively-new middle-class is only recently enjoying the perks of disposable income, so they’re not the most brand-conscious when it comes to online shopping. These are issues that are all very specific to India, and issues that can be solved by a company becoming vertically-integrated.
First, let’s establish exactly what is vertical integration. Simply put, it’s when a company owns two or more parts of the supply chain. When it’s moves closer down the line towards the customer, it’s forward integration, i.e., a farm owning a chain of grocery stores. When it moves further back towards manufacturing, it’s backwards integration, i.e. a supermarket owning its own farm. Now that we have a clear idea of what vertical integration is, let’s reexamine why vertical integration is the best option when it comes to dealing with India’s unique business climate.
India’s transport infrastructure can be a logistical nightmare. Years of underinvestment lead to poorly-maintained ports, pothole filled roads, and derailing railways. If a company wants to do business in India, they’ve got to make sure that they can deal with the poor infrastructure in the most efficient way possible.
Quantified Commerce, a vertically-integrated company that specializes in building E-commerce brands within the beauty segment, bypasses many of the problems associated with poor transport infrastructure. Because they were able cut costs through vertical-integration, they have revenue to spend on bringing in raw materials through air freight, avoiding ports altogether. They were able to streamline efficiency even further by owning distribution.
“By owning our own warehouse and shipping infrastructure, we are able to cut mid-mile transport from seven days to two, which will lead to a speedier delivery to the customer and a superior overall customer experience,” says Agam Berry, co-founder of Quantified Commerce. “Creating the best user-experience possible is only achievable through vertical-integration. By reducing our costs on multiple channels of distribution and through automating manufacturing, we can spend a higher percentage of revenue on the actual product, at the same time selling it directly to the customer at a reduced priced.”
In a traditional supply chain, 8-10% is the cap on the revenue allotted to cost of goods, since distributors, manufacturers, and marketing agencies would require a large portion of revenue. By owning every step of manufacturing, distribution, and by collaborating with social media influencers for advertising, Quantified Commerce can focus more on providing the absolute best customer satisfaction through speedy delivery and reasonable prices, all while maintaining high-quality merchandise.
Price is the most important factor in winning over Indian consumers. In fact, when Indians are shopping in a physical store, 92% of Internet users read reviews and do price comparisons of the items their thinking about buying. About 54% of that time is spent comparing the price of products, 20% is spent on reading reviews, 18% is spent on comparing products with other similar products, the final 8% is spent on nothing in particular. So, why exactly are they so price-conscious?
While the middle-class is growing, the wage disparity in India is still very wide. The average middle-class Indian salary is just shy of $4,000 a year. This may seem like not much, but cost-of-living is much cheaper. For example, you can get a high-speed smart phone data plan for a little over $2 per month. But, as that demonstrates, Indian consumers value low-price over sporting big-name brands. That’s why Chinese manufacturers are taking over the smart phone market.
This emphasis on cost especially holds true in E-commerce, as the blossoming middle-class is just now becoming accustomed to shopping online. E-commerce sites that don’t follow a vertically-integrated model cannot provide prospective buyers with the low-cost they need to turn from potential customers into loyal customers.“In a price-sensitive economy such as India, low-cost high-quality products are of the utmost importance,” says Berry. “If you’re spending money paying manufacturers and distributors, you simply can’t afford to offer your product at a low-cost. The consumer will look elsewhere. But, if you’re vertically integrated, you win over the customer with the price and build brand loyalty by demonstrating a quality product.”
In India, the consumer cost advantage that intrinsically comes with vertical integration is the only way to attract customers. But, once you have them, the consumer will develop a preference for your product and the consumer experience that comes with it.