That’s how DeHaat, an online marketplace for farmers, was born. DeHaat has built a profitable business model by cutting out what more affluent customers in cities would consider as essential.
The company initially owned and controlled the distribution of their products, but soon realized that this was best outsourced to another set of micro-entrepreneurs (or business partners). They had seen the microfinance industry empanel third party micro-entrepreneurs within a certain radius who acted as the local distributor of seeds, fertilizers and other essentials and this seemed to work really well.
Another breakthrough that DeHaat made was in quickly realizing that farmers didn’t need doorstep delivery. Nor did they need delivery on the same day. Farmers were quite willing to travel 5-10 km to pick up their consignments. Farmers were ‘time rich and money poor’, and such customers don’t care a lot about convenience because the opportunity cost of their time was nothing at all.
This is the story of all entrepreneurs who are profitably solving the problems of ‘middle India’. Simplistically put, middle India comprises the next half a billion consumers, beyond the top 100 million.
Here’s another example.
Razorpay started with the goal of building safe, affordable and easy to implement payment capability for online businesses. They did this using a new layer of software that plugged into banking systems but made it very simple for a small business to adopt and use. Razorpay today serves five million merchants spread across the cities and towns of India. Of these, only 10% are medium to large businesses with the rest being small businesses.
The key to success? Find ways to convert the middle India ‘prospect’ into a ‘paying user’ with minimal investment and involvement. This implied a very simple product usage sequence. Razorpay invested in building a near-zero integration platform and focused on making it so simple that even a small business in a tier-3 town could be up and running with their website or store payments platform in a few clicks. There was no need to know anything about code, application programming interface (API), integration, etc. In fact, the company simply creates links and uses the platform to receive business payments even over WhatsApp.
The sins of excess capital
It has been far easier for first generation entrepreneurs in India to build tech companies that deliver products and services for consumers at the top of the pyramid than to build and deliver products and services profitably for a growing middle India. Unsurprisingly, the first wave of post-Y2K entrepreneurship in India did just that.
Consumers at the top of the pyramid are ‘money rich and time poor’, and expect convenience as a basic—and even essential—component of any solution. Whether it is Amazon, Flipkart, Ola, or Zomato—each of these companies have gone to extraordinary lengths to make the overall experience, and every step of it, seamless for the consumer. Doorstep delivery, free returns, multiple payment options, and free shipping are among a host of things that have become table stakes.
There is nothing wrong with this approach. The problem started when the founders of some of the highly capitalized startups grossly overestimated the size of the market that was willing to pay for convenience. Under the garb of ‘changing consumer behaviour’ and ‘creating a market’, some of these startups went about burning capital to lure consumers who did not truly value convenience, and who would disappear the moment the incentives were withdrawn. This created the illusion of a large market, and the outcome was that these companies were riding a tiger they could not dismount.
John Maynard Keynes had once observed that the markets could be irrational for longer than you could remain solvent. In a new age parallel, markets would take longer to create than you would have capital to burn. If these startups, which had burnt boatloads of money to create a large market, tried to become profitable, the growth (and hence valuations), would come off, exposing the true size of the market. As long as capital was available easily, no one asked any questions on profitability. But with a long cycle of capital-scarcity looming large, there is no option but to cut burn.
The fact that less than a quarter of the unicorns are profitable reflects this anomaly.
Three things are becoming increasingly clear. One, many of the start-ups that have created artificial markets through the lure of incentives will have to course correct and the course correction is likely to come with a lot of pain and angst. We are beginning to see some of that already. Two, your core product needs to be profitable. The argument that your core product, though unprofitable, has a large base of daily/monthly active users to whom you could somehow sell other products profitably is mostly a myth. Third, what works for consumers at the top of the pyramid is unlikely to work for middle India.
The next 10-15 years is likely to be about building products and services profitably for middle India.
Building for middle India
Taking solutions that worked for the top 50-100 million consumers and applying them blindly to a lower socio-economic segment is bound to fail. Middle India consumers, like the farmers, are ‘time rich and money poor’. Hence, designing for convenience, especially if it results in an expensive product, is unlikely to fly.
In developed markets where there are customers with bigger wallet sizes, a company could choose to be a single product company and still build a large business through a combination of outstanding product quality and a great customer experience. It’s hard to make money in middle India as a single-product company. It’s not without reason that ‘salt to steel’ conglomerates emerged in India. For Razorpay, this means expanding from payments to neo-banking and to small business lending, among other areas.
