Written By Ritesh Malik:
The e-commerce industry in India is projected to reach a value of $350 billion by 2030, offering immense opportunities for businesses to grow and reach a wider customer base. However, not all businesses are able to leverage the potential of digital commerce, especially small startups that face various challenges in entering and competing in the online space. Hindrances with respect to financial aspects, access to technology, collaborating with logistics partners, and monopoly of well-established names in the sector, mar their growth. In such a complex and competitive landscape, there is an urgent need to create a level-playing field for industry big-wigs and emerging players.
Financial Constraints
One of the major challenges faced by small startups in going digital is the lack of adequate financial resources to invest in advanced digital infrastructure and services. According to a report by the Ministry of Micro, Small and Medium Enterprises (MSMEs), out of the 100 million MSMEs in India, only about 5 million are registered for selling on e-commerce platforms.
This indicates a low penetration of digital commerce among MSMEs, which account for about 30 per cent of India’s GDP and 48 per cent of its exports. One of the reasons for this low penetration is the high cost of accessing and maintaining digital platforms, which can be prohibitive for small businesses.
For instance, small startups often have to pay high commissions to marketplaces, which can range from 15 per cent to 35 per cent of the cart value, depending on the product category and the platform. These commissions eat into the margins of small businesses, making it difficult for them to sustain and grow their online presence. Moreover, small startups also have to bear the cost of advertising and marketing their products on digital platforms, which can be expensive and competitive, which can further reduce their profitability.
Lack of access to formal and affordable credit options also limits their ability to invest in digital infrastructure and services, as well as to cope with cash flow fluctuations and working capital requirements. According to a report by Omidyar Network India, about 40 per cent of MSMEs in India rely on informal and costly sources of credit, such as moneylenders and relatives. Moreover, many small startups, especially in rural areas, face difficulties in accessing financial services through digital channels, due to factors such as low digital literacy, poor internet connectivity, and lack of trust and awareness.
Technological Barriers
Another challenge faced by small startups in going digital is the complexity and diversity of technological requirements and standards for different digital platforms and services. Small startups often lack the technical expertise and resources to build and manage their own e-commerce platforms or to integrate with existing ones.
They also face challenges in complying with various regulations and policies related to data protection, consumer rights, taxation, and quality standards, which can vary across different platforms and jurisdictions. Moreover, small startups also have to deal with issues such as cyberattacks, fraud, and technical glitches, which can affect their online operations and reputation.
Small startups often face challenges optimizing online visibility and attractiveness due to limited skills and tools, hindering effective product listing, image enhancement, description refinement, pricing adjustments, and rating management
Logistical Challenges
Startups also face logistical challenges while going digital, as it involves high and variable costs, which can account for anywhere between 25 per cent to 40 per cent of the selling price on e-commerce platforms. Logistics is a crucial component of e-commerce, as it determines the speed, reliability, and convenience of delivering products to customers.
However, logistics in India is fraught with inefficiencies and challenges, such as poor infrastructure, fragmented service providers, regulatory hurdles, and lack of standardization. These factors increase the cost and time of logistics, as well as the risk of damage, loss, and theft of products.
Startups could also encounter discrimination in logistics services, with limited bargaining power, as larger sellers receive preferential rates and services, creating an uneven playing field that forces small startups to depend on marketplace logistics or seek less accessible and affordable alternatives
Data and Privacy Concerns
Another challenge faced by small startups in going digital is the privacy and security of their own and their customers’ data. However, data poses significant risks and responsibilities for businesses, as they have to ensure that their data is collected, stored, processed, and shared in a secure and ethical manner, respecting the rights and consent of the data subjects.
Many startups lack the awareness and resources to implement adequate data protection and security measures. Moreover, many small startups also face challenges in accessing and utilizing their own and their customers’ data, as they often depend on third-party platforms and services, such as marketplaces, seller apps, and logistics providers, which may not share the data with them, or may use the data for their own purposes. For instance, some marketplaces may use the data of small sellers to promote their own private labels or preferred sellers, or to influence the prices and ratings of products.
Big Tech Monopoly
Another challenge of startups going digital is the unfair and opaque practices adopted by some dominant marketplaces, which dictate who gets discovered and who doesn’t. Marketplaces are intermediaries that connect buyers and sellers online, and provide various services, such as product discovery, order management, payment processing, logistics, and customer support.
However, some marketplaces also engage in favoritism or self-preferencing practices, which give an undue advantage to their own private labels or selected sellers, while limiting the visibility and opportunities for other sellers. These practices can create a situation where a few marketplaces control the majority of the e-commerce market, and stifle the competition and innovation from small startups.
ONDC: A Possible Solution
The Open Network for Digital Commerce (ONDC) represents a visionary effort to propel the digital transformation of small startups in the e-commerce sector. ONDC aims to establish an interoperable, transparent digital infrastructure for e-commerce. Offering a democratic logistics approach, it provides cost-saving benefits and flexibility for businesses of all sizes. By redirecting traffic responsibility to buyer apps, ONDC reduces customer acquisition costs, enhancing marketing accessibility.
Additionally, ONDC simplifies technological requirements with a standardized e-commerce protocol, easing the burden on sellers and promoting interoperability. Prioritizing enhanced data privacy and security, ONDC ensures secure data sharing with user consent, safeguarding both seller and customer information.
The initiative targets increased marketplace transparency and fairness, eliminating favoritism, and providing equal opportunities for sellers based on objective criteria. By fostering fair competition, innovation, and inclusivity, ONDC aspires to revolutionize the e-commerce landscape, empowering small startups on their digital journey.
Summing Up
The challenges faced by small startups in going digital are manifold and complex, and require effective and innovative solutions to overcome them. ONDC is one such solution, which aims to create an open, interoperable, and transparent digital infrastructure for the e-commerce industry, that can benefit all stakeholders, especially small startups and consumers.
ONDC has the potential to reduce the barriers to entry and increase the competition and innovation in the digital space, by providing small startups with various advantages, such as reduced cost of logistics and customer acquisition, simplified and standardized technological requirements, enhanced data privacy and security, and increased transparency and fairness in marketplaces.
Nevertheless, it’s crucial to recognize that ONDC is not a panacea. Its success hinges on the collective support and collaboration of the government, regulators, industry, and society. The overarching objective is to build a digital ecosystem that is inclusive, accessible, and equitable for everyone, nurturing the growth and advancement of the e-commerce industry in India.
(The author is director at the Alliance of Digital India Foundation)
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