Indian online shoppers embrace platform fees, signalling a shift in priorities
The Indian e-commerce landscape is witnessing a significant shift in consumer behavior, with shoppers becoming more accepting of platform fees levied by online retailers. This trend marks a move away from the earlier focus on deep discounts towards a more discerning approach to online purchases. The recent introduction of fees by major players like Myntra, Zomato, and Swiggy, signifies a maturing market and a focus on sustainable business practices.
A quiet acceptance of platform fees
For years, Indian e-commerce thrived on a strategy of heavy discounts and freebies to attract customers. This approach, while successful in driving adoption, resulted in razor-thin margins for companies. With funding drying up, the focus has shifted towards profitability, leading to the introduction of platform fees.
Ecommerce platform Myntra recently increased its platform fee by a third to Rs 20 per order, and unlike a few years ago, there wasn't a social media backlash. This quiet acceptance suggests a maturing consumer base, prioritizing factors beyond just the lowest price. This trend extends beyond Myntra. Platforms like Nykaa Fashion charges Rs 29 per order, while food delivery giants Swiggy and Zomato have introduced Rs 3-4 platform fees in addition to delivery charges. Notably, Amazon, Flipkart, and Reliance's Ajio haven't implemented such fees yet.
Focus on unit economics and profitability
The acceptance of platform fees benefits e-commerce companies by allowing them to focus on unit economics - the cost of selling a single product. Previously, companies relied heavily on discounts and promotional offers to attract customers, hindering profitability. With funding drying up, a shift towards sustainable business models has become crucial.
For online food delivery platforms, a small platform fee can significantly improve their financial performance. As Karan Taurani of Elara Capital points out, a Rs1 platform fee could potentially improve EBITDA (earnings before interest, tax, depreciation, and amortization) by 5 per cent. This metric is a key measure of a company's operational health.
For example, Zomato's experience exemplifies the positive impact of platform fees. After implementing a platform fee in July 2023, the company reported improved margins and a consistent rise in the number of transacting customers. Myntra has also experimented with platform fees, starting with ₹10 and gradually increasing it to Rs 20. This demonstrates their confidence in a customer base that prioritizes convenience and a wider selection over minimal discounts.
Experts believe platform fees are here to stay, but companies will need to tread carefully. Satish Meena, an independent e-commerce analyst, suggests keeping fees within 3-5 per cent of the average order value to avoid deterring customers. Additionally, fees may be implemented strategically, with higher charges in urban areas with higher order values and lower fees in non-metro markets.
Maturing market and sustainable growth
The acceptance of platform fees signifies a maturing online market in India. As Ankur Bisen, from Technopak Advisors, points out, this is similar to other industries like telecom, where fees are being adjusted to ensure profitability. With established players like Zomato, Swiggy, and Myntra having a strong market presence, the focus is shifting towards sustainable growth through optimized pricing strategies. The era of unsustainable discount wars seems to be fading, paving the way for a more balanced and profitable e-commerce ecosystem in India.
