NOT AN EASY GAME – Profitability vs Economy of Scale in E-Commerce !

From day one at bluegape.com, our strategy was to build a profitable company. Even I wrote down a post at Pi that how I want to build my e-commerce company. After six months of hard work we somehow reached to 10 transactions a day. But even then that profit was not enough to support our bare minimum expenses of food, beer and rent of flat.

We started up with couple of lakhs in our bank account and even after making every transaction profitable, the money in our account was going down. I sat down with pen and paper to calculate that how many transactions a day can take us to profit that can cover our expenses of food, beer and rent of flat (Provided my rockstar girl bears all the expenses of our date, Thanks to her!). I figured out that almost 25 transactions a day can make a team of 4 rockstars self sustainable. Believe me, without spending dollars on marketing, it will take 3 more months to reach to 25 transactions a day. Even then we will be just self sustainable (My rockstar girl still have to bear expenses of our date).

Last Week, we changed our strategy from being profitable in each transaction to build a scale. We ran a marketing campaign with freecharge for Satyamev Jayate t-shirts. We did on an average 70 transactions a day in the last whole week. Let me tell you what has changed in this week :

  1. Energy in the team was phenomenal. It looks like a new customer is getting registered on site every moment. Everyone was cheering up.
  2. Tone of our vendors was completely different from when we used to go to them with 3-4 T-shirts, posters and mugs to print.

We acquired many new customers in one week and then we reached them all with a follow up call. What we realized is that some of them will never return to our website because they just came for the discount. But there were almost 40% of customers said that they would love to buy again if they like our service.

I am still with my point that value creation is the only key to build a great business but may be one has to use such marketing campaigns to take the word out quickly. If they will like our services, we will get our loyal customers and that's the whole game.

The last whole week led me to think if it’s good idea to focus too much on profitability or focus on reaching to a scale. What’s your thought?

P.S.: I still tweet @sbaghla !

Originally posted at bluegape blog here !

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Comment by Snehil Khanor on June 10, 2012 at 11:05am

Its a tradeoff really..of acquiring customers v/s gaining loyalty..
best you can do is acquire customers through these campaigns.. and gain loyalty by your awesome services.. :)
And to plan campaigns keep in mind that Customer acquisition cost(CAC) must be less than Customer's Life time value(LTV) [Everybody know this.. but it seems like no1 actually implement or maybe know1 actually care as all they care about is increasing no. of users to show that count to the investors]

BUT

also keep in mind that only 30-40% of the acquired customers will return.. so to remain profitable.. u'll have to plan so that CAC of 100 new customers is less than LTV of those 30-40. Thats a thinker.. and if you can plan this out.. no1 can stop you from being profitable :)

Comment by Nishant Agrawal on June 8, 2012 at 10:31pm

When your sole focus is on scaling up, you wont have an edge. Why won't someone else sprout up and sell cheaper than you? Barriers to entry are nil. Your business model will fail.

Growth will be slow if your focus is on profitability. But you can pay your bills. And above all, you will have strong fundamentals. No one can take that away from you.

Try to differentiate on other factors. Bring in something that others cant. T-shirts with amazing one liners, creative campaigns, mesmerizing designs. Force people to pay a premium. 

Satyameve Jayate had grabbed people's attention and you took advantage of that to sell T-Shirts - that's nice! Exploit people's current focus - that's a good strategy.

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