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TODAY’S STORY
4 Nov
,
2022

Building the trusted apple tree

Stoa Daily Challenge #15

India’s largest e-commerce player, Flipkart, has just unveiled its plan to enter the metaverse.

Venu from Flipkart's Innovation Lab is responsible for growing Flipverse. The cross-functional team she is leading will have to

1. Get more users to visit Flipverse.
2. Engage them longer across stalls.

Venu has listed duties to help her team reach these goals, but she is unsure how to allocate them.

Will you be able to step into her shoes and help her prioritize her tasks?

Play the challenge here.

Now, to today's issue.

____

I want you to think about why we use e-commerce platforms. And more importantly, I want you to think about what experiences we have with these e-commerce platforms that make us eventually prefer one over another.Take two minutes to think about this.

Done?

Okay, was your answer related to one or more of the following?

  • Better collection of products
  • Product discovery
  • Lower Prices
  • Better UX
  • Great review system
  • Convenient return policy

If it was, then I would go out on a limb and tell you that your answer — however accurate it might be based on your own experiences and people you know — is still incomplete without this missing ingredient:

Trust.

Marketplaces are successful only when they serve as facilitators of trust.

And you would not use a marketplace even if it had all the above listed criteria going on for it and more, if you didn't trust it to do right by you. This is truer in the case of B2B e-commerce versus B2C. Here are some reasons why:

Most B2B buyers order large volumes of goods versus an average individual consumer. They are often buying in bulk, with quantities reaching several thousand or more. A Croma may place an order of a 1000 earphones with a Xiaomi or a BoAT. In contrast, B2C consumers will walk into Croma and buy one single pair of headphones.

In order to reduce the risk in ordering large volumes that cost a lot of money, B2B buyers prefer working hard to build long-lasting business relationships. In fact, it's common for B2B suppliers to have repeat loyal buyers due to these strong relationships built on trust.

Why do businesses invest in building relationships with their suppliers more than individual consumers?

Because B2C buyers aren't running a business. They do not need a consistent supply of the same inventory at a predictable price. A B2C consumer buys on a whim and impulse. You see a good-looking pair of shoes on Amazon and you're tempted to buy it. And compared to a wholesaler, you enjoy a larger spread of choices as your requirements are smaller: as an individual consumer, you are not going to place a bulk order of 10,000 pieces.

But for businesses, buying behaviour looks very different.

B2B buyers often have various responsibilities and want less hassle. They are on a website to buy, not browse. Their specifications are clear and the price they're willing to pay for the product is also more or less clear. They log into their corporate account to buy the items they need and quickly move on to the checkout process. And once they build trust with a supplier, they stick with them due to trust and reliability.

In short, B2B buyers want boring predictability. B2C buyers want variety and novelty.

This makes building trust all the more crucial for B2B e-commerce than B2C. The wholesale order amount is much larger, and thus naturally involves way more risk. There's a lot more money at stake.

Shipping huge volumes is in itself another expensive logistical challenge, which naturally makes returns an expensive and time-consuming affair. Due to this, B2B customers often highly value delivery service quality as compared to B2C. They also take delivery timelines a lot more seriously as inventory management can be a problem both when a business has both surplus inventory or a deficit.

So, how can B2B e-commerce design a trusted apple tree keeping these preferences in mind?

Let's take the example of Udaan.

Started in 2016, Udaan is a B2B e-commerce platform for small- to medium-sized businesses offering end-to-end solutions. Local retailers anywhere can discover and buy stock on Udaan from wholesalers or manufacturers across the country and avail of the company’s logistics and credit services.The platform boasts of a network of over 3 million registered users and 25,000-30,000 sellers across 900+ cities in the country covering more than 12,000 pin codes. The platform has over 1.7 million retailers, chemists, kirana shops, HoReCa, farmers, etc. doing over 4.5 million transactions per month, making udaan a leader in the b2b eCommerce business.

