Longer answer: The poor quality of subsystems, supply chain & infrastructure is such that the best case is that marketplaces will take time to deliver a quality experience to consumers and therefore will take time to scale and reach meaningful profitability.
I have been quite excited by Uber’s launch in Bangalore. For anyone who has haggled with auto-rickshaw drivers and been ditched last minute by every call-taxi service, Uber’s commitment to providing a high quality on-demand experience is a welcome disruption. And yet I worried about how they will execute in India. As in developed markets they are choosing to integrate local cab companies and don’t quite have control over quality of cars and drivers. The average black limo service in the US has been providing high quality service for years making sure that personnel are properly screened and trained and systems and processes are in place to provide a quality experience. In other words the quality of the subsystems in the cab industry is very high. But what a local cab operator in the US does not have is expertise and access to capital to consolidate like Uber has been able to. Uber and others provide a “software integration” of fragmented suppliers without having to worry about the quality of the last mile delivery. It has worked great for consumers and for cab operators and drivers (who now have much higher utilization of their capacity). None of these underlying realities are true in India and my experience with Uber bears testimony to that. Without getting into details of issues I have had with Uber in Bangalore, I have reconciled to the fact that that they are going to be better than an auto-rickshaw and other services, but I should be prepared for an experience that is less than optimal. How they are going to scale this is anyone’s guess. As I blogged before, I stopped using Meru cabs because of scaling challenges they faced. Uber’s biggest advantage is that their growth and profitability can come from other markets and there is therefore less pressure on the India operations compared to a player that is only focused on India. (For a great discussion about “vertical integrators” vs “system integrators” and the underlying subsytems that enable one or the other type of business take a look at this HBR article “Skate to where the money will be” by Clayton Christensen. The short statement I can make is that only vertical integrators can make it in India today).
I see all the same issues in the massive post e-commerce experimentation with marketplaces in India. Quite frankly, I am pretty astonished at how much people want India to look like a developed economy and solve those problems rather that first accept what India is and then get into problem solving.
Here are some simple ground realities:
- It takes time for consumer behavior to change at scale: this has a lot to do with underlying mistrust, a lot to do with low real and perceived opportunity costs. As a result CAC in India is very high and that is why large conglomerates such as TATA’s, Godrej’s etc are able to leverage their brands across multiple categories – they are fundamentally cross-selling because basic trust has been established over generations
- It is hard to charge the appropriate “value price”: I think it is too simplistic to say that the Indian consumer is price sensitive (it is true that s/he is), it is far more important to ask why (some day I will write about this). The impact really is that while a company may provide a decent service finding customers at scale who will pay the right price is impossible and this has a non trivial impact on LTV
- Contribution margin is generally low (obviously not in all businesses): This is a direct impact of poor infrastructure, process mindset etc and this then also has a big impact on LTV
- Debt markets are practically non-existent (except for companies with long operating histories or where land can be provided as collateral). And since the infrastructure is poor there is typically a very high CapEx requirement just to build the operating infrastructure. All of this has to be funded through equity capital
These are the ground realities. These are not a knock on India. In fact for those of us who have chosen to solve problems for the Indian consumer it is critical for meaningful problem solving to accept these realities and ask the business questions of growth, profitability and returns.
My problem with this experimentation with marketplaces in India is that this is just copy-pasting business models from a completely different environment and hoping that something will stick. I’d much rather ask questions such as:
- What adjacent markets (verticals or geographies) can a company address to expand addressable markets and accelerate growth?
- How much and at what frequency should one spend on marketing to maintain a healthy LTV/CAC ratio?
- Outside of debt financing from banks, what kinds of vendor financing can be used to decrease cash requirements for CapEx?
- What kind of software systems need to be put in place to improve contribution margins? How can mobile internet be used?
The answers in India are non-trivial and most of us are at the bleeding edge of trying things out unique to India to accelerate growth and achieve profitability. But I can speak for Peeyush and me: we’ve never taken our eyes off what the realities are. That is the only way we know how to solve problems.
The good news is that in the last 6-9 months as e-commerce funding has dried up I have seen a distinct improvement in the quality of conversations – people are starting to accept ground realities and asking meaty questions on how to solve real problem. Just today someone wanted me to walk them through the nitty-gritty of how Canvera is able to quickly reconcile payments from over 400 cities. I like this. I hope to see more of this as the startup eco-system matures. I’d like to see Indian problems being solved when serving the Indian consumer.