By Alok Chawla, Co-Founder, Gizmobaba.com
We have all been hearing about social commerce being the next big thing, but many of us wonder, “what exactly is social commerce”?
Lets begin by trying to understand this new concept.
Social commerce is a subset of ecommerce, simply put, it involves using social media to reach out and influence customers to make a purchase.
The first wave of e-commerce was about buyers going online, discovering websites and products and then directly making the transaction online. However, the growing penetration of smartphones and high speed internet in tier 2 and tier 3 towns is expected to bring in the next 400 million online shoppers, but these shoppers are expected to behave differently from the current breed of shoppers.
Many of these online buyers are first time buyers, they have started using the mobile phone to access social media, and spend most of their time on websites like TikTok, Facebook, YouTube etc. consuming content and chatting on WhatsApp with friends and family. They are however not buying products online.
The new wave of social commerce ventures are trying to get these potential buyers into their fold, using a social reseller to influence the purchase decision of these potential customers. The business model is simple: Resellers register with the social selling platforms and get access to their products catalogue. They mark up their margin on the product and share the products using social media to their contacts, friends, groups typically over WhatsApp, Facebook etc. Once someone likes the product and decides to buy, the reseller places their order on the social commerce platform with the buyers direct address. The social e-commerce platform takes care of the logistics and the payment side of the transaction. Upon delivery, the re-seller receives his/her share of profit.
There are multiple similar implementations with minor tweaks but the basic model deals with a reseller pushing product options into his network, and placing orders on behalf of his customers to earn a margin.
There are a lot of challenges that the current platforms are facing as they try to scale up while bringing down cash burn. Some of the major problems faced are:
Wafer thin margins: The social commerce platforms operate as marketplaces, and as they try to bring products to their resellers at the lowest possible prices, they work on wafer thin margins in commissions received from sellers. Sellers too cannot mark up too much else the product price would not be attractive for their customers. With average basket sizes being low, logistics cost sometimes exceed the product price, taking overall margin to negative territory.
High returns: The largest category being focused on currently is apparels, which while being easy to sell, also has colour and sizing issues that causes high percentage of returns. Returns drives up cost of sellers on the platform as well causes huge cash burn for the platform itself.
Insufficient average monthly income for resellers: With average basket sizes being small, and resellers trying to keep a competitive price, and to add to that, close to 50% returns, a resellers makes a thin commission and that too only on half his sales. He will need to sell harder to earn a small residual income. As the numbers of sellers go up, there will also be cross competition from the sellers as a social group may have multiple sellers trying to sell to them, which will further bring down reseller margins. Unless the resellers can make a reasonable and consistent income there is a risk that resellers will drop off the platform.
As most of the large social commerce platforms are well funded, they will continue to experiment and burn capital in trying to acquire scale, so breakeven or profits will not be the keyword in the short term. 2020 will see a few well funded social commerce startups offer huge discounting in trying to compete with each other, and trying to get to the top of the customers mindshare.
A player in this space who is able to address all the above major issues however, will be able to achieve positive unit economics quickly, and will have an unfair advantage to be able to scale in size without requiring too much capital burn. We will also possibly see hybrid models evolve, which would mean online plus offline models.
The formula for long term success for a social platform would be to offer quality products with good margins to share with their resellers (>Rs.200 per transaction), and ability to take average basket value to Rs.1000+ levels, and doing all this with positive unit economics!
A lot of action is expected in this space in the next 12 months and it will be interesting to watch how the various well funded players in this space play their cards!