Why the proposed Ola-TaxiForSure merger is bad news

While a merger intuitively makes economic sense, it’s not good for the customers. The industry is consolidating way too fast, and hopefully new challengers will arise soon

Today’s Economic Times reports that Ola Cabs is in the process of buying out competitor TaxiForSure. As a regular user of such services, I’m not happy, and I think this is a bad move. I must mention upfront, though, that I don’t use either of these two services much. I’ve never used TaxiForSure (mostly because I never find a cab using its service), and have used Ola sparingly (it’s my second choice after Uber, so use it only when Uber is not available).

Now, intuitively, consolidation in a platform industry is a good thing. This means that more customers and more drivers are on the same platform, and that implies that the possibility of finding a real-time match between a customer who wants a ride and a driver who wants to offer one is enhanced. The two-sided network effects that are inherent in markets like this imply super-linear returns to scale, and so such models work only at scale. This is perhaps the reason as to why this sector has drawn such massive investments.

While it is true that consolidation will mean lower matching cost for both customers and drivers, my view on this is that it’s happening too soon. The on-demand taxi market in India is still very young (it effectively took off less than a year back when Uber made its entry here. Prior to that, TaxiForSure was not “on demand” and Ola was too niche), and is still going through the process of experimentation that a young industry should.

For starters, the licensing norms for this industry are not clear (and it is unlikely they will be for a long time, considering how disruptive this industry is). Secondly, pricing models are still fluid and firms are experimenting significantly with them. As a corollary to that, driver incentive schemes (especially to prevent them from “multihoming”) are also  rather fluid. The process of finding a match (the process a customer and a driver have to go through in order to “match” with each other), is also being experimented with, though the deal indicates that the verdict on this is clear. Essentially there are too many things in the industry that are still fluid.

The problem with consolidation at a time when paradigms and procedures are still fluid is that current paradigms (which may not be optimal) will get “frozen”, and customers (and drivers) will have to live with the inefficiencies and suboptimalities that are part of the current paradigms. It looks as if after this consolidation the industry will settle into a comfortable duopoly, and comfortable duopolies are never great for innovation and for finding more optimal solutions.

Apart from the network effects, the reasons for the merger are clear, though – in the mad funding cycle unleashed by investors into this industry, TaxiForSure was a clear loser and was finding itself unable to compete against the larger better-funded rivals. Thus, it was a rational decision for the company to get acquired at this point in time. From Ola’s point of view, too, it is rational to do the deal, for it would give them substantial inorganic growth and undisputed number one position in the industry. For customers and drivers, though, now faced with lower choice, it is not a great deal.

This consolidation doesn’t mean the end, though. The strength of a robust industry is one where weak firms go out of business and new firms spring up in their place in their attempt to make a profit. That three has become two doesn’t mean that it should remain at two. There is room in the short term for a number three and even possibly a number four, as the Indian taxi aggregation industry tries to find its most efficient level.

I would posit that the most likely candidates to emerge as new challengers are companies such as Meru or EasyCabs, which are already in the cab provider business but only need to tweak their model to include an on-demand component. A wholly new venture to take up the place that is being vacated by TaxiForSure, however, cannot be ruled out. The only problem is that most major venture capitalists are in on either Uber or Ola, so it’s going to be a challenge for the new challenger to raise finances.

\begin{shameless plug}
I’m game for such a venture, and come on board to provide services in pricing, revenue management, availability management and driver incentive optimisation. :)
\end{shameless plug}

 

The end of experience

While it might have turned out that the stories about TCS laying of tens of thousands of IT workers in India are simply not true, the fact remains that the Indian IT sector is bloated around the middle. There are way too many employees in the middle management level who have few skills apart from project management, and who are essentially dispensable to their employers. The question is what the change is at the industry level that is putting to peril careers of so many people in their 40s.

Back in my parents’ generation, you could choose two paths, especially in a government job. If you were ambitious, you could choose to be an officer, for which you had to write (and pass) exams and be prepared to work demanding hours (unlike what people usually expect from a “government job”). In return you got advancement in your career, get promoted and get a chance to be part of your company’s top management.

Of course given pyramidal structures of organisations things wouldn’t have worked out so well for everyone had everyone chosen to go along this path (growth would’ve been painfully slow) so there was a parallel track – you could choose to not become an officer. While this meant that beyond a point you would stop getting promoted, you continued to get paid quite well (my parents’ “senior assistant” friends made almost as much as my officer parents did), and you retire with a comfortable pension. It worked well for everyone. Or so it seemed.

