One of the most popular documents floating around in the early 2000s was "Vision 2020", every industry had its vision document. Funnily enough, 2020 was a standout year, but for all the wrong reasons. The one section in those vision documents that industries were dragging their feet on was digitization; 2020 changed that. Better late than never, right? Anyway, the 2020 digitization drive did not leave anyone untouched; even the humble corner kirana shop was online selling essentials.
Small business owners are smart and adapt fast when needed. In the early days of the pandemic, they quickly moved to a PDF + WhatsApp + Phone system to generate and manage order flow. As the lockdown eased, the shops could see more categories, but PDF + WhatsApp continued. Many apps emerged to help the stores sell online, but the ones that witnessed sustained traction allowed the stores to put up their catalogue and sell in minutes. The kirana shops, footwear stores lapped up the tool. It was free, after all. These new apps are called dukan apps because they target small store owners - this is not standard terminology, but let's stick to it for lack of a better alternative.
The dukan apps created a buzz in the shop owner circle and in the investor circle; millions of dollars have made their way to these apps. I dismissed these apps earlier as another misplaced investor enthusiasm, but there is merit in taking a closer look when something feels absurd. Also, offline shops are the biggest, last-mile layer in the retail value chain; anything that reduces transaction data opacity in this space is welcome.
So that's what we will do in this article and explore the space and understand the cause of enthusiasm around these apps.
Side Note: One dukan app is very curious - MyKirana. This is an app that is promoted and managed by HUL. The Google Play Store numbers indicate that the app has a million and more downloads. There is not much press around this app, and not much is known about its traction. The app features in HUL strategy for the future, so it will be interesting to observe it evolve. It might be HUL's attempt to obtain first-hand knowledge of digital commerce.
Side Note: Both Zomato and Swiggy have scaled down their grocery marketplaces, so the field is open for dukan apps. Actually, dukan apps can enter the small restaurants and eateries space.
New-market Disruption of Dukan Apps
We use the word disruption for everything new, and that's not completely correct. Fortunately, there is a way to model it - Clayton Christensen's provides a good framework for it in his book The Innovator's Dilemma. Christensen describes two types of innovations that can be considered disruptive - low-end disruption and new-market disruption. We will look a little bit of theory that will help understand why the dukan apps are a new-market disruption.
Low-end Disruption
The low-end disruption opportunities emerge in mature categories and markets. Here the incumbents getaway by offering one-size-fits-all products. As a result, customers who cannot use all the product features are unwilling to pay for feature bloat. Such customers hunt for cheaper, functional alternatives. A simple, functional, cheaper product disrupts the lower end of the market. This is low-end disruption - such disruptive products improve overtime and acquire customers in higher tiers.
Let's look at a cliched yet easy example of shaving razors: Gillette razors have been the gold standard for decades, but innovation was restricted to adding more blades or making the handle more comfortable. Many customers are unwilling to pay a premium for over-engineered cartridges; some still pay reluctantly. There had to be a better option. We have Dollar Shave Club and Harry's. Both offer a simple purchase experience, with a standard product at an affordable price point. HUL acquired Dollar Shave Club for a billion dollars. Edgewell wanted to acquire Harry's in another billion-dollar deal, but the deal was blocked. Both the brands received a lot of customer endorsement and continue to grow.
Side-Note: We don't see a Dollar Shave Club, Harry's equivalent in India. We do have insurgent brands in the category, but they are as pricey as Gillette. That said, there are a couple of brands in functional, low-price game, e.g. Zlade
New-market Disruption
The innovations that target non-consumers are new-market innovations. The non-consumers were excluded earlier because they could not access the product or could not afford it. We use the term "New-market" because innovation expands the customer base by bringing new consumers to the market. The new-market disruptions come about because of some transformational changes in technology, cost structures, or rapidly changing market conditions. The handheld Sony Transistor Radio was a new-market innovation - it had a lot of static but is was portable and affordable compared to vacuum tube radios.
That said, a new-market innovation's success is not just introducing a revolutionary product but also improving overtime to acquire customers from incumbents. The new-market disruption has the potential to put an incumbent out of business.
Let's look at a more recent example of TikTok. Creating content for YouTube is not trivial. The creators need a range of tools - a camera or a good mobile phone, tripod, editing software etc. Not everyone can spend, and this a barrier for an average creator. TikTok changed everything; you only need a mobile phone. The creators shoot a video, usein-app editing, add background music and you are done in no time. Suddenly content creation was cheap and easy. Many of the early TikTok users were folks from Tier II/III/IV towns and cities. Within months, TikTok was the preferred platform for content creators; even steady YouTube creators joined TikTok to build a following.
