The question to ask about internet businesses today is: Are they creating artificial demand, like most critics claim, or are they in the grey area of building a new kind of revolution?
“You remember the time we would get these quirky bookmarks whenever we would order a book on Flipkart,” asked a friend. He was referring to a time when people refused to go online to shop. Today, the world is different. However, in the current scenario of markdowns, mass firings and eBay talks, most have forgotten the major shift that has taken place in consumer behaviour.
Digital now isn’t just a part of the economy; it is the economy. And while it entails limitless opportunities for some, it also means disruption and displacement for others. Customers no longer simply expect ease of use, they’re now expecting proactive experiences.
Vikram Gupta, Managing Partner, Ivy Cap Venture says,
“There is a fundamental shift happening in the way that consumers are behaving not just in India but across the globe. Anyone who is above the age of 45 today knows a time when he or she would make and receive trunk international calls. Today, the Gen X and millennials are used to a world of online interactions, messages, selling and buying. In the next 10 years they will be the ones surviving. So it is safe to assume that online is the way forward.”
An app not just brings your food, it also shops for you and even completes tasks for you. Yet, today, it is with a sense of wariness and skepticism that people are watching most of these startups.
The world of internal tug-of-war
It started around the end of 2015 and early 2016 when the funding started drying up and the Tigers began to slip into hibernation. The larger cheque sizes soon became far and few. One heard of delivery boys revolting, and the drivers protesting. It continues even today.
It's all etched in the mind. How the delivery boys ransacked the Runnr office last year, or how the drivers of the cab aggregators broke into the Ola and Uber offices! How the cab drivers who earned close to Rs 1 lakh had their incentives slashed, and were asked to do more rides for incentives; or how the delivery boys who earned close to Rs 30,000 a month had to now do with Rs 18,000!
But even with their earnings slashed, the drivers and the delivery boys are making more money than they have ever made in the past. Thirty-one-year-old Srinivas, who currently works for Runnr, says,
“My first job was in a courier company. I was earning around Rs 10,000 a month, which wasn’t enough. One day, a friend recommended me to Runnr. I am glad I joined. In the first month, after working only for 15 days I got Rs 18,000.”
Delivery boys have an option of working either in the e-com or the foodtech delivery markets. There’s a big difference between the two, though.
“My experience has been that people are more keen to take up foodtech delivery rather than e-com delivery. These deliveries are usually on-demand and are single orders. Plus, the delivery guys do not have to carry too much weight,” says Dinesh Goel, CEO of Aasaanjobs.
New game, new rules
All sorts of questions are being asked in the wake of mass firings, lack of money and funding dearth at startups. Many are questioning the business models of startups. Will any of the business models work if discounting is removed? Have we created artificial demand? Where are the norms and rules of the traditional businesses? But then again, internet businesses cannot be compared to traditional businesses.
Today, businesses have created convenience. In an age where people are losing patience and have an attention span of a goldfish, internet businesses are giving us one of the most valuable things – time. The internet businesses in India are created by creating a lot of supply and convenience. It is after creating convenience and habit that a business model is created.
Initially, when Flipkart started in India, it came in with the view that somebody has to create this market. Unless you’ve experienced something it is very hard for the consumer to put a price to it. Says Vikram,
“The Indian market wasn’t ready to even start buying online. The only way it could be done was to let the consumer try it once, even at the cost of making losses, once the consumer appreciates the whole experience then they are ready to start paying. That is how most of the businesses have to go through the cycle.”
Physics of the business
People were definitely asking how the Flipkarts of the world could sell at a price that was significantly lower than the selling price. Vikram believes that it was a deliberate ploy to get people to come online and experience it.
While the model definitely isn’t sustainable, it is a cycle that every sector goes through. Business model by business model, you need to go through the cycle and there aren’t any shortcuts there. In the bigger picture, when people experience more online buying, other online models benefit. This is true for any business that is going through a shift for the first time.
Kabeer Biswas, Co-founder and CEO, dunzo, the hyperlocal concierge task management platform, believes that there are no fixed cost structures that one can stick to. These businesses haven’t existed before. He explains,
“What one believes would work on paper, doesn’t necessarily work. Physics is a real thing you know. And one always believes one can optimise to make the balance work. The question really is at what point or scale does one say this can’t be optimised anymore and we need to price this out.”
There’s huge merit in the space Flipkart occupies. We have barely scratched the surface of e-commerce in India. Flipkart is definitely India’s biggest calling card in the sector; it has inspired thousands of entrepreneurs and brought to the forefront a new way of doing business.
