Business strategist Rajesh Srivastava analyses the secret behind the success of Baba Ramdev's Patanjali, the rise of Kabaddi, Uber's strategy, Maggi Noodles' comeback, Google and Facebook's drive to control last-mile connectivity, and more.
12 business stories from 2015 and how they will play out in 2016
- Air India’s flight path
- Uber—mission drift or clever strategy?
- Baba Ramdev’s strategy to take on MNCs
- What’s cooking with iChef
- Maggi—untwisting the noodle
- Xiaomi and OnePlus: Up, up and ...
- Can Flipkart keep its valuation soaring?
- Project Loon’s net gains
- The future of shopping
- Pro Kabaddi League—Game on
- Surge pricing comes to town
- Ola Auto—the fight for autorickshaws
1. Air India’s flight path
Air India released a TV commercial in April with the tagline, “Proud to be Indian. Proud to be Global.”
The state-owned airline has expanded its international footprint after joining the Star Alliance, the world’s largest airline grouping, in 2014. The benefits reflect in its financial performance too: Mint reported on December 8 that the airline has seen its revenue almost double since it joined Star Alliance.
Yet, anyone who has flown Air India will know that the message in the commercial and the airline’s service operate in different universes. If the experience does not match the increased expectation, over time business for the airline will dry up.
As Jerry Della Femina said, “Nothing kills a bad product faster than good advertising.”
What should Air India’s strategy be? It should invest its scarce resources—financial and non-financial—in creating a great product, by investing in training its flight staff, improving the aircraft’s interiors, improving the menu, upgrading the entertainment system and making sure the airline consistently delivers an awesome experience to every guest.
This process of building traffic is slow but, in the long run, will pay richer dividends. If it doesn’t follow this slow and steady path, it is going to find out about Jerry Della Femina’s prescient observation the hard way.
2016 and Beyond
Air India has again been in the news for the wrong reasons:
- On December 16, a ground engineer met with a fatal accident, allegedly due to human error. This incident seems to indicate the airline’s systems and processes are not robust enough to ensure the safety of its own staff—on the ground. Can it then ensure the safety of passengers in the air? If flyers begin to doubt this, it won’t bode well for Air India.
- According to a recent press report, Air India was planning to stop serving non-vegetarian food on short-haul flights and also withdraw tea and coffee from its lunch and dinner menu. The airline denied this, maintaining that it doesn’t serve non-vegetarian food on short-haul flights, so the question of withdrawing it does not arise!
This episode indicates that Air India is not customer-centric—it takes decisions in favour of its bottom line. This also does not auger well for the airline in 2016 and beyond.
- According to reports, the new management is focusing on making the carrier profitable. Chances are, they will take decisions—like the one on the menu—to trim cost, but at the expense of customers’ goodwill.
If Air India is to survive, a user-centric approach is imperative: install robust systems and process to ensure safety and strive to deliver the promise it makes to its flyers.
Given its track record, it is unlikely that Air India will follow this path.
2.Uber—mission drift or clever strategy?
Do you find Uber’s recent moves baffling? It started a food delivery service in select cities; tied up with Carnegie Mellon University (CMU) to develop robotics; it showed interest in buying HERE, a mapping service by Nokia, for reportedly $3 billion.
There is a method in CEO Travis Kalanick’s madness.
Uber wishes to transform itself from a taxi-hailing company into one that delivers everything—from people to food, to essential household items on demand, to couriers and more. So here’s how it hoped to achieve this transformation:
Mapping Service: Mapping is the soul of Uber’s business. Its riders and drivers connect with each other through maps. Currently, Uber relies on Google Maps, which is, of course, updated regularly, but Uber needs to be updated in real time. Acquiring HERE would help it do so.
Robotics: Uber is striving to make its rides safer and also squeeze out cost from its operations. For example, there have been instances where drivers have harmed riders, bringing negative publicity for Uber. So, it tied with CMU to work on robotics to hasten the introduction of driverless cars. This will make the rides safer and robots are unlikely to ask for commissions, or go on strike, demanding higher wages.
Food delivery: UberEats promises to deliver dishes from “popular, iconic restaurants” faster than it takes to boil water—with a service time of 10 minutes.
This is not all. Uber is beta testing delivery services for essential household items (UberEssentials); courier delivery service (UberRush) and also a car-pooling service (UberPool).
The Business Lessons
Here’s my take on why Uber is getting into seemingly unrelated businesses and its business model which is fuelling its soaring valuation, estimated at over $51 billion.