Dukan apps and New-market Disruption
Dukan apps bring digital commerce to offline shops that were excluded earlier. Unlike Internet 1.0 solutions of Lead-gen, online ads etc., the dukan apps are all about transactions. What enabled this disruption? Advances in mobile software frameworks, cheap data, UPI and the pandemic.
The dukan apps make it simple for small shops to upload a product catalogue and start selling in minutes - no fancy features, self-service on a mobile phone. This was not possible earlier. Estimates suggest, nearly 3-4 million shops are already using these apps.
Side Note: Most new-market innovations are risky as the underlying technology shift or market shift is unproven. As a result, the competition early on is not intense. But the mobile app market is a bit different; the competition is intense from the get-go. The cost of building software is really low, and what matters is distribution and retention. The apps that crack distribution and retention will survive. Others will perish. The churn will be quite high, so it’s urgent to identify a steady customer segment that pays for the service.
Side Note: Look back to 2013-15, we can spot another new-market disruption, the one that brought sellers of digital goods online in India. There was a lot of friction in selling digital work such as graphic illustrations, presentation templates etc. New apps such as Instamojo simplified payment by wrapping the complex, archaic payment process into simple APIs. With time, pure payments became easier and low margin business, and this forced the early entrants such as Instamojo to move up the value chain. Later, Instamojo launched financing, shipping aggregation etc. and continues to target small businesses and higher-tier customers.
The dukan apps will not find growth by just digitizing kirana shops or facilitating small entrepreneurs; they have to progressively acquire larger customers who are willing to pay for their services.
We can draw a lot of lessons from Shopify to help us understand the dukan opportunity better. Shopify started as a simple SaaS that made selling online easy, overtime it has grown to become a commerce behemoth.
Shopify
Shopify started as a simple SaaS solution that enables a business to quickly set up and run an online retail store. Shopify started as a snowboard shop in 2004, formally launching the SaaS product in 2007. The initial target customers for Shopify were entrepreneurs and small businesses. As the market matured and technology improved, Shopify moved up the value chain to serve larger enterprises such as Pixar, Tesla, Allbirds, Heinz, Staples and Gymshark.
Today Shopify's GMV stands at USD 120 billion, and the bulk of the customers continue to be entrepreneurs and small businesses, nearly 1.5 billion of them.
What makes Shopify so successful is its sharp focus on their customer, the merchant. For Shopify, a merchant is the centrepiece of the product development strategy. The objective is simple, do everything to help the merchant earn more money.
Over time, Shopify has built a constellation of services and a strong ecosystem of partners to help its merchants. Here is a brief overview of the services:
Subscription: Merchants pay for the software that enables them to run the store online and manage the backend operations.
White-glove Service: Shopify provides its large merchants advanced tools for automation, payments and faster customer service. Shopify also fostered a huge partner ecosystem that can develop custom solutions for its customers.
App Store and Ad Revenue: Merchants can extend the base functionality of Shopify software by purchasing third-party apps on the Shopify App Store. The Shopify APIs are available for developers who build apps for various use-cases. A related source of revenue for Shopify is feature and search result ranking on the app store.
Payments and POS: The Shopify payment gateway is free for all customers, but other payment gateways have to pay a fee to acquire Shopify customers.
Pay Later: Shopify also offers an EMI solution or "Buy Now Pay Later" service for shoppers. Shopify earns a percentage of the transaction value for offering this service to its merchants.
Shipping Aggregation: Shopify aggregates logistics providers for its merchants and gets better deals for them. Of course the logistics providers pay Shopify a platform access fee.
Fulfilment Network: It is a network of automated warehouses built across the country to fulfil orders fast. Merchants are willing to pay for storage and fulfilment to improve customer experience. What sets Shopify apart from other software providers is their investment in real infrastructure like a fulfilment network. Such infrastructure makes the both buying and selling more predictable.
Capital: Shopify offers its merchants a simple, fast, and convenient working capital solution. Shopify purchases a designated amount of the merchant's future receivables at a discount, and the merchant remits the fixed percentage of daily sales to clear the advance or loan.
Shop App: Aggregator platform for all Shopify sellers. Shop App is free for now, but it will open a lot of revenue streams for Shopify.
These revenue streams have evolved as Shopify grew with its merchants. Shopify’s focus on making commerce easy for it’s merchants powers it flywheel.
Shopify's journey as both a product and a business model gives us a template to evaluate our dukan apps. The mobile-first approach of the dukan apps is a great start, and more will be built on this foundation. Let’s try and visualise the possible revenue streams for these apps.
Monetizing the Digital Dukan Platform
Straight away, we have a problem; the dukan apps are free for every - no paying customer. Free makes it a little hard to ascertain the value merchants attach to the apps. Anyway, the possible advantage of making the app free is to get as many merchants and figure out a set of merchants that’s more sticky and build a product around this segment.