As Deepak Shenoy explains so well in this excellent post (same link as above), back in the days when IT exporters made big margins, they could afford to pay their employees well. And they gave them fat raises every year irrespective of their performance. Employees went to middle management. They stopped coding. And the only skills they developed was “project management”, and perhaps people management. And they continued to get fat raises each year. Until margins started thinning down.

Now, as Deepak explains, IT exporters are facing diminishing margins, and they need to cut cost. When you are cutting costs, the first person on the block is one that is drawing a fat salary for not doing too much. And in the Indian IT sector, it’s these mid-level project management guys, who don’t code, are not key to management and have no specific skills. And so, sooner or later, as margins thin out, their jobs are going to be in trouble.

The problem with this particular cohort of workers is that they haven’t developed enough skills as they have gone along, and the skills that they have are easily replaceable with someone much younger (and thus drawing a much lower salary). In something as generic as project management, you are not going to lose too much by replacing a project manager with 15 years experience with one with 10 years experience, especially if the one with 10 years experience will get paid much lower than the other guy.

From a company’s perspective, it should not matter how long a particular employee has been there in its compensation decision. So if an employee with 10 years’ experience is offering the same value as one with 15 years’ experience, they ought to be paid similar salaries. Except that given the massive raises in salaries back in good times and the power of compound interest, the employee with 15 years’ experience is getting paid much more than the one with 10 years’ experience. And that is what makes him dispensable.

The big lesson from this story is that you should continue developing and never “settle”. With 15 years’ experience, you get paid more than someone with 10 years’ experience, but you should also demonstrate sufficient skill sets that show you as being significantly superior to the other guy. Experience, to put it in one way, is a proxy for measuring how much you’ve learned in your job, and if you stop learning there is no point in attributing value to that part of your experience where you’ve not learnt much!

Selection bias and recommendation systems

Yesterday I was watching a video on youtube, and at the end of it it recommended another (the “top recommendation” at that point in time). This video floored me – it was a superb rendition of Endaro Mahaanubhaavulu by Mandolin U Shrinivas. Listen and enjoy as you read the rest of the post.

I was immediately bowled over by youtube’s recommendation system. I had searched for both Shrinivas and Endaro … in the not-so-distant past so Youtube had put two and two together and served me up an awesome rendition! I was so happy that I went to town twitter about it.

It was then that I realised that this was the firs time ever that I had noticed the top recommendation of Youtube. In other words, every time I use youtube, it recommends a video to me, but I seldom notice it. And I seldom notice it for a reason – they’re usually irrelevant and crap. The one time I like the video it throws up, though, I feel really happy and go gaga over the algorithm!

In other words, there’s a bias which I don’t know what its exactly called – the bias that when event happens in a certain direction, you tend to notice it and give credit where you think it’s due. And when it doesn’t happen that way, you simply ignore it!

In terms of larger implications, this is similar to how legends such as “lucky shirts” are born. When something spectacular happens, you notice everything that is associated with that spectacular event and give credit where you think it’s due (lucky shirt, lucky pen, etc.). But when things don’t go your way you think it’s despite the lucky shirt, not because the shirt has become unlucky.

It’s the same thing with belief in “god”. When you pray and something good happens to you after that, you believe that your prayers have been answered. However, when you pray and something good doesn’t happen, you ignore the fact that you prayed.

Coming back to recommendation systems such as Youtube’s, the problem is that it is impossible for a recommendation system to get recommendations right all the time. There will be times when you get it wrong. In fact, going by my personal experience with Youtube, Amazon, etc. most of the time you will get your recommendation wrong.

The key to building a recommendation system, thus, is to build it such that you maximise the chances of getting it right. Going one step further I can say that you should maximise the chances of getting it spectacularly right, in which case the customer will notice and give you credit for understanding her. Getting it “partly right” most of the time is not enough to catch the customer’s attention.

Putting marketing jargon on it, what you should focus on is delighting the customer some of the time rather than keeping her merely happy most of the time!

Coffee pricing at Bangalore airport

I had what I thought was a neat theory on coffee pricing at the Bangalore International Airport. However, on second thoughts, I think the theory is bunk. On third thoughts, however, I think I should publish it, even though I don’t believe it is true. So here goes.

There are two places where you get great filter coffee outside the terminal of the Kempegowda International Airport near Bangalore. At the Western edge, close to the departure gates, there is Maiya’s, which also sells South Indian snacks and food items apart from pre-mixed filter coffee (without sugar). The coffee here is priced at Rs. 30 per cup. At the Eastern edge, close to the arrival gates, there is an outlet of Hatti Kaapi. Now, this outlet has started selling snacks, too, and now sells coffee in cups and pots of various sizes. However, the “basic” filter coffee, which is mixed fresh on the spot (you can choose the level of sweetness, and strength) and is available in a paper cup the same size of that at Maiya’s, is priced at Rs. 15.

