Impact of Digital Marketing Adoption on Profitability of Indian MSMEs: The Mediating Role of Sales Growth and Customer Retention

Abstract

Purpose:
This study investigates the relationship between digital marketing adoption and the profitability of Micro-Small-Medium Enterprises (MSMEs), with a focus on the mediating roles of digital marketing capability, sales growth, customer retention, and competitive advantage. This study aims to provide evidence of how adoptions can translate into profit for resource-constrained MSMEs operating in emerging markets.

Design/methodology/approach:
Quantitative methodology is used for this study based on primary data collected from 450 MSMEs. PLS SEM is applied to analyse the conceptual model proposed. Reliability and validity are evaluated for the measurement model. Then, the structural model is analysed via bootstrapping to evaluate the hypothesis tested and the mediation effect.

Findings:
Digital marketing adoption has been shown to affect profitability across multiple channels positively. Of these, sales growth is the most influential mediator, followed closely by digital marketing capability, customer retention, and competitive advantage. In addition to enhancing market performance measures, digital marketing capability has been found to directly increase profitability. Furthermore, while barriers to adoption have been shown to have a significant negative effect on profitability, they confirm the fact that structural constraints continue to hinder digital transformation among MSMEs. The results show that there is a partial mediation, indicating that both direct and indirect effects contribute to overall firm performance.

Research limitations/implications:

A major limitation of this study is its reliance on cross-sectional data and its focus on MSMEs within a single country, thereby limiting the study's ability to generalise. Future studies could address these issues by employing longitudinal designs, conducting sector-specific analyses, and incorporating emerging technologies such as artificial intelligence and data analytics to deepen our understanding of digital transformation processes.

Practical implications:

As previously mentioned, the results suggest that MSMEs need to go beyond simply adopting digital marketing and instead develop their digital marketing capabilities if they hope to experience sustainable profitability. Therefore, policymakers and supporting institutions should prioritise initiatives to build capacity, improve digital literacy, and increase access to the supporting infrastructure to reduce barriers to adoption and thereby improve the competitiveness of MSMEs.

Social implications:

Enabling MSMEs to use digital marketing effectively is beneficial for achieving broad social and economic development, promoting job creation, and encouraging inclusive growth, especially in emerging economies, where MSMEs serve a vital social and economic function.

Originality/value:
This study presents an integrated, comprehensive framework that links digital marketing adoption to profitability through multiple mediating mechanisms. Additionally, this study builds on the current literature by integrating technology adoption theories, the resource-based view, and performance theories into a single model applicable to MSMEs in emerging markets.