Uber believes in:
- Sweating existing asset to the extreme so that return on assets (ROA) is maximized with minimum investment.
- An asset light business model to minimise capital expenditure, resulting in higher free cash flow.
- Entering adjacent markets that require similar skills the company already has. This will also allow multiple revenue streams and help de-risk its business.
- Striving to consistently deliver a pleasant experience to its guest. Most companies in services business would harness its people to deliver it. But not Uber. It harnesses technology to deliver a consistent experience. For example, in India, it pursues a three person per city policy; globally Uber has just 1,500 employees. Contrast this with Ola, which has more than 30,000 people to support its business in India.
What business do you think Uber is in? Transportation? No, Uber believes it is in the data analytics business and spends its resources on strengthening this aspect to give it a competitive advantage. Recently, it announced that it was opening a 500-strong R&D centre in India, populated with engineers, to provide muscle to its growing business in India.
2016 and Beyond
What does 2016 look like for Uber? Good, provided it continues its existing strategy.
Though two of Uber’s strategic initiatives in 2015 seem to have come to naught.
HERE was purchased by a consortium of German auto giants Audi, BMW and Mercedes.
The collaboration with CMU ended in bitterness with CMU crying foul that Uber, having recently received fresh $5 billion funding, has been weaning away its top talent by giving them unprecedented salary hikes.
3. Baba Ramdev’s strategy to take on MNCs
It is estimated that sales of Baba Ramdev’s Patanjali brand of products are likely to top Rs 5,000 crore by the end of FY 16.
How is Patanjali able to clock impressive sales growth figures at a time when other packaged consumer goods companies are finding the going difficult?
A Home-Grown Formula
To many, Patanjali would seem to have come out of nowhere and become an overnight success.
Not really. The company was incorporated in 2006, but the background work of identifying the product category, finalising its recipe, sourcing raw materials, etc. began years earlier.
Here’s my take on why it has succeeded, based on a fortuitous meeting with Ramdev in 2011 in Goa:
1. Product: Use genuine, natural ingredients and in sufficient quantities, so that it delivers the promise. The result: customers experience the promise.
2. Competitive Price: 15% – 30% lower than the competition.
3. Promotion: Use alternate media to build the brand:
Create buzz (word of mouth publicity): When a company makes a claim, only 20% – 49% of the people believe it. But when real people speak good about a brand, believability jumps to 70%; when friends speak say good things it goes up to 90%. Result: more people believe in the brand promise, and the firm needs to spend less on advertising and sales promotion.
Leverage public relations: Baba Ramdev is the celebrity endorser of his brand. He is always in news, which automatically brings publicity to his brands.
Go digital: His website is extremely engaging.
Integrate the brand in your message: He holds innumerable Yoga camps and is on Sanskar channel for the better part of the day. While demonstrating Yoga poses, he subtly introduces the products, highlighting their features and benefits. He avoids forceful product placement.
4. Place (Distribution): Patanjali uses multiple distribution channels, from company-owned stores that exclusively sell the brand, to normal stores, to modern retail outlets like Big Bazaar.
5. People: According to Ramdev, the salespeople in the Patanjali stores act as “authentic consultants”. They listen to the customer’s problems and provide a solution that will eliminate the problem once and for all. He took pains to point out that big companies ensure that people become dependent upon their product, thus providing them business.
6. Low expenses: According to Ramdev, his sales people travel by public transport, and stay with friends or relatives as far as possible, or in functional hotels. He hires locally at extremely competitive salaries.
The Business Lessons
Has his strategy borne fruit? Well, my mother insists on using Patanjali products and has convinced my wife to opt for them.
The lessons then:
1. Focus on creating a great product.
2. Make sure the product delivers the promise.
3. Place customers' interest ahead of yours. In return, they will protect your interest by giving you business.
4. Make your customer your brand advocate.
5. Use alternate media to build your brand.
6. Keep expenses low.
2016 and Beyond
Will Patanjali continue its march? Seems unlikely. In the dying months of 2015, Patanjali seems to be jettisoning the strategies that brought it success:
1. Instead of focusing on its differentiator—herbal and Ayurvedic products—it seems to have become more competitor focused. On November 15, it launched atta noodles to take advantage of Nestle Maggi’s woes. This was accompanied with negative publicity. The Food Safety and Standards Authorities of India (FSSAI) sent Ramdev legal notice, alleging that he didn’t obtain due permission prior to the launch.