The argument I had in mind for this differential pricing was that the clientele of Maiya’s, it being at the departure gate, is mostly passengers on their way to board flights. Given that they can afford to fly, they can afford to pay a premium for good coffee. Hence it is good economics to charge a high price for the coffee. Also, given that departing passengers are usually short on time, it is unlikely that they will pay the additional time cost of walking down to the Hatti Kaapi outlet in order to save the Rs. 15 per cup monetary cost of coffee there.

At the other end, Hatti Kaapi is at the arrival gate, and its major clientele consists of drivers. Given the distance of the airport from Bangalore city, it has become almost unheard of for relatives and friends to go all the way to the airport to pick up people. So people waiting at the arrival gate are mostly drivers. And given that drivers are not particularly rich (not rich on an average as airline travellers at least), they are much more price-sensitive when it comes to their coffee. And so the coffee at this end of the airport is priced at a much more reasonable Rs. 15 per cup. This makes for a nice economic theory, right?

The theory falls apart, however, if you compare the prices at Maiya and Hatti kaapi outlets at the airport to their prices elsewhere in the city. A good parallel is in Jayanagar, where the same two establishments have outlets across the road from each other (intersection of 7th Main and 30th Cross).

The kind of service in the two establishments is similar. You stand in line, take a token and stand in line again to get your cup of coffee. Hatti serves its coffee in a paper cup while Maiya serves in a ceramic cup-and-saucer. Like at the airport, Hatti’s kaapi is mixed on the spot and you can set your sugar level. Unlike at the airport, Maiya also mixes coffee fresh on the spot, but like at the airport no sugar is added and you need to add it yourself. It must be mentioned here that the Maiya in question has been there for several years while the Hatti outlet across the road started only a few months back.

And how do Maiya and Hatti price their coffee in Jayanagar? Maiya is at Rs. 18 per cup, and Hatti at Rs. 10 per cup. So the ratio of prices of a cup of coffee between Maiya and Hatti at the airport (2:1) is not very different from the ratio of prices of a cup of coffee between Maiya and Hatti in the city (1.8:1). So the theory I mentioned above falls flat on its head.

Where the theory stands, perhaps, is in explaining why Maiya and Hatti are located at the airport at the ends where they are located – Maiya being a more premium brand in general captures the passenger crowd at the departure gate, while Hatti being a more price-sensitive brand captures the driver crowd at the arrival gate.

And regarding the coffee itself I’ve had coffee at all four outlets and can confirm that both in the city and the airport, the quality of Maiya’s coffee is much superior to Hatti’s. In fact in Jayanagar, where the two outlets are a 5-minute walk from where I live, I prefer to pay the price and time (the lines at Maiya are generally longer than at Hatti) premium to drink coffee at Maiya rather than to drink the more “reasonably priced” stuff at Hatti.

Ashirwad Retail

This is a blog post I had written on 12th June 2007 and for some reason not published! Was cleaning up my drafts today and found this, and thought it would be good to publish just to show how I thought 7 years back! 

This evening I accompanied my mother to this store called Ashirwad Departmental Stores in Basavanagudi (near South End Circle). If you would ask me to describe the store I might probably call it a family-owned supermarket. And in my opinion, that store is easily the best department store I’ve seen in terms of customer service. And I believe this particular model might end up being the big success story in Indian retail.

Being a stand-alone store, Ashirwad may not have the supply chain efficiencies that chains such as Big Bazaar claim to have. It may not offer the discounts that say a Subhiksha offers. It may not be airconditioned and have the perfect lighting like yet another of the larger retailers. However, I believe it makes up for all this, and more

What Ashirwad so nicely achieves is in combining the good points of both organized and unorganized retail while trying to eliminate the drawbacks of both. To elaborate, one usually associates family run ‘kirana’ stores with inconvenient formats (you need to ask the shopkeeper for everything you need), lack of facility for bill payment for credit cards (i hear this is changing now), old or non-moving stock, the lack of a “shopping experience” and so forth.

Organized retail usually loses out on factors such as incompetent staff and store managers, ignorance of staff about store layout, bureaucracy, rules and most importantly the “impersonal” feeling. There are also quality issues that people (such as my mother) raise about the store-branded goods (mostly groceries) that are available at the supermarkets.

