This is how Dehaat, an online marketplace for farmers, was born. Countryside has built a profitable business model that the more affluent customers in the cities will consider necessary.
The company initially owned and controlled the distribution of its products, but it was soon realized that this was outsourced to another group of micro-entrepreneurs (or business partners). He had seen the microfinance industry empaneled a certain range of third party micro entrepreneurs who acted as local distributors of seeds, fertilizers and other essential commodities and it seemed to work really well.
Another success that Dehat achieved was in realizing that farmers did not need doorstep delivery. Nor did they require same day delivery. Farmers were willing to travel 5-10 km to collect their consignments. The farmers were the ‘rich of the time and the poor poor’, and such customers did not care much for convenience as the opportunity cost of their time was nothing.
This is the story of all the entrepreneurs who are profitably solving the problems of ‘Madhya Bharat’. Simply put, Central India comprises the next half a billion consumers, who are over the top 100 million.
Here is another example.
Razorpay started with the goal of building secure, affordable and easy to implement payment capability for online businesses. They did this by using a new layer of software that plugged into the banking system but made it much easier for a small business to adopt and use. Razorpay today serves 5 million merchants spread across India’s cities and towns. Of these, only 10% are medium to large businesses and the rest are small businesses.
key to success? Find ways to transform the ‘Prospect’ of Central India into a ‘Paying User’ with minimal investment and participation. It implied a very simple product usage sequence. Razorpay invested in building a near-zero integration platform and focused on making it simple enough that even a small business in a tier-3 city can have their website or store up with the payment platform in just a few clicks. There was no need to know anything about code, application programming interface (API), integration, etc. In fact, the company only creates links and uses the platform to receive business payments on WhatsApp as well.
sins of excess capital
It is far easier for first-generation entrepreneurs in India to build tech companies that deliver products and services to consumers at the top of the pyramid, not profitably for a growing central India. to manufacture and distribute. Unsurprisingly, so did the first wave of entrepreneurship in India after Y2K.
Consumers at the top of the pyramid are ‘wealthy and time-poor’, and expect convenience as a basic and even essential component of any solution. Be it Amazon, Flipkart, Ola, or Zomato – each of these companies has gone to extraordinary lengths to make the overall experience, and every step of it, seamless for consumers. Doorstep delivery, free returns, multiple payment options and free shipping are just a few of the many things that have become table stake.
There is nothing wrong with this approach. The problem began when the founders of some highly capitalized startups greatly underestimated the size of the market that was willing to pay for the facility. Under the guise of ‘changing consumer behavior’ and ‘making a market’, some of these startups tried to burn capital to entice consumers who didn’t really value convenience, and who in the moment of withdrawing incentives would disappear. This created the illusion of a bigger market, and the result was that these companies were riding a tiger they could not take off.
John Maynard Keynes once observed that the market can be irrational longer than you can remain solvent. In parallel to a new era, it will take more time to build the markets than you have capital to burn. If these startups, who had burned a bounty of money to create a bigger market, tried to become profitable, then growth (and hence valuation), would stall, exposing the true size of the market. As long as capital was readily available, no one questioned profitability. But with a long cycle of capital crunch at large, there is no option but to reduce the burn.
The fact that less than a quarter of unicorns are profitable reflects this discrepancy.
Three things are becoming increasingly clear. One, many start-ups creating artificial markets in the greed of incentives will surely have to be corrected and course correction is likely to come with a lot of pain and worry. We are already starting to see some of them. Second, your core product must be profitable. The argument that your original products, though unprofitable, have a large base of daily/monthly active users, to whom you can somehow profitably sell other products, is mostly a myth. Third, what works for consumers at the top of the pyramid is unlikely to work for central India.
The next 10-15 years are likely to be about creating beneficial products and services for Central India.
Building for Central India
Taking solutions that work for the top 50-100 million consumers and blindly implementing them in the lower socio-economic segment is bound to fail. The consumers of central India, like the farmers, are ‘the rich of the times and the poor of the rich’. Therefore, designing for convenience, especially if it results in an expensive product, is unlikely to fly.
In developed markets where there are customers with large wallet sizes, a company can choose to be a single product company and still build a large business through a combination of excellent product quality and a great customer experience. It’s hard to make money as a single-product company in central India. It is not without reason that the ‘Salt to Steel’ conglomerate emerged in India. For RazorPay, this means a range of small business loans from payments to neo-banking and more.