2. It is embracing the more expensive traditional advertising vehicles—TV, press, etc.—instead of continuing to build the brand through alternate media, which is slow but extremely effective.
It seems that Patanjali has caught the same disease as other packaged consumer goods companies—of chasing sales growth at all cost. This strategy is self defeating.
4. What’s cooking with iChef
We are in the midst of a cultural shift. Double income no kids (DINK) and double income single kid (DISK) families are on the rise, with both partners passionate about pursuing their careers. Young people of both genders in urban areas find preparing a meal at the end of a tiring day a burden.
iChef seeks to eliminate this pain point. It also realises that people are “time poor, but cash rich” and not averse to spending money to buy time.
It delivers ‘meal kits’ based on recipes created by master chefs to your doorstep. The kit includes cleaned, cut vegetables and other ingredients in the right quantity. All you need to do is cook using things normally available in a kitchen—gas stove, pans, salt, pepper, etc.
iChef’s business model is based on consumer insights. It uses these behavioural science principles and new rules of business:
1. Self penalisation: If it is not able to deliver the order, it will refund the money and deposit 10% of the order value into the user’s account.
2. Eliminate wastage: Since vegetables are pre-cut as per the recipe, there’s little wastage.
3. De-anchoring the price: iChef only offers kits for gourmet meals where people don’t have a reference price in mind. Hence, they cannot make out if the meal kit is expensive or not. For instance, you are unlikely to find paneer makhanwalla on the list, because people know the price they would pay for it in a restaurant.
4. Free delivery: Delivery cost is a sensitive issue. When people buy ingredients, they do not pay themselves to carry it home. So, paying for home delivery rankles. iChef has built-in the price of delivery in the meal kit.
2016 and Beyond
Can iChef continue to win over customers and extract a price premium? It can, if it:
1. Focuses on millennials (born between 1982 and 2000): They find convenience and time saving to be intensely valuable and are willing to pay cash for it.
2. Keeps the recipe simple enough: It should be sufficiently difficult so that the customer feels that he has put in an effort—people seem to value the output more if they’ve put an effort into it. Yet, it shouldn’t require special skills. If they fail to follow the recipe, the backlash could be severe.
3. Creates gourmet recipes: They should keep creating new gourmet recipes because people will pay a premium for being able to cook professional quality gourmet food.
5. Maggi—untwisting the noodle
In June, a case was lodged against Nestle India in a local court over safety standards of its Maggi Noodles. Uttar Pradesh Food Safety and Drug Administration (FSDA) found monosodium glutamate (MSG) and lead in excess of the prescribed limit in samples. Another case was filed against actors Amitabh Bachchan, Madhuri Dixit and Preity Zinta for promoting the brand.
A Possible Slide into Hot Water
The issue faced by Nestle falls under the realm of reputation management.
For a brand, two things are of critical importance: the trust and reputation it enjoys with its customers. This controversy threatened to damage both these elements.
Nestle’s response was tepid. An official statement said: “We do not add Monosodium Glutamate (MSG) to Maggi Noodles. We use raw materials that may contain naturally occurring Glutamate which could be confused with commercially produced MSG. Glutamate is safe and is found in everyday and high protein foods including tomatoes, peas, paneer, onions, milk…. the company does not agree with the order and is filing the requisite representations with the authorities.”
In the absence of a strong defence, a perception could gain credence that Nestle has taken a surreptitious route to add glutamate to overcome legal hurdles; that instead of adding it directly the company has used ingredients that contain glutamate. Legally, it cannot be prosecuted, while the presence of these elements will enhance flavour and get customers to consume more.
Nestle could suffer more collateral damage if these perceptions gained ground:
- Nestle is not sure of what it does and therefore every claim it makes should be taken with a pinch of salt.
- To achieve its business objective it can adopt surreptitious means, keeping its interest ahead of customers’.
2016 and Beyond
The new year augers well for Nestle because it seems to have learnt from the setback. It is taking proactive steps to protect its business:
1. A balanced brand portfolio: No single brand should contribute disproportionately to its overall sales. To achieve this goal, Nestle is planning to introduce into India a range of new coffee, chocolate and milk products plus a selection of health products from its international portfolio.
2. Follow the statutory guidelines in letter and spirit. If the re-launched Maggi is tested, the sample is unlikely to contain MSG beyond the permissible quantity. Why? Not only will Nestle ensure, like before, that it does not add MSG, but it must have also taken adequate steps to ensure that MSG does not enter its recipe even surreptitiously through the ingredients.