But, Flipkart, on its part, will have to find ways to make its way deep inside customers’ wallets by constantly cross-selling and up-selling, while at the same time tightening its own belt. The problem is there are different variables and levers you can pull to adjust the pricing.
And this doesn’t work just on the consumer side but on the supply side as well. All the drivers and delivery boys haven’t been a part of anything like this before. They had to be convinced that if they joined the bandwagon, they would make more money and get more consumers than they were already getting. Vikram explains,
“Initially you gave them a large amount of money to make them experience it. But businesses had to come to a point where the demand for the supply side has suddenly increased and you need to rationalise that and bring it to normalcy. So you start cutting down the prices and bring it to a point where the demand is same as the supply.”
The delicate pricing balance
You need to charge in such a way that it is sustainable and at the same time the customer shouldn’t feel that they are under appreciated. Pricing, therefore, is more of an emotional than just an economical problem. For any internet business to get profitable, there needs to be different data points to get there.
That’s why the first mover has to make a much larger investment compared to the second mover. Typically, in many cases, the second mover has made higher returns with lesser investments compared to the first mover. Reason: the first mover has broken into the market and taken on the uphill battle.
According to Shripati Acharya, Co-founder and Managing Partner, Prime Venture Partner, when introducing products into the market, the questions that entrepreneurs ask themselves are: what is the right product, how to test it, who is the customer, what is the sales cycle and so on. The one thing entrepreneurs usually do not ask is: what the right price is.
The underlying belief is that once the product is ready and deployed with the first set of customers, then a price point can be talked about. Besides, one can always start low and then raise the price so why bother with this headache now?
One of the strongest levers which have a direct impact on the value of the company is pricing. “Even a 20 percent increase in price can dramatically move the needle on margins and convert a ho-hum business into an attractive one,” says Shripati in a YourStory article.
And when the company is an innovator and first mover in a new industry or segment, going in with a price that is too low can significantly reduce the total available market for itself as well as for any other company that might enter the market down the road. In other words, mis-pricing can have the impact of driving profitability out of a new industry segment.
More the variables more the displacement
In most of these businesses the higher the supply, the higher is the demand. So if you need to get a 20 percent shift in pricing to get sustainable, you simplistically take five percent from demand, five percent from supply and for the remaining 10 percent you wonder if you can reduce the lean time by three minutes, which makes it 8 percent of a value of a delivery or task. This reduces the 10 to eight percent. There are, therefore, several variables that a founder needs to play with.
In a super-competitive scenario like an Ola and Uber, apart from balancing the demand and supply, they need to worry about each other as well. If one pays their driver a certain amount, the other needs to work around their; and if Uber makes its fares cheaper, Ola, in order to be in the market, needs to put in a competitive pricing.
But the competitive scenario and pricing linkage isn’t new. It has been happening for over a century now. The only reason most consumers drink their colas at the price point it currently is because of the century-old famous cola wars.
Even then in 2015, Coca-Cola had to shift, and the shift, in this case, was for a corporate giant and not a small entity. In 2015, when the startup world was at its all-time high, the CEO of Coca-Cola announced plans to lay off 1,600 to 1,800 employees to cut costs and the prices too shot up. And it soon projected better than expected results. The same was done for Pepsi.
At that point in time better pricing in terms of configurations of smaller packages helped the companies realise more price per ounce. And for a week in September, the prices of Coca-Cola were cheaper than Pepsi. The price gap between Pepsi and Coke reduced to a point where Coke’s price premium was below its long-term average of 40 percent.
One doesn’t have to go too far. In India in 2003, the world was in for one of the biggest mobile disruptions. (This is 14 years before Reliance disrupted the internet data world with Jio).
For those who would recollect, in 2003 the data sector in India was still in its infancy. The telecom businesses weren’t prepared for the kind of commotion Reliance would create. Nor were they prepared for the same stir it created a year ago.
Can it be done better?
“Of course, one can always argue if it could have been done better. Yes, it could have been done much better, one could have maybe one could not have played with so many different variables, but all of that can be said only in retrospect as the business lines people are working on are new,” adds Vikram.
While on the big picture, is online buying increasing? Of course, it is increasing substantially, the internet penetration is increasing substantially. But even if we compare with China, we know there is a large gap, the number of people who have gone and experienced online shopping is still high.
And it generally is large investments that help create the market. New investments happen not just because there is an opportunity but because of everything playing together. In the next four to five years this gap will be lesser and lesser. Because honestly, people who were investing in this weren’t even aware that which variables would work.
Funding has dried up, so the option is going to back to the basics. But if you run out of breath even before you find your alternatives, you’re out of the running. It is important to plan properly. Some people have taken higher risks therefore, they faced the result accordingly, some have taken a lesser risk and been able to survive.