Digitization has come a long way In India. Today, India is one of the largest markets for Internet companies with a number of driving factors like low cost of internet data which has lowered the barriers for the masses and made them an integral part of the digital economy. Further, as the ‘digital native’ population enters adulthood, India will have the largest youth population that adopts new products and digital services much faster.

In the last 5 years, fintech e-commerce, logistics providers heavily invested in strengthening and catering to the needs of the Indian consumers and penetrated their capabilities to the remotest parts of the countries. Here’s a look at how the ecosystem has matured till date.

1. Customers show maturity as they move from basic to complex services

Digital Penetration by Category, % of overall $ spend, CY 2015 – 2030F

Note: 2030 estimates are of moderate confidence

Although the initial journey started with simple online services like buying books, mobile recharges, today the market is flooded with every possible service which will come to rescue at the time of need. Starting from booking tickets for travel or movies, to ordering food online, taking online dance or Maths classes, these services today are available anytime through your smartphones.

We estimate that digital adoption is bound to increase atleast 2-3x across sectors over the next decade.

2. Covid effect on the online world

Purchase Intent for Online, % of respondents, sector penetration benchmarks, N: 803

Notes:

• Penetration within the online shopper cohort.
• Percent of users who intend to keep doing activity after COVID-19 at same or higher level.

E-commerce and essentials including Grocery, Food-tech and OTT-Video saw their penetration has been growing since Covid-19. Net purchase intent for the consumers to continue using online channels for these categories is high indicating sustained adoption once the situation normalizes.

Some of the ‘non-essential’ categories like Consumer electronics, apparel or footwear in products, edtech in services, and shortform video in content have seen significantly growing adoption or penetration during Covid and purchase intent for buying these categories online in the post Covid world continues to be high. Further, discretionary spend in categories like beauty services, travel, fitness, home repair has dropped gone post Covid.

3. A good sign-Consumers now willing to pay more online

Willingness to Pay – by Sectors, % of Respondents, N = 803

Convenience and online experience are becoming the key drivers for customers coming online, against price or discounting in the past which was the primary reason. This marks a major shift in terms of customer behavior as it will enable platforms to be able to optimize their unit economics much faster by focusing on continuously providing better experience without lowering down prices significantly.

Users’ willingness to pay (WTP) across sectors has on average either increased slightly or substantially, with WTP decreasing for very few users. Online pharmacy, doctor consultations and food delivery were the top sectors where over 60% users were willing to pay. This has also shifted the user’s mindset from being open to trying online services first before trying the offline equivalent.

4. Small cities are the next big bet for internet companies

Share of Tier 2+ city customers, % of overall, CY 2015 – CY 2030F

At this juncture, sectors like Short-form Video and E-tailing have a high share of users coming from Tier 2+ cities. However, in the next 10 years most sectors will have a majority of the users coming from these smaller geographies. Ed-tech and eGrocery are likely to see the largest growth with >50% of their users coming from Tier-2+ cities by CY30.

5. But, needs to solve these challenges

Challenges, Illustrative

But, before clocking those numbers, there are three levels of solutioning which need to happen for greater digital penetration in Bharat. Firstly, is the infrastructure or access which is strongly influenced by policy decisions, Government initiatives, and overall economic growth of the country. As the Income per capita continues to grow and the overall infrastructure and access for digital becomes more robust. Secondly, the mindset or lack of willingness which we can witness is slowly changing. But, it requires innovative solutioning by internet platforms and businesses to help create awareness.

Product related challenges have been a crucial factor. Availability of apps in vernacular languages is still largely lagging behind but we have started seeing a lot more apps with language options although the experience still needs refinement. Increasingly, we are seeing businesses cater to unique needs of Indian consumers through building localized solutions based on a grounds-up approach.

6. To address it, Indian startups’ next innovations

Social models, D2C, SME enablement are some of themes which solves around the aforementioned challenges. Certain companies and sectors have already begun their ascent to penetrating India by creating a more optimized user experience. For instance, social commerce platforms have tweaked their products to cater to the low-income user with vernacular interfaces while D2C brands altered their offerings to have a cheaper and high quality product. Digital and SME enablement companies have educated low income and Tier 2+ users of the benefits of their services with the aim to change their mindsets.