Mega annual online sale events are about to become new normal. The poster boy of Indian eCommerce Industry Flipkart and other top e-tailers have launched events like Big Billion Day sale. At least, the big three – Flipkart, Amazon India, Snapdeal – will soon have revenue trends very similar to Amazon US, as shown in the chart below. As can be seen, the quarter four is the holiday season in the US and mega discounts result in a spike in revenue. The trends are no different in India, price sensitive shoppers try to make the most out of Big Billion day and stall their buying process in anticipation of saving thousands of dollars on the products they are willing to buy.
Despite selling record half-a-million handsets in just 10 hours of the sales this year, Flipkart once again is facing criticism for running into glitches. The drive was not that smooth for other players as well. Still, most of the top e-tailers recorded encouragiing response to their festive offers. Snapdeal in its Diwali Dil Ki Deal campaign shipped five million orders so far. In its Great Indian Freedom Sale, Amazon claimed categories like television, appliance, health, movies and personal care received 3X – 7X growth in sales number over the previous offer season.
While a customer emerges as a clear winner from such festival offers, does it benefit online retailers equally? And if not, then why almost every major eCommerce player in India is trying to throw the party at a regular interval that increasing the gap between their profits and cost? Let’s find out.
As shown below, Gross Margin of Amazon US, recorded during Q4 is generally lowest in the year. This is due to heavy discounting i.e. even though units sold are more, the profit per unit is typically less.
(Note: Above figures are cumulative of all Amazon businesses, so do not truly reflect retail trend but should be a good enough approximation, at least from trend perspective)
Also, worth noting is the fact that a big sale event reduces sale before and after the event. Firstly, customers postpone their buying in anticipation of the sale and then stock certain items during the sale, leading drop in sales in the period after the event. Therefore, a lot a units that could have been sold at normal rates are sold at much discount.
One thing looks certain – mega sales events are not there to drive mega profits and if Amazon US trends are any indication, it won’t be so anytime in future.
That said, here are some reasons why these mega-events may still be necessary:
Change Customer Behaviour
While new customer acquisition is certainly a goal the online retailers would have, any one company will probably not gain much from switchers (those customers who will switch from a competitor to buy from it due to sale) as switchers will be on all sides and will average out. There will be some customers who are on the fence and will buy now only because of sale. However, the biggest long-term benefit will be from those who do not shop online and will do so because of this event. As 90% Indians are yet to become online buyers, these mega events can be thought of as online retailers pooling their resources for the benefit of the ecosystem, where the change in user behaviour will benefit all. However, do note that change in behaviour only refers to certain customers becoming more used to online shopping. It does not mean that customers will change their behaviour towards any particular brand being discounted by the retailer. Meaning, they will not buy more of discounted brand after the event.
Introduce sticky innovations
These events can serve as a good opportunity for companies to experiment with their new innovations, especially those that will make users stick to their online platform and become revenue drivers for future. For example, Amazon facilitated subscription in Amazon prime during sale event in the US. Similarly, Flipkart by making its sale event App exclusive has ensured that several people will download its app. Apps are considered more sticky than a website and prove a barrier to switch. (Not sure if there is any empirical evidence but argument is that once you have much personal info in the app and have become used to an interface, you will find it inconvenient to switch to a new app. Relatively higher time required to install app vs to visit website and limited storage of mobile device further adds this inconvenience)
Play the Game:
Game theory may also partly explain why online retailers cannot do away with these mega sale events. While it may in the interest of everyone not to offer deep discounts, if even one retailer offers such discount, everyone will shift to a suboptimal equilibrium of offering discounts. Therefore, how the top management of individual companies see themselves, their future, their competition will determine much of their behaviour and behaviour of their ecosystem. Big billion day 2015 sale announcement by Flipkart was soon matched by the similar announcement by rivals Amazon and Snapdeal also. However, the ecosystem seems to be maturing as unlike last year, most big retailers have (at least till the time of writing) refrained from very deep discounts.