Assuming that merchants continue to be the focus, here are some possible monetization avenues for dukan apps. We can split them into two categories, earn money and improve business. The merchants will adopt anything that helps them earn more money over something that saves money or improves efficiency.
Earn Money
Subscriptions: Let's assume that the base version of the app continues to be free. The paying customers might be the bigger shops, independent retail chains.The kirana shops have a fixed market, and many owners are unwilling to expand their base; this makes standalone kirana shops an unattractive market in the long term. The best bet for dukan apps is to target other non-food categories, acquire bigger shops.
Side Note: Jio Mart model for kirana-as-a-fulfilment-centre might work as shops are assured of additional revenue with little investment and no burden of servicing the customer.
Category Subscription: With basic functionality in place, there is merit in building solutions by verticals, e.g. beauty, fashion and food. The selling and buying experience is different for each vertical, so one-size-fits-all solution will be undesirable. Also, some interesting categories might emerge after an initial churn in the customer base.
Side Note: Another opportunity for the dukan apps is to go the Dumpling way - enable entrepreneurs to set up curated stores (one or more categories) and serve niche customers. Something similar to what Meesho is doing but offline.
Video-based Selling: Bring in the typical bazaar experience to mobile, video-based selling is quite helpful. Again, video-based selling might work for certain non-food categories. If the apps make video-selling seamless then they can obviate the need for a lot of jugaad on the part of the merchant. Will shops go for video-based selling? Well, here is an example
Integrations: Bigger retailers want to expand their selling channels, and easier integrations with other platforms help them streamline the process. The dukan app can offer a common backend with one-click integration with platforms such as Meesho, Instagram and other aggregator platforms.
Micro-warehousing: Many non-food retailers with differentiated products may not have multiple branches or fulfilment points, in such cases a dark store might be interesting. Retailers can use micro-warehousing to stock merchandise and deliver in hours, improve customer service and expand the market. Agreed, this seems crazy, but commerce will get there soon.
Payments: Cash is the king in India, and for digital payments, its UPI. Making money on payment service is hard. It might change in the future, but for now, integrating pay-later apps for a fee might be a good option.
Improve Business
B2B E-commerce: Shop-level sales data is a gold-mine for B2B commerce. The dukan apps can integrate with existing B2B platforms and charge a platform access fee. The dukan app can also function as a retail curator for insurgent brands, i.e. profile the stores and enable the brands to select the right stores for them.
The apps can go the capital intensive way and set up their own B2B operation, but this is a less likely to happen.
POS: As these dukan apps move up the value chain to serve larger shops, there is an opportunity to replace existing POS systems. The current POS systems are clunky, need extra hardware, so a mobile-first solution might be interesting.
Shipping: The market for kirana shops is extremely hyperlocal, so there is no need for shipping or delivery. But it's different for bigger shops, retail chains, apparel stores etc. Some of them would like simple delivery options integrated into the shopping experience. So platform access fee as revenue is an option.
Advertisements: Brands are looking to connect with consumers directly and present contextual offers. The dukan apps can be a great medium for brands to connect with consumers.
Micro Apps: Bigger retailers, chains might want to have a mini-app of their own, and it should be easy to convert the catalogue into an app with a single click.
Financing: Finally, the most popular monetization of option lending. The platform can use the transaction data to predict cash flow and extend working capital loans. One option is to float an NBFC, and the other is to partner with the existing NBFC and earn sourcing fees.
So there are quite a few possibilities, and it's not just lending or ads. Of course, predicated on retailers/shops (bigger the better) as the core customer. Free software might lead these apps down ads, lead-gen for fintech alley, not bad but low-margin and extremely competitive. The future direction of these dukan apps depends on the market response and the founder's vision.
Side Note: For most shops, it's easier to adopt a technology, hard and expensive to acquire customers. Our neighbourhood kirana shop has a captive audience, i.e. the shop's phone book, but this is not true for non-kirana shops. So how can the dukan apps make it easy? Building an aggregation app is one way; the other could be integrating with Facebook, Instagram and Google Shops. Shopify has done something similar, launched the Shop App and also integrated deeply with Instagram Shops.
Closing Note
So, the hype around these dukan apps justified? Maybe. We can see the potential; a lot depends on how some of the founders execute and envision last-mile in the next decade. The pandemic in one sense is what the demonetisation did to digital payments.
Yes, India is a completely different market, and the Shopify template might not work, or it might work but differently. But the lesson is to define your customer and build to make your customer successful.
Transaction-centric businesses, i.e. helping people earn more money, work well in India. Unlike in the western markets, in which ad-based monetization works fine. With transaction as the core action, the dukan apps have a great starting point. The last-mile digital commerce is going to change in the next decade, we have to see what role these apps play.
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