How ecommerce startups in India can make the aggregator model work

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The marketplace model was touted to be the cure-all that would bring order to the unorganized retail sector in India. Companies like Flipkart, Snapdeal, and even Amazon, which was late to the game in India, adopted the marketplace model to reduce their capital inventory and rely on volume to make up for the small margins. But that is clearly not working anymore.

Amazon has been ramping up its range of private labels like Symbol, Myx, and Solimo in recent months. Flipkart recently launched Divastri, its own private fashion brand. In fact, the dramatic fall of Snapdeal’s fortunes in recent years has been pinned on its inability to move away from the aggregator model.

The failure of the marketplace model to thrive in an ecosystem that is deprived of plush VC funding is not restricted to horizontal ecommerce players. Uber’s rival in India, Ola, has been investing in building its own fleet for a couple of years now. Oyo, a hotel aggregator, has also been gradually moving away from pure-play aggregation by leasing hotels under its Flagship program.

So, does this mean that marketplaces using the aggregator model are going away? Not really.

But what we are seeing are the limits of pure-play aggregation as a business model. Pure-play aggregation means that the quality and inventory of the products on sale are controlled by a third party. Now, this comes with two problems. First, this offers very little control to the end-seller like Flipkart or Amazon both in terms of what’s on sale and the margins. Second, this provides little scope for differentiation. When customers see the same brands and inventory on all major ecommerce platforms, price becomes the only differentiating factor. A price war has not helped anybody, particularly these tech startups.

A price war has not helped anybody, particularly these tech startups.

Marketplaces have a few advantages inherent to the business model. For example, they offer tremendous opportunities to scale, which is normally unthinkable for a startup business. This comes with very little capital expenditure requirements, which is very attractive for a startup. In short, unless a market explodes like it did with Indian ecommerce, startups can enjoy the benefits offered by adopting the aggregator model.

To make the marketplace model work, startups must first acknowledge that aggregation is merely a stop-gap arrangement until they scale (or the market gets bigger). Businesses like Ola have executed this strategy to perfection and have made sure that they are not vulnerable to the market as much as they otherwise would be in pure-play aggregation.

Marketplace can also work as a strategy to complement your main business. Shopify is a good example of this strategy. The ecommerce platform developer recently launched Exchange, a free-to-use marketplace for businesses, on its platform to buy and sell websites. From Shopify’s perspective, this marketplace is not just to make money but to consolidate their position as an ecommerce platform leader.

It is not wrong to assume that a fair number of startups (including the ecommerce websites on Shopify) don’t take off as much as the founder is anticipating. A marketplace in this case helps Shopify customers sell their business (thus, keeping the store alive) instead of shutting it down. It also helps aspiring entrepreneurs take the plunge by buying existing online stores instead of investing in one from scratch. In either case, a marketplace helps Shopify complement its main money-making business.

Aggregation is here to stay and there will always be a few startups that fill the void in this space. That does not necessarily mean that this strategy will work for businesses of all sizes and industries. The only way to thrive is by using aggregation as a means to scale while staying on the lookout for opportunities to differentiate and pivot.