3. Be transparent and authentic and over communicate if hit by a scandal: Nestle would have learnt, at a high cost, that silence is not a judicious strategy—provided you have nothing to hide.
6. Xiaomi and OnePlus: Up, up and ….
The Chinese brands Xiaomi and OnePlus were two of the most exciting players to emerge in the smartphone market.
Xiaomi had a brand name which the rest of us found difficult to pronounce; it produced limited quantity, sold through flash sales and focused on the local Chinese market.
OnePlus had an easy-to-say Western name, focused on business outside China and sold only through invites.
But there were similarities in their strategies too: Both created awesome products, sold only online and operated on wafer thin margins. Both deployed the behavioural science principle of the Scarcity Effect (anything that is scare becomes more valuable). Now instead of the brands running after the customers, it was the other way round.
2016 and Beyond
I feel both Xiaomi and OnePlus will lose momentum. Towards the end of 2015, both seemed set to join the rat race of chasing sales, and seemed to be bidding good bye to the business model and behavioural sciences principles that gave them unprecedented success:
1.Scarcity effect and ‘only by invite’ policy: To own a Xiaomi you had to pre-book, while OnePlus could be had only though an invite. Now both are abundantly available. This will reduce their desirability.
2. Let the product talk, no need for mass media advertising: In the dying months of 2015, OnePlus launched an aggressive advertising campaign to inform and entice potential buyers. This is a stark departure from its strategy of investing money in creating an “insanely great product” and offering it at an attractive price—and let product and price do its advertisement. The product is still good, the price point is attractive, but pursuing this strategy will require more money, which will dent its fragile bottom line.
3. Online-only sales: Xiaomi is moving away from selling its products only online to selling them through leading electronic bricks-and-motor retail chain stores, such as The Mobile Store. This would make the device available everywhere and deliver a death blow to the scarcity strategy.
If the new strategies do not deliver sales, it will force Xiaomi and OnePus to offer more discounts. To communicate this, they may launch more aggressive advertising campaigns. Result: its already fragile bottom line will come under intense pressure, resulting in an inevitable downward spiral.
7.Can Flipkart keep its valuation soaring?
The soaring valuation of e-commerce companies was much in the news. To me, they seemed stretched by a wide margin. The valuation of these companies is done as a multiple of Gross Merchandise Value (GMV), or the value of goods sold on the site before accounting for discounts, returns, advertisement cost, etc.
Now here is the shocker: The normal discount is between 20% and 70% (average 40%); the normal return can be 20% - 30% (average 25%) and advertisement cost can be as high as 15%. When you subtract these expenses from the GMV, there is merely 20% margin left to pay for other operating expenses. I feel when the dust settles, only one or two companies would have lived up to the hype; all others will perish, taking down the investments made in them.
2016 and Beyond
In May, Flipkart was valued at $15.5 billion. Will its valuation continue its upward movement in 2016? I think not. Here’s why:
Investors, till recently, valued companies based on multiples of revenue (such as GMV) and number of active users on the platform. They gave margins and cash flow a miss. Result: most investors have burned their fingers and are no in mood to repeat this mistake.
If Flipkart wishes to continue to be the darling of investors, ensuring that its valuation continues to move northward, it ought to shift focus from maximizing GMV to:
- Consistently delivering an insanely great experiences to every customers—from the time they get on board till they get delivery and ensure awesome after sales service.
- Spending money not on buying sales—which it currently does by only advertising deals and discount—but shift this money to building its brand and reputation.
It can monitor the effectiveness of this strategy by measuring net promoter score (NPS), which measures customer loyalty. A higher NPS means greater loyalty. And in case it’s low, take action in real time!
Most importantly, Flipkart should make up its mind, wither it wants to follow Amazon’s or Alibaba’s business model or adopt a user-centric approach which would involve engaging with users to determine their pain points and taking prompt action.
8.Project Loon’s net gains
In Sri Lanka, merely 3 million people are connected to the internet out of a total population of about 22 million.
Google’s mission is to make internet access universal. To achieve this, it has teamed up with the Sri Lanka government to deliver broadband connectivity to every region of the island nation, making it the first country in the world to have universal internet coverage.
How It Works
This initiative is part of Google’s Project Loon, which aims to provide cheap or free internet connectivity to people in remote rural areas around the world via a fleet of helium-filled balloons floating way up in the stratosphere.
