Can premium service offerings like Amazon Prime, Snapdeal Gold and Flipkart Assured prove to be game changers for Indian e-commerce which is ruled by discount hunters and CoD transactions?
With the festive season about to descend upon us and e-commerce sales being sluggish so far, top e-tailers are turning to premium services to build up the momentum. It is a significant move as the GMV in e-commerce has seen a decline of 20-25% this year in the first six months due to cutbacks on discounts and advertising. No wonder then, that top-rung companies are revamping their services portfolio by bringing in loyalty services, such as Amazon Prime, Flipkart Assured and Snapdeal Gold. The aim? To lock-in customers with free and fast shipping and better shopping experiences, thus also reducing cart abandonment considerably.
Launched two years ago, Flipkart First was the first mover in India in the premium loyalty services space, but didn’t find many takers. However, the launch of Amazon Prime in July saw similar competitive offerings from both Flipkart and Snapdeal aimed at improving customer stickiness and reducing reacquisition costs for lapsed customers.
Globally, Amazon Prime has been very successful at not only locking in existing users but also making them spend more — a major painpoint for Indian e-commerce. Can Amazon Prime change the game in India too, where bargain hunters rule the roost?
As e-commerce players slug it out in the premium service space, BrandWagon assesses whether subscription-based services can work in the Indian context, or if free-for-all, ‘inclusive’ services like Snapdeal Gold and Flipkart Assured are the way to go.
How Amazon Prime did it According to research firm Consumer Intelligence Research Partners (CIRP), Amazon Prime members are more than half (52%) of the e-tailer’s customer base in the US (as of June 30, 2016). Not only do they outnumber non-Prime members, they also spend more than double that of non-Prime members. As per CIRP, Amazon Prime has 63 million US members, who spend about $1,200 per year on average, compared to about $500 per year for non-members. So what is the secret of its success?
“Amazon Prime is more than just a subscription-based loyalty programme,” says Michael Levin, partner and co-founder, CIRP. “The term ‘subscription-based loyalty programme’ doesn’t do justice to what Amazon Prime accomplishes — creating loyalty, increasing spending, encouraging repeat shopping and allowing customers to try new products and departments.”
Prime was originally conceived as a convenience programme — making it easier for customers to get products fast. “Before 2005, Amazon was doing a lot of experimentation around free shipping. But we wanted to offer predictability and make it easy for customers to get things quickly,” says an Amazon India spokesperson. The year 2011 proved to be an inflection point for Amazon with a spike in membership. This was made possible by rapid growth in fulfillment centres. “We opened more than 50 new fulfilment centres worldwide in the last four years alone, allowing for more selection and faster delivery speed. Second, we added new digital benefits like books, movies, TV shows and more,” the spokesperson informs.
But a word of caution: what works for Amazon in the US and other markets may not be true in India, at least for now, as Indians are still used to the idea of free shipping. The service may find uptake initially only among the top customer segments who value convenience and are ready to pay for it.
“For discount hunters, subscription doesn’t work. However, over the last two years, a premium segment of online shoppers has emerged who appreciates good experience and is ready to pay for that,” observes Mrigank Gutgutia, engagement manager, RedSeer Consulting. “The premium one-day and two-day deliveries are around 5-10% of the total orders in e-commerce and a subscription service like Amazon Prime is likely to be restricted to this small subset of online shoppers — possibly only the top 5%.” The rest are still discount hunters.
However, there is a catch here. “In India, the number of customers who subscribe to such services will be small but the value per customer will be high,” points out Devangshu Dutta, chief executive, Third Eyesight.
Amazon has rolled out its Prime membership in over 100 Indian cities with benefits like unlimited free one-day, two-day and standard delivery without any minimum purchase and discounted same day and morning delivery. In addition, Prime members in India are also set to get early access deals and premium Prime Video content which will be launched in India soon.