Here's how it works:

  • The buyer (retailer) selects a product, places an order with sellers (wholesalers, brands and manufacturers) who pack it and dispatch it through udaanExpress — its fulfilment and delivery service.
  • The buyer pays on delivery unless it is a credit transaction facilitated via another offering by the startup called udaanCapital focused on lending to SMEs to expand their business.
  • The online platform itself, meanwhile, provides SaaS offerings such as analysis of real-time marketing feedback through app data analytics enables brands and manufacturers to make well-informed decisions about product launches and testing of new products in different markets.
  • While the app-based pricing system gives better pricing control, the product listing advertisements and in-app advertisements encourages manufacturers and wholesalers to reach their targeted, specific, and ready-to-purchase retailers on the platform.

To source demand, the company has an army of "feet-on-street" employees who individually manage 50-100 shops each in a specific category and location.These employees serve as on-ground sales reps, account managers, and return request troubleshooters. Their activities include:

  • Signing up buyers, including doing their KYC
  • Visit buyers 2-4 times a month to generate demand and help them buy from the platform
  • Solve issues around seller payments, returns, credit issues, etc.

Historically, the startup has faced some of the following problems:

It hasn't been able to tie up with big consumer goods manufacturers like Hindustan Unilever and Britannia, which means it can only serve a limited volume of goods to retailers. To mitigate this issue, the startup has decided to go wide with the kind of suppliers and buyers it has on the platform, which means sales reps can't focus on single categories and optimize within them, which reduces their overall efficiency.

The on-ground sales staff is a major cost center for the company which, even in the best case, can only scale linearly as the company fleshes out its network of buyers. As each store has to be served individually, there are no economies of scale to be had.

In contrast, the startup's recent decision to expand warehouse capacity by fivefold to 50 million square feet across several states in the next 7- 8 years paints a more lucrative picture. These warehouses scale well with increasing supply and demand, as their costs get amortized over a larger user base. As sales volumes and velocity increase, the per-unit costs of seller pick-ups, warehousing, and logistics steadily drop.

But even here, the variety of products that Udaan serves on its platform poses a challenge. Specifically, there are many categories of products that need different warehousing requirements and cannot be stored in the same warehouse. For example, you cannot store fresh produce with high perishability with goods like electronics or clothing. You need separate warehouses for these which increases fixed infrastructure costs.

Return and refunds are another major source of expenditure as well as corrosion of trust between buyers and sellers on the platform.

As per The Morning Context,"Take the example of the footwear category. A minimum order is eight pairs of footwear. Shipping costs via Udaan's own logistics will be between Rs 400 and Rs 500. Udaan does not charge more than 10% of the order value for delivery, capped to Rs 100. Eight pairs of shoes will cost a store let's say Rs 1,500, so Udaan gets just Rs 100, a fourth of its delivery costs. The assumption here is that as the minimum unit order threshold increases, costs can get more in line with delivery charges. But if the ordered product is low-value, e.g. cheap rubber slippers instead of leather shoes, it is a losing battle."

This is a double-whammy for the startup in terms of operational overhead if the return rates are high. If you read the Return FAQ document on the company's website as of October 2020, here's what the policy states with respect to the proof the buyer needs to provide in order for the return request to be processed:

"At the time of making a Return Request on the Platform, Buyer will be required to provide appropriate supporting documentation/ proof including without limitation:

  • images of the Product(s) indicating the issue in the Product/ shipment delivered. The images need to capture the following: (a) the shipping label with Order ID; (b) Order details; (c) packed shipment; (d) issue observed by the Buyer in the Product; (e) damages to the Product; and/or (f) the IMEI number (in case the Product is a mobile phone);
  • unboxing/ normal video clip indicating the issues in the Product/ shipment delivered. The video clip needs to capture all sides of the package, order details, shipping label, quantity of the Product, damages in the Product, IMEI number (in case of mobile phones), any tampering with the outer box etc.;
  • copy of bill/ tax invoice for the Product received.