For Sri Lanka, Google’s plan is to have a network of about 13 balloons floating in the stratosphere at an eight of around 19 km—2x the height at which commercial airlines fly. These balloons will receive Wi-Fi signal from ground stations and will bounce these signals along to each other. Every time a balloon receives a signal, it will transmit it to an area of 40 km in diameter below, allowing people to directly connect to the 3G network using smartphones and other devices.
What’s in It for Google
Why is Google so magnanimous in providing cheap or free internet connectivity to every Sri Lankan and subsequently to the world?
One of the world’s biggest battles is for control last mile connectivity into users’ homes. Many believe that the company that controls the last mile will take home the world’s richest jackpot.
No wonder Facebook is also working on internet.org with a goal to make basic internet service available to every person in the world. Or take Space Internet or O3b – Other 3 Billion. These are also efforts to provide high speed internet connectivity to every person on the planet.
2016 and Beyond
In India, Project Loon will have to wait for a while. This is what Sunder Pichai indicated when he announced that Google in collaboration with Indian Railways will provide high-speed Wi-Fi internet connectivity at 400 ‘high footfall’ railway stations across India—initially for free and then gradually make it a self-sustainable.
Project Railway seems to be the first concrete step Google is taking in India, to connect the next billion online. Currently only 25 out of 125 crore Indians are connected to the internet, leaving out 1 billion Indians.
This initiative by Goggle to connect the “next billion Indians” will ensure that it gets a firm grip over last mile connectivity in India. Once this mission is accomplished, it will surely announce plans to monetize it, as it did in the past with its search initiative.
It offered search free to users, which resulted in 1.2 billion people using its platform. Once it had those numbers, it monetized it by inviting advertisers on its platform.
Will its worthy competitor Facebook remain a silent spectator? Of course not.
Facebook has launched Free Basics in India. Through this initiative, it along with its internet service provider (ISP), will decide which sites people can access for free. Internet activist allege this move will make Facebook and its ISP gatekeepers to the Internet, controlling the content we can access free and what we pay for—a severe blow to Net Neutrality.
2016 promises to witness dogfight between the two worthy tech giants—over us!
9.The future of shopping
Shoppers love to shop.
And when it comes to shopping for clothes, they wish to try on as many as possible before finalising the ones to buy. But trying on a multitude of clothes is a cumbersome and enervating experience.
Shoppers Stop realised this pain point and decided to leverage technology to reduce it.
It has launched an augmented reality-based dressing room.
This room contains a Magic Mirror; the shopper can view herself adorned in new clothes and accessories without having to physically try them on.
The Business Lessons
- Identify customer pain points.
- Devise a solution that will reduce or eliminate them.
- Explore the possibility of using technology in both identifying and drawing up a plan to reduce or eliminate the pain point.
2016 and Beyond
Shopping in India will be turbo-charged by technology:
- The personal assistant will go mainstream: Many more e-commerce sites will provide a shopping personal assistant, inspired from Apple’s Siri or Microsoft’s Cortina. These personal assistants will make recommendations and facilitate cross-selling of merchandise.
- Self-checkout in bricks-and-mortar stores: Stores, powered by technology, will introduce self-checkout. This will allow shoppers to self scan their purchase, generate a bill, pay using the mobile wallet and walk out. This will eliminate endless waiting in line to make a payment.
- Big Data analysis to see relationships between unknown variables and leveraging them to ring in sales: Take this case where, based on weather reports, Big Data predicts a storm. It will also tell store managers the product categories to stock up on: battery, candles, mineral water, beer. Yes, beer. Past sales data indicate that when people are forced to stay indoors because of a storm, they get a bit nervous and also have time to kill—and beer helps both. Hence, beer sales witness an upward spike when storms hit an area!
- Leveraging technology to become more agile and lean: In other words, responsive to customers and asset light—which will result in improved customer satisfaction and bottom line.
- Wish lists: More sites will offer shoppers the option of sharing their wish list so that the e-tailer can make it available and not lose sales.
- Review and rating by customers will assume greater importance: Retailers will keep an eagle eye on how shoppers review their products and rate their shopping experience. Why? Other shoppers will refer to them while taking decisions.
- Rise of fit lifters / web lifters: More shoppers will visit bricks-and-mortar stores to physically try on the product for style and fit, then visit price comparison sites for best deals and place an order online. Bricks-and-mortar retailers call such shoppers as fit lifters. When the reverse happens, e-tailors call them web lifters.
