Demystifying the inventory-led and marketplace e-commerce models

There have been so many changes in the Indian e-commerce industry since its beginnings in 1997. Today, Indian e-commerce has developed itself in many different areas. It was predicted that the e-commerce industry would grow to $16 billion by the end of 2015, and this was a successful prediction. The fact is that all the major changes of the industry took place in the period of the last five years.

Indian e-commerce is about to complete a successful 10 years. The inventory-led and marketplace e-commerce models are both major parts of the Indian e-commerce industry, but play different roles in the market. There are some differences in the functions and advantages of these models, and they, therefore, serve different purposes. The e-commerce industry has experienced many different changes. EBay was the first participant in this industry. Afterwards, Flipkart entered as a homegrown player and changed from inventory-led to a completely efficient marketplace model. Snapdeal shifted from an everyday deals site to an internet-based marketplace. The market would later also see the entrance of American e-commerce giant Amazon.

Difference between these two e-commerce models

The new FDI policy rules and regulations in the e-commerce market have permitted 100 percent FDI in the e-commerce marketplace model under the automatic route. However, no FDI is permitted in the inventory model.

• Marketplace: A true e-commerce marketplace adheres to the standards and directions of a zero inventory model. Some classic examples are Naaptol, eBay and Shopclues. The e-commerce marketplace becomes a digital platform for consumers and merchants without warehousing the products. Marketplaces do offer shipment, delivery and payment help to merchants by tying up with some selected logistics companies and financial institutions.
• Inventory: Shopping websites where online buyers choose from among products owned by the online shopping company or shopping website take care of the whole process end-to-end, starting with product purchase, warehousing and ending with product dispatch. A few examples of such are Jabong, Yepme and LatestOne.com.

Seller opinions on Marketplace vs Inventory-led

Marketplaces are hard to execute due to the fact that they require satisfactory and synchronised liquidity on the purchaser and merchant sides. Once satisfactory liquidity has been built up and the 'flywheel is turning', these organisations show solid system impacts (the fact is that a market that has the most purchasers will attract more dealers, and the expanding base of vendors will in turn draw in more purchasers). So, once a marketplace becomes efficient and dominant, it scales quickly and frequently displays ‘winner take all' qualities. Furthermore, due to the fact that marketplaces are basically technology platforms that offer tools to purchasers and dealers to engage and a trusted atmosphere that encourages transactions and price discovery, they can scale quickly.

In India, there is no doubt that being in complete control of the product (i.e. having physical warehousing or inventory) empowers a player in the space with an unrivaled post-purchase shopper experience. If you have the product in your complete control, then, supposing that your systems and procedures are robust, you: (i) have total transparency and visibility into your stock level, (ii) know where the product is physically placed, and (iii) control the picking, packing and shipping procedure. This implies that you minimise the probability of accepting the order at the time when you don't have the product. It additionally implies that you can streamline dispatch time. Being in control of the product empowers you to deliver quicker, with a higher level precision, and respond efficiently to client inquiries about delivery and shipping status.

What are these two models?

Whenever an e-commerce organisation maintains its very own distribution centre to stock inventory and dispatch orders straight to the customer’s doorstep, it is called warehouse show or inventory-led. When Flipkart started, its operations followed a warehouse model, with WS Retail playing a central role. Over time, they embraced the marketplace model to scale range and variety.

If an e-commerce organisation encourages a dealer to set up a store, display products, maintain stock and send orders directly to clients, it follows the marketplace model. The platform facilitator (the e-commerce organisation) charges a commission on orders (running from 5 to 30 percent on the basis of class and category) from merchants. Popular e-commerce organisations like Amazon, Flipkart and Snapdeal follow the marketplace model.

Pros and cons

Marketplace

• Pros –Highly scalable
• Investor-friendly
• Wide product portfolio
• Large number of sellers
• Cons –Difficult to conduct quality checks
• Shipping costs are higher
• Difficult to build customer trust and loyalty

Inventory-led

• Pros –Speedier delivery
• Better quality control
• Best customer experience and trust
• Cons –Difficult to scale (but not impossible)
• High fixed costs
• Restricted cash flow

Which e-commerce model works best in India?

When we talk about India, we see that a huge part of the population has low trust in the internet. Usually, the marketplace model is very costly and troublesome. The market-based stock model usually grasps the quality of customary physical models, with minimised exposure to the hazards of sourcing and warehousing. Substantial scale stock and high productivity don’t appear to go together.

For instance, for a 30 percent gross edge business, the working costs stretch to around 45-50 percent. Marketplace pioneers, like Myntra, Amazon and Flipkart, are working in the marketplace space for extra customers, expanded benefits and reduced inventory-based glitches.

The e-commerce market initially followed the inventory model. However, due to the current Indian FDI laws, Flipkart and Amazon are moving towards the hybrid model, practically being marketplaces while still having a stake in large sellers on their platforms. This model is being seen as a “beyond any doubt approach” to profitability, as there is less capital requirement. It also gives the right level of control towards client experience.

Experienced experts, who have been watching the development of the e-commerce market in India and keeping a tab on the foreign e-commerce marketplace model, deduce that the e-commerce business in India is gradually moving to the marketplace-led model from the inventory-led model.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)