Startup City Magazine

Growth of Tier II & Tier III Cities

By Sanjeev Bhatia, Co- Founder, Only Mobile

Sanjeev Bhatia, Co- Founder, Only Mobile

Headquartered in Surat, OnlyMobile is an e-commerce startup which segregates itself from their contemporaries in the e-Commerce space include non-predatory pricing policies, wide reach via a network of ware houses and call centres, genuine and company authenticated products and a unique 30-day price protection policy for consumers

After the biggest block buster peak season period of Diwali 2016, almost all major market places have shared that they have received the most number of orders from the tier-III and onward towns. And I am sure, if you have just started your new e-commerce venture you would have analyzed your sales trend, too. You realized that probably that is not your case and you are forced to think that you are going wrong in chasing the right set of customers? 

But is it really worth to focus on tier-II or tier-III during the initial period of your set up? I guess, not. Let us understand why I advocate focusing on metros & tier-I/II cities. 

The Reason why Tier III & Tier IV Cities are Growing Fast

Typically, whatever retail revolution has happened in our country, most developments have taken place in the metros and tier I & tier II cities. Tier III and onwards cities have not yet gotten access to major brands and advanced retail treatment so far. However, there still exists a population out there which is increasingly looking at various options and choices. They are growing increasingly aspirational. 

Thanks to increased penetration of telecom operators and falling prices of smart phones and internet tariff rates, now more and more people from tier-II towns have access to multiple shopping options outside their geographical boundaries. Naturally, these towns and villages do not have the access to most of the products that are available offline, but those that are available online.  

So, if they are looking for a nice pair of shoes or a laptop bag or mobile phone covers or a mobile phone, they make the entire purchase decision basis the representation of the product on the company’s website.  On the other hand, the metro, tier-I/tier-II city customers have still got the option of the buying the product offline, at a retail outlet. Therefore, the purchase decision made by people living in the metro cities is much more informed than their Tier III counterparts. 

Many brands do not have a well-entrenched distribution network in our country. Leading handset brands such as Oppo or Vivo have yet not reached to more than 6000 pin codes. Similar is the trend in case of apparel brands and many other such verticals. This could be because of various reasons – one could be the sheer lack of sustainable potential or continuous demand for the products/design etc. Moreover, retailers, dealers and distribution partners operating in Tier III towns have the tendency to keep their retail margins pretty high- making products costlier for consumers. 

These customers, when they looked at your site, they realized that you have got great designs or catalogue and off course your prices are very attractive and they placed orders with you. That is the promise of being online. 

Orders are Coming Online

This is a good thing as long as you are having a profitable business. If you are working in electronics or branded garments vertical – you have got very little margins to play with and if you are in a private label – your margins are high but so is your investment in the inventory. 

Delayed Deliveries 

Logistics is a major issue while serving Tier III cities and towns. Most e-commerce logistic solution providers are well stretched within metros, tier-I & tier-II cities and towns but they have got very limited presence in tier-III towns. This means that your ordered item is not going to reach you within 3-4 working days. It may take 5 days to 9 days. Naturally, this is quite a long period and this increases chances of order returns. Customer may loose the interest or may opt for something else. Even sudden drop of price from your competitor may also affect the delivery ratio if deliveries are prolonged. Now, calculate how much you are going to pay more to your shipping partner when you get your shipped ordered item back. Additionally, there is the cost of wasted packaging material. 

COD Remittance Charges 

Businesses in Tier III cities and towns chiefly thrive on Cash on Delivery model. Therefore, effectively you are paying higher remittance charges and commission to your shipping partner rather than your payment gateway partner. So, per unit profit is lesser in COD orders. Naturally, you have the option to opt for the pre-paid option only for these markets but then your business will go down no less than 75 percent at least in the beginning. COD is a friendly devil of Indian e-Commerce system. 

Damages/Loss During Product Return 

Certainly, when your delivery period is quite long, your returns will be even longer. One estimate suggests that at least 5 percent of the returned orders will be no longer in sellable condition again. You will either scrap the inventory or will sell at a loss to some other place. 

Customer Returns 

This is the most burning issue in Indian ecommerce. A tier-III customer is taking the purchase decision about a product basis the representation of the product that is on the website. Despite your best efforts, you are not going to overcome the language barrier. There is always a higher probability that your products will not be liked by customers once they receive the product. They shall opt for the returns option,  if you have. If you do not accept the return request – you are going to lose him forever and if you accept the return request then you is going to struggle with used, damaged or non-sellable inventory. 

Entry Tax Burden

Many states have got entry tax – Rajasthan, Madhya Pradesh, Jammu & Kashmir, Uttar Pradesh, Jharkhand, Assam and Gujarat to name few. Once your shipped item is coming back to you, you are not going to get the refund of your entry tax which your shipping partners are paying on your behalf and passing the same to you. 

It makes sense for Big three market places to go beyond metros; tier-I and tier-II since they are into hyper expansion mode and have got kind of bottom less pockets. Also, in their cases, the biggest burn is over the shoulder of the seller,  not on them. But in your case, it is directly you. Thus, if you go through the delivery ratio and net unit economics of orders coming from tier III cities and towns, the pros and cons will be better understood. 

Tier III Markets are Nonetheless, Important!

They are important so being careful is the only way out. It requires the setting up of a dedicated call center, which can call these customers before processing their order s to ensure that the customer has made an informed purchased decision and that it is not an impulsive buying decision. This will also add on to your relationship with the customers which will in turn help you to conduct a more profitable business. Also, you should be very careful about the complete shipping address of these customers so that logistics nightmares are taken care of effectively. 

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