- Omni-channel retailing will go mainstream because shopper will want to move seamlessly between various channels.
- Online-to-offline will go mainstream: Shoppers will place orders on retailer’s site (and not just at online marketplaces), and the retailer will deliver it offline—to their home.
- Showrooming: Bricks-and-mortar stores will devolve to being merely showrooms—shoppers will come to the showroom to touch and feel the product, try them on for style and fit, but will place orders online. Result: More and more sales will move online.
10. Pro Kabaddi League—Game on
Did you know that Pro Kabaddi League (PKL) is the second most viewed sporting event (viewership: 435 million) after IPL (552 million) in India? It has attracted 3x more viewership than FIFA World Cup 2014.
What has attracted viewers to this sporting event, which till recently was played in the hinterlands of India and had near zero aspiration value and extremely little relevance to urban youth? When Star Sports decided to adopt kabaddi, it took onboard these issues and decided to address them strategically.
Its strategy rested on two pillars—to deliver a world-class experience to viewers and marry it with glamour and aspiration.
1. Deliver a world class experience: Star Sports invited a world class production team to produce the content so that viewers could get a ringside view of the excitement on the playground. For this, 15 cameras were mounted across the arena. The broadcast was adequately supported by statistics, graphics and analytics to boost the perception that kabaddi is a serious game. Commentators were fluent with kabaddi vocabulary, which they could effortlessly deploy to describe the action.
2. Make it glamorous: Celebrities from Bollywood, cricket and TV graced the venue. Their presence helped make the sport aspirational. When the cameras captured their agony and ecstasy at the teams’ ups and downs, viewers too started relating to the game.
3. 360-degree communication: The theme song ‘Le Panga’ was sung by Amitabh Bachchan. TV spots and hoardings supported this event. Amitabh Bachchan singing the National Anthem flagged off the opening event of PKL 2.
To keep the excitement alive, a women’s Kabaddi league may be is in the offing.
Lesson for us: Every problem can be overcome provided the issues are identified correctly. Then the issues must be addressed robustly through a strategy. Equal effort and resources must be put behind executing the strategy.
2016 and Beyond
Sporting events, powered by technology, will attract fans in greater numbers both inside and outside the stadium. Providing them an unforgettable, immersive experience will lead to more views and stickiness (time spent watching the sport).
The only prerequisite: the fans should be armed with a smart mobile device!
Fans will have the option to view players stats, replay exciting moments, and view the action from different angles thanks to live feed from multiple cameras placed strategically.
Star Sports too should embed more technology to deliver such immersive experience.
This immersive experience will ensure that more and more fans throng the stadium for a live experience. Those who could not make it inside the stadium will be able to experience the thrill through a smart mobile device.
11. Surge pricing comes to town
Uber made “surge price” a common term. This is the price charged to customers depending upon demand, environment factors and more.
For example, if it rains suddenly and demand for taxis goes up in an area, Uber will immediately raise the price to get more drivers on the road. When the demand falls, the price comes back to normal.
This strategy has caused an uproar with many labelling it unethical because a user’s helplessness is being exploited for commercial gain.
Hold on. Much before Uber made surge pricing a well-known term, e-commerce companies, led by Amazon, have been practicing it on you.
If you search for a product online, the price quoted will depend on the location and device you are using. If you are in Mumbai’s affluent Malabar Hill area, and on an Apple iPad, you will likely be shown a 20-25 % higher price compared with your friend who is searching for the same merchandise at the same time, but form a less affluent suburban location and on a Window's installed Dell laptop.
By the way, if your track e-commerce sites, you will be dismayed to find that using smart algorithms, the prices of merchandise change multiple times a day depending upon demand!
2016 and Beyond
Expect to see more “exotic” pricing strategies enter popular lexicon.
1. Dynamic pricing: It is flexible pricing. Users are charged depending upon when they actually make the purchase. Say you want to book flight tickets for your vacation. If you book early, you will have to a pay lower price; closer to the time of departure you will have to pay a higher price. Multiplexes too follow this strategy.
2. Predatory pricing: Two or more industry players surreptitiously collude to target a common enemy (company) with a strategic intent of putting it out of business. They take strategic price drops to cause maximum harm to the targeted company till they drive it out of business. They then take the price up. In most countries it is illegal to indulge in predatory pricing because customers stand to lose. Recently local taxi aggregators in Chennai filed a case against Ola for allegedly practising predatory pricing.
