D2C Model - Preventing pyramids
After seven years on the drawing board (the first inter-ministerial committee on this sat in 2014), the Centre has finally notified rules for direct selling under the Consumer Protection Act.
New Rules
- The idea is to curb fraudsters and Ponzi schemes, the guidelines have implications for all consumer firms using the direct route to vend products or services to consumers, sweeping into their ambit large global consumer firms
- Though these large companies are all part of a self-regulatory body, there was a crying need for the government to frame rules for multi-level marketing (MLM) given the questionable entities that have entered the fray and duped gullible consumers, and the number of legal cases this sector has seen.
Ban on pyramid and money circulation schemes
- The rules completely ban pyramid and money circulation schemes, which masquerade as ‘direct selling’ but in reality have Ponzi elements
- There is nothing wrong with consumer firms choosing a direct-to-consumer model that disintermediates the distribution chain, saves them advertising costs and allows for more affordable pricing, this model assumes discomfiting characteristics when it acquires a pyramid character.
- Unlike a simple direct selling model where a consumer firm directly recruits sales agents to engage in door-to-door selling and takes responsibility for their pitches, pyramid schemes incentivise an initial set of sales agents recruited by the company to add on more and more indirect sellers through informal networks. This modus operandi results in the manufacturer having little control over the sales process.
Why D2C is preferred?.
- The manner in which the direct-to-consumer models function now is vastly different from how they function before the modern economy swelled with the onset of the internet, wider and diverse consumer base, specialised firms and industries, and the general development over the years.
- The point, however, is that the model was prevalent then because most businesses operating around the world were small businesses increasingly gaining momentum again around the economies of the world.
- The dot-com bubble of the late 1990s and early 2000s is not a proud part of our economic history for obvious reasons but like a silver lining around every cloud, the dot-com bubble gave us internet-only retailers whosold products and services to consumers directly without any extensive physical setup.
- The dot-com bubble is where we can trace back the origin of direct to consumer as we know it today.
Atma Nirbhar Bharat
- While the world was introduced to the modern day direct-to-consumer model as early as two decades back the model has become a part of Indian vocabulary only recently.
- And fortunately for India, direct-to-consumer became a part of our economic system via a much more positive phenomenon, so to say, called Atmanirbhar Bharat.
- Self-reliance has several different meanings in several different contexts and the context India chose relied heavily on digitisation. In the word of the Prime minister, " when India speaks of becoming self-reliant, it doesn't advocate a self-centered system.
- In India self Reliance, there is a concern for the whole world's happiness, cooperation and peace.
- Digital India has, thus, been an integral part of Atma nirbhar Bharat, and it is digital India that has enabled and continues to facilitate the Indian direct-to-consumer market.
- Product differentiation is another feature that the D2C model facilities when sellers have the power to make changes in the consumer interaction setup.
- The D2C model also facilitates easy liquidation of business in a situation of failure, of offering a relatively convenient exit to entrepreneurs who can then move that capability to other, more productive businesses, causing minimal loss to the individual and economy.
Grass-root entrepreneurship
- What is happening in India through the direct-to-consumer model is that entrepreneurship is leaving the elite circles of the country and reaching the grassroots minds of India.
- This not to say that there haven't been entrepreneurs in India who have risen out of the margins of the society to create the now uber-successful businesses but to highlight that the high cost of business operations and monopoly of middleman made entrepreneurship a sort of 'elitist' profession
- Even if individuals created great products and ideas, the end goal, reaching consumers, remained a challenge for most entrepreneurs before the advent of mass digitisation.
- Digitisation has power grassroots entrepreneurship by giving power to business owners to create their own terms of Business and reach consumers without using extensive capital for building physical infrastructure.
- Essentially, D2C, through digitisation, has shortened the time it takes for a business to hit break even by reducing the cost side of the equation and enabling business owners to make quick profits.
- Success when measured purely on Profit parameters can now be achieved sooner by an entrepreneur owing to the reduced non-monetary investment, time.
- More young entrepreneurs are empowered to take up entrepreneurship because the time input does not contradict with the responsibilities of these young founders towards their families.
- When speaking of enablers, a niche segment of digitisation, digital payments has had a tremendous impact on the success of online retail.
- Before digital payments became a household phenomenon, the online Retail Industry favoured the buyers unfairly over the sellers for shifting the risk cost that is to be borne by buyers and sellers alike only on the salads in economic interaction.
- While the sellers had to bear the cost of manufacturing and partly the cost of delivery, the buyers were free to exit the contract at any point with the cash on delivery system. The buyers essentially had no risk share in the contact.
Summing up
- Digital payment system empowered entrepreneurs redistribute the risk in an economic contract by imposing monetary liability on buyers as well.
- Many new businesses choose to function only on an online payment system until the positive word of mouth makes cash-on-delivery a less risky alternative.
- The risk distribution has given the same platform to online retailers as that of offline retailers but the cost aspect still remains skewed in favour of digital business.
- While the online D2C market has been facilitated by businesses like the digital payments industry, the market itself has created additional business segments in the economy like logistics startups that go beyond wholesale deliveries to reach the doorstep of the consumer. The producers directly become retailers,by-passing the wholesale market altogether.
- Atmanirbhar Bharat in this way has created a new ecosystem in the Indian economy. It is powered by digitisation and the Indian entrepreneurial spirit. This manifestation of Atmanirbhar Bharat could not have been highlighted at a better time when covid 19 has forced isolation on nations around the world and traditional supply chains have been compromised.
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