Prior to the internet and technological diffusion, major commerce and businesses were concentrated in metropolitan cities and large economic centres resulting in a market divide that excluded small and medium-sized businesses based in tier-2 cities. With the increasing penetration of the triad of cheaper smartphones, faster internet and reliable payment systems like UPI, the inequality of this power balance started normalizing. This brought a revolution in the way Indians in tier-2 and beyond bought and sold via e-commerce. According to a report, the pandemic facilitated a huge surge in India’s e-commerce penetration, boosting it by 12 months to an estimated 4.6 percent in FY21. As a result, the business-to-consumer (B2C) online commerce landscape in India’s untapped tier-2 cities has begun to change rapidly.
Diversity in languages and customs in tier 2 cities creates market complexities as well as opportunities. To cater to different consumer demands, E-commerce entities harness digital technologies to provide personalized experience to their customers, resulting in increased traction and business growth. According to a recent report, due to the widespread use of disruptive technology, tier 2 locations and beyond may make up for 88 percent of online shoppers between 2020 and 2030. The Indian e-commerce market is projected to grow at a staggering 25-30% annual rate over the next five years, reaching $120-140 billion in market size by FY26. Small-town and cities in India will drive this expansion, making up for 80% of new customer growth. As more businesses invest in digital solutions and technologies to optimize supply chains, improve turnaround times, and better understand customer demand, let’s understand how this has transformed the way commerce is done in tier-2 cities in India:
Internet and Digital Technologies
The success rate of commerce in tier 2 cities is directly connected to the penetration of the internet in these areas. India’s mobile and internet uptake has skyrocketed; currently, 80 percent of the country’s 650 million smartphone owners live in small towns and cities. To take advantage of this unique opportunity, retailers in tier 2 cities are trying to complement traditional retailing with digital commerce by tying up with big e-retailers. AI algorithms and big data analytics are assisting brands and the retailers in tier 2 cities in decoding the diverse consumer behaviour through their buying inputs such as product preferences, browsing history, and so on. Automated technologies like AI chatbots are fast becoming the mainstay in enabling customer satisfaction and retention rates like never before.
Social networking sites and the rise of the creator economy led by social media influencers continue to play an increasingly crucial role in the growth of the e-commerce business and are empowering many merchants and female entrepreneurs to deliver their products to potential customers across India.
As cash flow is one of the most important aspects of running a business, the wide range of digital payment options have revolutionized the way commerce is done in tier 2 cities. Payment gateways enable businesses to receive money immediately rather than waiting for COD payments, reducing the likelihood of theft and fraud. Retailers are gradually shifting toward payment gateways to improve the security that is generally associated with financial transactions. To encourage customers to use card-based payments, banks and e-tailers are offering various incentives such as cashback and easy easy monthly installment (EMI). On the consumer side, the rapid adoption of UPI and the easily availability of small ticket loans via pre-paid credits, Buy Now Pay Later (BNPL) cards and similar instruments means that today there is more than one secure way to complete a transaction online than what was possible till a few years back with limited options.
The rise of e-commerce and digital payments in recent years has given a boost to last-mile logistics and warehousing infrastructure in tier 2 cities. This has provided a hassle-free solution for consumers to shop and for retailers and brands to complete the fulfillment in record times. As consumer demand grows in tier-2 cities, robust supply chains and logistics networks are expanding their services into markets to help nurture upcoming businesses. Also, consumer-friendly return policies through logistics firms have played a significant role in bringing the consumers of tier-2 cities to opt for alternative commerce. This opportunity to plug into an expansive logistics network with competitive prices from new age logistics players has led to the boom of several hundreds of D2C brands launching from and targeting tier-2 cities and beyond.
However, despite the technological advancements, commerce in tier-2 cities still requires a rethink of traditional marketing strategies, to ensure a more focused customer-centric approach which will require several trust-building measures to allow users in the tier 2 cities to become actual online shoppers from just being internet bandwidth consumers.
According to a report from Blume Ventures, out of approximately 700 million mobile internet users, only 150 million actually shopped online. Less than half of those shoppers were from tier 2 and beyond. Therefore, while the foundation has been laid in terms of infrastructure, much remains to be done in terms of driving change in consumer behaviour to be able to successfully secure the demands of a diverse customer base.In this scenario, companies which are able to build out a reliable distribution network with high proximity to the end consumer will be able to deliver disproportionate value to existing and emerging consumer brands. Eventually, agility and the ability to deliver in an ever changing landscape will separate the leaders from the pack, as it always has been.
(The author is Mr. Vidyarthi Baddireddy, Co-Founder and CEO of PickMyWork and the views expressed in this article are his own)