3. Freemium: The product is made available free, but users are charged for premium features. Take newspapers like Wall Street Journal. The basic content is available free, but if a reader wishes to access premium content she has to pay for it. Aravind Eye Care follows this pricing strategy—it provides free eye care to over 70% of patients who come from an economically challenged background and charge 30% patients. In short, 30% of the patients subsidise the rest.
4. Free (zero) pricing: New age companies like Google have made this pricing strategy mainstream. They do not charge actual users for using their product. Since it is free, a large number of customers patronize the brand. The company then puts an invisible digital ring around its customers—advertisers have to pay a fee to the brand owner.
5. Negative pricing: You pay your users each time they use your brand. This too brings in a large number of users to the platform—when the numbers are large, advertisers are willing to pay top dollar to reach these users. Again the brand owner makes money not form the primary user of the brand but from advertisers. This strategy is already in practice—each time your credit card company offers a cash back, or the retail store gives you loyalty points.
6. Cartel pricing: Here industry leaders get together and take pricing decision to protect their interests. Who is the loser? Customers. Pursuing this strategy is also illegal.
12. Ola Auto—the fight for autorickshaws
What do successful businesses do to ensure their top line and bottom line keeps growing? One strategy is to plan an entry into adjacent territories.
Take taxi-hailing services Uber and Ola. Both have quietly started aggregating auto rickshaws on their platform.
Both are pursuing a ‘loss leader’ strategy to lure auto rickshaw drivers on to their platform—they provide the drivers business without charging them a fee. This is in contrast to taxi drivers who pay a commission to use the platform.
From the Streets
This aggressive strategy is hurting the small players present in the market. Take Bengaluru-based mGaadi, which claims to have over 10,000 auto rickshaws on its platform. It charges a flat Rs. 5 fee for every ride it provides. Certainly, its business is getting adversely impacted.
So how is mGaadi responding to the threat posed by these whales? By providing better service. mGaadi has started offering advance booking for an autorickshaw.
Or take Pune-based Autowale. It built stickiness into its business model itself. To ensure that autorickshaw drivers do not desert it for greener pastures, Autowale made it mandatory for every auto driver to pay a fee upfront. But why would an auto driver pay an upfront fee? Because he is promised a 150% increase in income.
Only time will tell who will survive the battle. But even as the autorickshaw space witnesses a battle, another adjacent territory is ripe for entry—bus service. Ola is already eyeing this territory.
2016 and Beyond
The new year may not auger well for the national taxi aggregators who have entered into autorickshaw aggregation—uberAUTO, Ola Auto.
In the dying months of 2015, uberAUTO quietly withdrew its auto service from Delhi, the only city where it was functioning. Uber did not give any specific reason for the withdrawal, except that it is temporarily withdrawing this product to solve specific problems to help it scale. But I don’t see it re-entering the market in 2016 for the following reasons:
- Lower transactions size and lower margin per transaction. This makes the business model unattractive for Uber.
- Uber Taxi has caught on in urban areas because it catered to people who are cash rich and time poor and are willing to pay for convenience. The majority of auto riders are not sufficiently cash rich.
- An autorickshaw, for most users, is a cheap means of transport and they are not used to paying a premium for the ride; most are used to hailing it off the street. An app does not provide them more advantage but makes the ride more expensive.
- Many autorickshaw users don’t have smartphones and can’t access the app.
- In due course, taxi aggregators will discover that the auto business is eating into their more profitable taxi business—a customer can easily downgrade to an auto.
Why is Ola still in the running?
It could be focused on generating revenue because venture capitalists often give valuation based on multiple of revenues.
Does that mean that auto aggregators do not have a future? Of course, it has a future. But national players are unlikely to dominate it; local and niche players like mGaadi, Autowale, and Jugnoo will dominate this service.
- They are willing to work on a lower margin.
- They are willing to make an effort to understand the psychology of auto users and create suitable offerings—a pricing policy to match their expectation; introduce non- app-based system for accessing the auto, etc.
In this series, Rajesh Srivastava, Business Strategist and Visiting Faculty at IIM Indore gives you a regular dose of strategy case studies to help you think and keep you one step ahead as a professional as compared to your peers. Rajesh is an alumnus of IIM Bangalore and IIT Kanpur and has over 2 decades of experience in the FMCG industry. All previous Strategy with RS posts can be found here