The initial focus should, however, always be to win the customer with one product or service to start with, and then use the trust and goodwill earned in the process to launch adjacent products and services. A leaky bucket or an extremely high customer acquisition cost are not good places to begin expanding into adjacencies, both from a focus as well as a financial prudence point of view.
Cavinkare ka chota packet
While new age tech startups had tried to please the ‘money-poor’ consumers through discounts, some of the older companies, in complete contrast, chose to simply ignore the needs of these ‘money-poor’ consumers. Clayton Christensen had observed that disruption is what happens when incumbents are so focused on pleasing their most profitable customers that they neglect or misjudge the needs of other segments.
Chinni Krishnan, a farmer turned entrepreneur in Cuddalore, noticed how the multinationals (MNCs) had neglected the low-income consumers. He had dabbled in pharmaceuticals and fast moving consumer goods (FMCG) in the first few decades following independence. Sometime in the late 1970s, a few years before his demise, he came up with the idea of selling products in small sachets. In those days, talcum powder and epsom salts were sold in tin containers or glass bottles and the minimum quantity was nearly 100 grams. He noticed that these products were not bought by the workmen in the farms and factories, or the other low-income communities, because they were considered expensive. He took a call to change the packaging and began selling talcum powder in 20 gram packs and epsom salt in five gram sachets. He soon realized that even liquid products could be packed in sachets. The idea was a huge success.
Chinni Krishnan was a great innovator, but the idea of selling shampoo in sachets would be marketed and popularized by his son C.K. Ranganathan who founded CavinKare.
MNCs in India were quick to copy this innovation. Chinni Krishnan and CavinKare had figured out a door into middle India through a deep understanding of the consumer—the insight was that the middle India consumer may have been poor, but was aspirational. The problem was that most low-income families had a serious cash-flow problem and, hence, could not afford to buy the large pack. Buying a regular bottle of shampoo meant carving out a significant chunk of the monthly income for a luxury product, and this was simply untenable. The small pack sizes were a good way to get first time consumers try out a product.
Companies also figured out the right pricing strategy that would be at the intersection of a fair profit for the company and affordability of the small pack for the consumer. And, as these consumers climbed up the socio-economic ladder, they would graduate to buying the same product in higher packs sizes. Therefore, besides creating a market by tapping into consumers at the middle and the bottom of the pyramid, these companies were creating loyal consumers who would continue to buy the same products in bigger pack sizes.
The word ‘sachet’ over a period of time turned out to be a metaphor for ‘small pack size’. Soon, soft drinks, biscuits, snacks, nutrition and food products, chocolates, would all be sold in small packs, in addition to the regular pack sizes. Rapid digitization and technology is partially offsetting the higher cost of distribution and adverse impact on unit-economics of the chota packet.
The banking industry in India had refused to recognize the equivalent of a ‘sachet’ in banking, and in the process, lost the plot. They had stopped thinking innovatively about customers who were so far considered ‘unprofitable’ or ‘un-bankable’. This complacence helped new age disruptors think out of the box and overcome impediments that constrained traditional banks. Today, there are scores of fintech companies in India attacking every spectrum of banking from consumer lending to wealth management to small business credit. These young firms, if they don’t lose their way, are very likely the winners of tomorrow as they master the art and science of addressing an underserved market of several hundred million middle India consumers.
The winners of tomorrow
To win this market, new entrants have to solve for profitable scale by balancing the three vectors of cost of acquiring the customer, cost of servicing the customer, and being able to price the product in a way that leads to profitable transactions.
Some new-age founders who are building products and services for this market cut their teeth working for (or just keenly observing) some of the other new-age startups like a Flipkart or the Urban Company. These founders are keenly aware that what works for the top 5% of the country certainly does not work for middle India. Having mostly grown up in middle India communities, they get this intuitively. Some of these companies have evolved using common sense, patience and a maniacal belief in success based on solving some of the thorniest challenges.
Along the way, they have solved for demand, a proclivity for seeking value rather than convenience, and cost of customer acquisition by creating unique business models with lean operations. In the process, they have also defined the principles and frameworks for winning in this market.
The future belongs to companies that can deliver the metaphorical chota packets profitably.
(TN Hari is the author of Pony to Unicorn and an advisor at The Fundamentum Partnership.)