“What works for Amazon Prime is that it has been launched in a slightly more mature market compared to Flipkart First,” opines Gutgutia.
All Prime products are delivered through fulfilment by Amazon (FBA). Currently over 70% of the units shipped are fulfiled by Amazon and over 80% of the sellers use its fulfilment services, which makes fast shipping possible.
Analysts say the customers of subscription-based services such as Amazon Prime and Flipkart First are early adopters, frequent purchasers on e-commerce and mostly reside in top metro cities. “In any category, early adopters form 10-15% of the overall customer base. Thus, with 40-50 million e-commerce shoppers today, India has potential of four to eight million customers for subscription-based services,” says Pankaj Gupta, senior practice head, consumer and retail, Tata Strategic Management Group.
“These numbers are likely to grow thrice as much by 2020, driven by rapid growth in internet subscription and e-commerce customers.” Nevertheless, there are serious lessons for Indian players looking for sustainable models to boost the bottomline.
The loyalty factor “India was always ready for a subscription-based programme but we went through the wrong route with e-commerce viewed as a discounting platform originally,” observes Dutta. Clearly, the discounting mindset is a big challenge but this also makes the Indian market unique. Globally, subscription-based e-commerce services offer customers increased value in one or multiple forms such as faster deliveries, assured availability, free content, privileged access to exclusive content, etc and charge the customer a fixed annual fee for the same. But what if you could avail some of these services for free?
This is the rationale behind Flipkart Assured and Snapdeal Gold. Both offer ‘inclusive’ services, free for all and with no aim to monetise them for now.
“Customer acquisition is expensive. Hence, a business needs to retain its existing customers to drive profitability. Also, subscription-based models face the challenge of achieving scale,” says Gupta. At Flipkart, most of the sought-after products across popular categories including fashion, mobiles, electronics, etc are under the Flipkart Assured (F-Assured) umbrella. According to the e-tailer, all products carrying the F-Assured stamp go through rigorous quality checks and all purchases are packed and shipped by Flipkart.
“At F-Assured, the focus is on product quality and speed of delivery. These are important drivers of trust,” says Mausam Bhatt, vice president, Flipkart. “Most of the delivery for F-Assured products is done within two days. Currently, four lakh products are listed under F-Assured.” Flipkart is working with 14,000 sellers for the service and covers more than 5,000 pincodes under the assured badge, including tier II and tier III cities. Shipment charges are not levied on products priced beyond R500.
This is unlike the Flipkart First service, the annual paid subscription service for registered Flipkart users, where subscribers get access to free in-a-day delivery, free standard delivery and same day delivery at a discounted price of R70, for an annual fee of R500. “Flipkart First is a subscription programme targeted at a niche segment of consumers while Assured is an inclusive programme available for all,” says Bhatt.
Now take Snapdeal. Its premium service Snapdeal Gold offers customers free shipping, free upgrade to next day delivery and extended purchase protection on prepaid orders on products carrying the Gold badge. Snapdeal claims over one lakh customers upgraded their orders to Gold within the first 24 hours of launch on August 30. “All customers are special and we don’t believe that better service should be reserved only for a few. Free shipping is an important consideration among e-commerce users, especially those who use online shopping regularly,” says Jayant Sood, chief customer experience officer, Snapdeal.
Snapdeal Gold covers nearly five million products available through SD+ (Snapdeal’s fulfilment centres). Snapdeal Gold is also incentivising prepaid transactions against COD, which is not just an extra logistics cost but also has higher return to origin. COD rates are still at 70% for most companies and it is a big expense.
However, no matter how attractive the proposition of ‘free and fast’ shipping is, it is not sustainable in the long run. “The free and fast shipping proposition seems more of a reaction to competitive pressure. At the end of the day, you also have to make sure the consumer stays with you,” says Pragya Singh, VP, Technopak.
Clearly, for any subscription service to work, identification of customers who are willing to pay and making sure a suitable experience matching that price is delivered, are crucial.