- Konga has a new business model
- It announced this change last week, after it informed its customers that it had switched to the prepay model
- It also reportedly sacked about 300 staff members on the back of a change in its business model.
- This article examines the new business model and what lessons have been learnt.
Background
The media was agog with the recent news about the sack of over 300 staff members at Konga. I always wondered why the management team at Konga had not taken steps earlier to address the major challenges in its business model.
When I got tired of standing by the sidelines, I wrote a blog post regarding the issue, where I suggested a few urgent steps they needed to take to reposition the business for growth. Here is my previous post where I suggested 5 things I believed Konga should do. They include:
- Stop trying to be Nigeria’s largest online mall.
- Focus on quality control – sack merchants with poor quality products.
- You don’t have to incur a customer acquisition cost (“CAC”) on the same customer twice.
- Scrap pay-on-delivery (“POD”).
- Forget nationwide delivery; focus on profitable city clusters.
One thing needs to be clear, there is limited supply of cash within the Nigerian tech space, so every entrepreneur must figure out a way to maximize every funding round. You can’t assume that you will be able to raise funds in the next round. Nothing is sure. Hence, you must put to the best use every dollar raised.
You must have a clear path to self-sufficiency within a very short period of time. By self-sufficiency, I mean your business will not depend on investors funds to pay salaries or meet its operational obligations. All you might need additional capital for, should be growth and expansion, not operations so that you would not be under pressure to raise more funds.
I have heard this over and over again, “Amazon didn’t make money in its first 10 years!” Let’s assume this is true. First, you are not Amazon, you are not Jeff, neither are you operating in the US where basic infrastructure is available. The US has the most developed venture capital (VC), so cash might not be the problem of a US entrepreneur. You are here (Nigeria) therefore, you have to adapt your business to the environment in which it is operating! Please don’t ask me about Andela, we have agreed that Andela is not a Nigerian business.
That said, let’s talk Konga!
Konga did not just reduce its staff strength, it also announced major changes to its business model – cancelling pay-on-delivery (long overdue) for customers and warehouse services for its merchants. It also introduced a controversial feature some weeks back which allows the buyer to communicate directly with the seller. This essentially means that Konga introduced a feature that encourages disintermediation on its own platform.
For every e-commerce platform business, disintermediation is one of the biggest problems they try to deal with. One of the ways to prevent disintermediation is for the e-commerce player to give an incentive for a trade participant to complete the transaction on the platform. The platform does not allow direct communication between both trade partners. Hence, for Konga to encourage such communication raised more questions than answers.
So, let us connect the dots. Konga started as an online store, then became a platform. It also invested in warehouses to serve as value added to its merchants. Now, Konga is scrapping all of that and seems to be transitioning to become a classified ads business. To make it clearer, Konga is becoming another jiji.ng or OLX.
Is Konga taking the Easy way out?
Konga needed to rethink its business model and like I had initially recommended, it scrapped POD. But in addition to scrapping POD, Konga is becoming another Jiji or OLX. Is this the right decision? Time, I guess will tell. But what options are available to Konga?
- Rethink and reposition its current ecommerce play
- Become a grocer – Supermart
- Sell to Jumia
- Classified ads – Jiji, OLX
At any rate all these are tough choices for a CEO to make, since there is no guarantee of success with any option.
Online Classified Ads – Business Model
There are 2 major models for an online classified ads play: horizontal and vertical.
- Horizontal – the horizontal model, offers ads across a wide range of categories, from automobiles to human hair. Jiji and OLX are major players in Nigeria’s horizontal space.
- Vertical – like you may suspect, it focuses on a single category, such as cars, real estate etc. Cheki, Tolet.com.ng are major players in the vertical space in Nigeria.
If Konga is indeed planning to pivot into the classified ads space, it will more likely have to compete in the horizontal space. The competition in this space will be extreme. Konga should not expect to have an easy walk.
I appreciate that Konga will have a head start which the incumbents never had. It has a number of merchants already, some loyal customers as well as brand recognition. Konga will not have to build from scratch like OLX and Jiji had to. But I am sure both OLX and Jiji will not fold their arms and allow Konga to eat their lunches.
Online Classified Ads – Revenue Model
There are multiple ways of making money in this new business line, I will highlight a few:
Subscription – You charge advertisers to become members of the site before they can publish ads. This might involve a one-off membership fee and a monthly, quarterly or annual subscription fees. Since you might not be able to charge per transaction (disintermediation), you can charge the merchants on the platform to access your customer base.
The challenge then will be, what is the right price point? The final price point has to be worthwhile for both Konga and the merchants.
Free classifieds with premium options – This feature offers merchants the benefits of posting their listings for free, and offers premium features such as “Featured Ad” or the ability to add more pictures if they pay a small fee.
This will allow for a wide product range (since the merchants are not paying to list), while Konga will look to convert these merchants to paying merchants (again, since you can’t charge the customer).
Paid Listings – People typically look at the first few pages of search results. In the same way, you can offer merchants the possibility to bump their listing up to the top for a small fee (think about google ads). So, for your ad to be listed as part of the first few ads, you would need to pay a fee.
Advert Banners – The easiest way is to add the Google Adsense code to your site and show banners through Google’s ad network. These banner positions are also open to your merchants. But in case you have no paid advert, the Google Ads will still run anyway.
Please note that a lot of these models can be combined.
Conclusion
I sincerely hope Konga has thought through this strategic move. You don’t want to have a reputation for being the company that pivots in the face of simple challenges. Konga should appreciate its current position and know that it might not have the capacity to raise the money it requires like it used to. Hence, the need to maintain a lean model.
The Konga story has shown that entrepreneurship is not an easy route and I sincerely hope that the buzz around startup entrepreneurs will die to give way to real businesses, solving real problems rather than tech for tech’s sake.
