Sustainability issue with e-tail discounts

Easier in some categories of sales but even in these, limits on how much and for how long

Price advantage might be the biggest pull for e-commerce but how deep is the online discount?

Sector estimates show fashion scores the most in discounts offered through online space. In electronics, the price differential is the lowest, analysts said.

Also, while the current e-commerce war is being fought on prices, a wide gap between online and offline here might not be sustainable. This gap could range between 10 and 40 per cent, depending on category and season. For new books, the difference can be up to 15 per cent; in fashion, up to 25 per cent.

However, electronics is a category which works on very thin margins and even a 10 per cent discount offered, along with free delivery, can turn out to be operationally unprofitable. During a sale period, discounts could go up to even 40 per cent, cutting across categories.

“For the fashion category, if a retailer is offering free delivery, there is a discount of up to 15 per cent because there are no logistics charges. Beyond that, depending upon brand, average ticket size, etc, a price differential of about 25 per cent can be sustainable,” says Praveen Sinha, chief executive and founder, Jabong.com. Sector insiders say discounts beyond 40 per cent in fashion can turn out to be operationally unprofitable.

E-commerce had grown in popularity primarily because of books and heavy discounts on these.  In fact,  Flipkart surpassed the likes of Crossword and others in terms of unit sales, according to a recent Nielsen survey. Amazon and Flipkart started their business with books.

Sometimes during sales, one can even find discounts up to 40 per cent on books sold online.

The low inventory cost for books, long shelf life and  ease of delivery are the other factors that make the category online-friendly, said Prince Goyal, founder of Madbooks.com.

Other emerging categories like furniture can offer price incentives of 15-30 per cent. “We sell furniture to the upper middle class consumer, who is not looking for a price advantage but is more focused on designs. Even in that category, the online price is about 15 per cent cheaper,” said Rajiv Srivatsa, chief operations officer, Urban Ladder.com.

Experts say the coming three years will be all about price wars. “Many new and big players will enter the e-commerce space and woo consumers through price undercutting. The price war is likely to continue to the  benefit of consumers," said Arvind Singhal, chairman, Technopak India. Deep discounts are not sustainable in the long period, he added. “Two to three years after acquiring consumers, the big players will like to focus on profitability.”  

In mature markets like in America, e-commerce has established itself for convenience and assortment. The implicit assumption that the online medium is cheaper for retailers is countered by Amazon’s experience in the US, where it has worked on a profit margin of about one per cent, according to a Forbes report.