However, the initial focus should always be to win over the customer with a product or service, and then use the trust and goodwill earned in the process to launch nearby products and services. A leaky bucket or extremely high customer acquisition costs, from a focus as well as financial prudence point of view, are not good places to start expanding in the near future.
small packet of cavincare
While new age tech startups tried to please ‘money-poor’ consumers through discounts, some older companies, on the contrary, chose to ignore the needs of these ‘money-poor’ consumers. Clayton Christensen observed that disruption occurs when executives are so focused on pleasing their most profitable customers that they neglect or miscalculate the needs of other sectors.
Chinni Krishnan, a farmer-turned-entrepreneur in Cuddalore, observed how multinational companies (MNCs) have neglected low-income consumers. He worked in pharmaceuticals and fast moving consumer goods (FMCG) in the first few decades after independence. In the late 1970s, a few years before his demise, he had the idea to sell the product in small pouches. In those days, talcum powder and Epsom salts were sold in tin containers or glass bottles and the minimum quantity was around 100 grams. He observed that these products were not bought by those working in farms and factories, or other low-income communities, as they were considered expensive. He called to change the packaging and started selling talcum powder in 20 gram packs and Epsom salt in five gram sachets. He soon realized that liquid products could also be packaged in pouches. The idea was a huge success.
Chinni Krishnan was a great innovator, but the idea of selling shampoo in sachets would be promoted and popularized by his son CK Ranganathan who founded Cavincare.
Multinational companies in India were quick to imitate this innovation. Chinni Krishnan and KevinCare had uncovered a gateway into central India through a deeper understanding of the consumer – the insight being that the consumer in central India may have been poor, but ambitious. The problem was that most low-income households had severe cash-flow problems and, therefore, could not afford to buy larger packs. Buying a regular bottle of shampoo meant making a significant amount of monthly income for a luxury product, and that was simply unsustainable. The small pack size was a good way for consumers to try out a product for the first time.
The companies also figured out the right pricing strategy that would be at the intersection of reasonable profit for the company and affordability of smaller packs for the consumer. And, as these consumers moved up the socio-economic ladder, they would move on to buy the same product in higher pack sizes. So, in addition to creating a market by tapping into consumers in the middle and bottom of the pyramid, these companies were creating loyal consumers who would continue to buy similar products in larger pack sizes.
Over time the word ‘conscious’ became a metaphor for ‘small pack size’. Soon, soft drinks, biscuits, snacks, nutrition and food products, chocolates, in addition to all regular pack sizes, will be sold in smaller packs. Rapid digitization and technology is partially offsetting the high cost of distribution and the adverse impact on the unit-economics of the smaller packet.
The banking industry in India had refused to recognize the equivalent of ‘conscious’ in banking, and in the process, the conspiracy was lost. They stopped thinking innovatively about customers who were hitherto considered ‘unprofitable’ or ‘non-bankable’. This complacency has helped new-age disruptors think out-of-the-box and remove the barriers that have hindered traditional banks. Today, India has a large number of fintech companies attacking every area of banking from consumer loans to wealth management to small business loans. These young firms, if they do not lose their way, have great potential to be tomorrow’s winners as they master the art and science of addressing the underfunded market of several hundred million central India consumers.
yesterday’s winner
To conquer this market, new entrants have to solve for profitable scale by balancing the three vectors of being able to do the cost of acquiring the customer, the cost of servicing the customer, and the price of the product in a way that leads to profitable transactions. Are.
Some of the new-age founders who are building products and services for this market have been working (or just looking out of curiosity) for some other new-age startup like Flipkart or Urban Company. These founders are well aware that what works for the top 5% of the country certainly doesn’t work for central India. Growing up in communities mostly in central India, they get it instinctively. Some of these companies have grown using common sense, patience and an insane belief in success based on solving some tough challenges.
Along the way, they have solved for demand, the tendency to seek value rather than convenience, and the cost of customer acquisition by creating unique business models with lean operations. In the process, he has also defined the principles and frameworks to win in this market.
The future belongs to companies that can profitably distribute smaller packets.
(TN Hari is the author of Pony to Unicorn and advisor to The Fundamentum Partnership.)