Bengaluru: India’s largest e-commerce firm Flipkart Ltd is considering a plan to reduce commissions charged to its third-party sellers and diversify its business model by adding advertising, payments and other services starting this year, three people familiar with the matter said.
Flipkart’s plan is based loosely on the business model of China’s e-commerce giant Alibaba Group. The Chinese firm charges low commissions on one platform and offers free listings on another to sellers, but makes money through ads, logistics, payments and other services.
The company wants to reduce commission rates over time and encourage sellers to plough back the savings into advertisements, logistics and other services, according to the three people cited above, all of whom spoke on condition of anonymity. It has already launched a mobile ads service and plans to introduce a new payments service later this year, they said.
Flipkart declined to comment for this story.
The company, which has been trying to move to a marketplace model since 2013, currently charges third-party sellers commissions ranging from 5-20% on every order. Commissions on apparel are higher than those on electronics and books. These commissions vary based on the products Flipkart is trying to push. Lowering commission rates may potentially allow the company, which has more than 40,000 third-party sellers, to attract thousands of small businesses.
Sachin Bansal, co-founder and chief executive of Flipkart, is spearheading the ad business after the company reorganized its structure in January. The firm is using the technology of AdIQuity Technologies, which it bought for an undisclosed amount earlier this year, for its ad product.
Ad revenue can be generated in three ways: by selling so-called banner and other ads where all kinds of consumer brands advertise to Flipkart users; by getting brand partners such as Xiaomi to spend on marketing on the shopping app; and by charging fees for promoting products of third-party sellers. For instance, a third-party seller can pay to have its goods shown first when a shopper uses certain keywords to search on the app; if a user searches for “casual shoes”, a seller can ensure its products are shown prominently by paying extra.
Flipkart’s move towards a diverse revenue model is the third transformational change the company is trying to effect in the way it operates. Over the past six months, it has been accelerating a shift to the marketplace model from an inventory-led business. The company may also do away with its website and become an app-only retailer starting September to dominate mobile commerce, according to various media reports.
There are some potential synergies between these three moves. Getting ads from sellers is only possible if Flipkart builds a large marketplace where tens of thousands of businesses compete for premium positioning. Again, brands will put up ads only if there’s a large captive audience on the app.
Since Flipkart gets more than 70% of its traffic from its mobile app, shutting its desktop platform may potentially force the rest of the shoppers to switch to the mobile app. The firm, which has a user base of more than 30 million, is betting that getting more shoppers on the mobile will, in turn, prompt advertisers such as Hindustan Unilever Ltd and Samsung to shift their spending towards its app.
However, there are risks to this approach.
Implementing three big strategic changes together will be tough for Flipkart, even as it tries to assimilate several new senior hires, experts said. The company has recruited a new tech leadership team and other senior executives in operations, supply chain and other functions.
Shoppers are also typically fickle when it comes to retaining mobile apps. Various studies show that users delete many of the apps they download. In India, there are more than 10 shopping apps of well-known e-commerce brands. Besides, Flipkart almost certainly will lose some sales to rivals such as Snapdeal, Amazon India and Jabong, which haven’t abandoned their desktop or mobile website platforms even though these companies, too, get a majority of their traffic from the mobile.
“Transforming a company is possible, and technology giants like Amazon and Google are good examples of how to move into new businesses in a swift and sure manner,” said Raja Lahiri, partner at Grant Thornton India, a consultancy. “Adding revenue streams like ads makes a lot of sense for a large e-commerce firm because it has a large audience that can be monetized. Moving from an inventory business, though, can be a complex process because it requires resetting relationships with vendors, which isn’t a simple task.”
As Flipkart moves into ads, some of its rivals will have the advantage of tapping China’s Alibaba for advice. Alibaba is close to investing in Flipkart’s largest rival Snapdeal, according to reports in Mint and other publications. Ant Financial, an arm of Alibaba, is a large investor in another Flipkart rival, Paytm.