If any further information or clarification is required from the Buyer, we will contact the Buyer.

Depending on the category of Product, the Buyer may raise a Return Request for any of the issues as set forth under paragraph A.2 above within the timelines prescribed below:

Upon receipt of a Return Request from the Buyer, the same will be displayed on the Platform. We will internally scrutinize the Return Request raised by the Buyer and notify the Seller. The Return Request raised by the Buyer will either be approved or rejected and the same will be communicated to the Buyer."

As you can see, the process involves a lot of data in the form of images, videos, and documents being sent back and forth to initiate a return process.

Suffice it to say, each of these steps may cause a lot of miscommunication and misunderstanding leading to a lot of back and forth between the buyer and the company, leading to delays in the return and refund. This also creates a bad experience for the buyer.

Some on-ground problems I can think of:

  • The on-ground staff may not be able to always figure out what is wrong with the product and would have to take the buyer's word for it
  • The photos/proof sent by the buyer can be faulty, i.e., badly photographed, missing details, bad articulation of the problem, etc. which can make verification more time consuming
  • It might not be possible to identify in some cases if the damage to product was caused during shipment, due to the buyer's own storage practices, or before the package even left the seller

An answer by a Quora user provides more insight into the kind of practical challenges that can arise while dealing with these refund requests.

In short, the problem of returns is a hairy one in the B2B context as reverse shipping returns is both expensive and time-consuming, especially if the purchase is happening across two far-off states in the country.

Is optimizing such a process for shorter times even a good idea without first entertaining the question of how to minimize returns in the first place?

In my opinion, the goal should be to reduce the customer’s need or desire to return instead of thinking about how to make the return process more efficient. The best way to cut the expense and operational overhead of returns is to prevent them from happening in the first place, and then to create disincentives for sellers to defraud buyers and disincentives for buyers to place return requests at their whim and fancy.

For sure, there can be some optimizations done on the level of technology and route optimization to reduce reverse shipping and refund times for the seller and buyer respectively, but the right level to think about the problem is how to minimize the buyer's propensity to return in the first place.

If you were to look at the data, you will figure out a few key reasons for e-commerce returns:

  • The product description does not match the item, the product looks different in person
  • The visuals on the listing are updated without an update in the listing details or vice-versa, leading to bad purchases
  • The product has missing parts and is thus rendered useless
  • The product was handled badly during shipping, leading to damaged packaging which renders it unsellable further up in the chain

The first 3 reasons can be easily taken care of by helping sellers who list on the platform to do a better job at creating better listings that are more representative of the product.

Notice that serving refund requests scales a lot more badly and creates a lot of overhead versus helping sellers create a better listing in the first place, which is a one-time fix.

With respect to products getting damaged during shipping, the company can invest in better logistics equipment and personnel that ensure safe delivery of goods — which is again — an infrastructural and educational investment that needs to be done once.

The essential thing to notice here is I'm suggesting solutions that are pre-emptive versus corrective.

Pre-emptive solutions need to be designed once and they avoid the entire category of problems in the future, while corrective solutions have to be executed every single time an error occurs in the system.

A single product listing done well saves time and effort on all orders received on that listing. Precaution is better than prevention. And it's vastly better for trust-building as even a successful and seamless execution of a return request is a lot more inferior than the buyer not having to go through the hassle in the first place.

When you're dealing with large order volumes and payments, tempers can flare up quickly, as the stakes are higher: there are entire businesses to be managed, versus a single individual.

If I were posed the question of optimizing the return process, I would honestly ask if we could do something to avoid having returns in the first place.

The latter is just a solid strategy that helps you design a platform that builds trust rather than patches and resolves events of mistrust: the former being crucial if you wish to survive in the B2B e-commerce space and command healthy margins from your sellers in the long-term.

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