Ola Cabs – Pursuing A Monopoly

Dr Gurudas Nulkar – Head of Marketing Department at SCMHRD

“We miss you! Here’s your discount voucher!”

Rs.50 off on all rides this week!”

Ola gives away money. First time users are reimbursedRs.100; downloading the app gets you another Rs. 50 off and Ola cabbies are smiling their way to the bank with loyalty and volume bonus. A quick calculation reveals that Ola loses money on many transactions. And yet they send out millions of mails every week doling discounts. Another Kingfisher Airlines in the making?

The business of app-based cabs is in its infancy. To its customers it offers a compelling value – advance book cabs, no waiting, waving or haggling, cool rides and easy payments. If the rickshawalla’s don’t respond quickly they will be the next Kingfisher!

To understand why Ola doesn’t mind the loss per transaction, we need to determine the probable key success factors for this business and what it takes to meet them.

1. Cab network is a critical resource.

At this stage cabs are few in most Indian cities. As app-based cab companies don’t own cars or employ drivers themselves, the way to beat competition is to sign up the freelance cabbies with Ola. If Ola can give them good business, they probably wouldn’t work with the newer players. A large cab base is important for consumers too. When I open my Ola app I like to see the swarm of cabs around my area. This assures me that my booking will be honoured…Ola has many cabs. On the other hand an app which throws up very few cabs is not very reassuring.

For this, Ola must offer higher earning opportunities to the cabbies. Response promptness, loyalty and  Incentivizing their loyalty and high volumes is the cost of containing the competition.

2. Three cab apps on my phone? No way!

I already have so many apps its slowing down my phone. Do I really need two apps for my local travel? If Ola works for me I should delete the others. And this is what Ola aims for. They want to be the only app on consumers phones. For without other apps on their phones, consumers won’t even consider competitors.

Giving  away money to consumers is a reliable way of retaining customers. For that Ola has to dish out unprofitable discounts and this is the cost of keeping customers.

Once customers are hooked to the app and show no signs of choosing a competitor, prices can be raised and cross selling is possible – profits raise their head.

3. More customers, quickly

Network-effect businesses need gigantic numbers quickly and are the ‘winner-takes-all’ type. Large customer base also ensures that the cab drivers are happy. Over time, small competitors have no chance of profits and are either bought out by the apex predator or simply die. Its survival of the largest in most app based businesses.

Where does the money come from?

Early stage investors support this pursuit of monopoly. The next investors coming in at a later stage in business want to put their money on firms with a huge customer base and are ready to pay the price for it. Money from the early stage investors is thus spent on customer acquisition, retention and driver loyalty.

How would the profits come by?

As Ola turns into a monopolistic business, it is easy to raise prices covertly – charging for peak times, prime routes, special cabs, waiting times – many different ways. Also in the cab, the passenger is literally a sitting duck….Ola can sell many other products and services to him in one ride! Profits are just round the corner….

Dr. Gurudas Nulkar

He is the Head of Marketing Department at SCMHRD. He also heads the MBA Executive Education Program at SCMHRD.As a first generation entrepreneur,he founded Prostick Adhesive Tapes in 1994.
An ecologist by choice,he is the Trustee of the Ecological Society, an NGO pursuing ecological education in India for the last 30 years. He is also an active cyclist.

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