A family run supermarket tackles them all. The thing with Ashirwad is that the guy at the billing counter (there is just one, and there are no huge queues) is one of the owners of the store, and the store P&L has a direct impact on his life. He reports to no one, and hence has to offer no explanations. This solves a large number of problems – starting from billing time to allowing people to selling without a bill. Also, I noticed one thing that two people do the billing simultaneously (one looks at the items and packs them, while the other keys in the codes) speeds up the billing process by a huge amount.

Then, there is the format itself. It is a supermarket “help yourself” format, but there are staff all around (and they really know the store) in order to help you out if you can’t locate something. The level of intrusion, in my opinion, is just right. In fact, there are enough staff in the store so if you can’t, or don’t want to, go around the store to fetch things for yourself, the staff will do it for you, converting the store into a regular kirana. And you can browse all day if you want, and the staff won’t bother you, and it becomes a supermarket!

The most important thing that sets Ashirwad apart from the other supermarkets is that “personal” feeling. It being a family-run store, the staff are also fairly permanent (this perhaps explains their knowledge of the store layout – something sorely lacking in current “organized retail”) and if you visit the store a couple of times you become a “regular customer” and get the associated benefits. The same staff being there always also helps in case you want to return defective goods (another major hassle at supermarkets) or go to claim some unclaimed discount. Oh, and by the way, Ashirwad delivers.

The most important thing that sets Ashirwad apart from the other family run stores is it’s size and format. The shopping experience is sorely missing in the kiranas, and the fact that you need a shopkeeper to serve you also increases service time. They accept both credit card and meal pass coupons without a fuss, and most of the stock looks fresh. The in-store brands (in groceries) are also supposed to be of good quality.

However, what really struck me about Ashirwad, and I see that as a clear sign of financial strength, is the range of inventory. One way stores like Subhiksha save on expenses is by stocking only the really fast moving of FMCGs, thus saving on inventory carrying costs. Which means that every visit to a Subhiksha has to be followed by a visit to some other store to get what you didn’t get at Subhiksha (which is a lot). The range of goods (talkign about biscuits and tea and cosmetics here) I saw at Subhiksha seemed much larger than that I’ve seen at Food World, or maybe even Big Bazaar. I’m really impressed.

Now that I’ve praised the Ashirwad model so much, the question is regarding its scalability. Is it possible for me to open a thousand Ashirwads, and hope to give the Big Bazaars and Reliance Retails a run for their money? The answer, I think, is no and yes.

One of the key things that make Ashirwad what it is is that it is a standalone store, and it is a family that runs it. As I talked earlier, a large number of benefits of kirana stores are also seen in Ashirwad purely because the guy at the cash counter owns a share of the P & L, and that he has full control of the store. I opening a thousand such stores would imply employing store managers, and staff, and doing everything top down. Doesn’t fit into the concept at all.

So is there some hope in this? What if I can link up with a thousand such kiranas and make money out of that? I need not open a thousand Ashirwads myself. What I need to do is to convert a thousand existing kiranas into Ashirwads. And get a share of their profits (or maybe a fixed fee) while they function like a thousand independent Ashirwads – with all the associated benefits, and owning their own P&Ls.

Now if this format is such a clear winner, why is it not being replicated? Why are there not already a thousand Ashirwads out there? Looking at the various players, the people best placed to convert to this format are the kirana owners. Why are they not doing it, when it is such a winner? I believe the main, and maybe only, reason is that they don’t NEED TO. They don’t see any benefits in remodeling their store, and offering things they are not offering right now, and are hence not spending in this direction. They believe they are making enough money in the present format and there is no need ot change.

In the introduction to this piece, I actually mentioned a couple of drawbacks that Ashirwad suffers vis-a-vis organized retail. I mentioned reduction in supply chain costs. And I also mentioned discounts. Is there a way in which we could work with say fifty Ashirwad-like stores in a large city such as Bangalore and help them save costs? Is there something we can do that can save costs for all these guys (and significnatly so that a part of it can be passed on to the customer) and also make a profit for ourselves?

What kind of model can we use for this? How can we save the costs for the stores? What revenue sharing model do we use, and how do we make money? Who invests in teh store remodeling, us or them? Why will the stores partner us? Will their revenues increase so much by joining with us that they can pay us a part of that? All these questions still need to be answered. And once I do that, I need to approach someone with loads of money in order ot implement it.

Natural monopoly in package delivery

I’ve never got a call from a postman asking for the route to my home. I’m assuming none of you have, either. In fact, it is extremely unlikely that anyone even writes the recipient’s phone numbers on any letter or package that is being sent by ordinary post. It is assumed that the address uniquely identifies your house and the postman knows how to get there.

However, every time I get a courier or any other package delivered I’m faced with a constant barrage of calls from the delivery person. And this after living in Jayanagar, which apart from a few dead ends and diagonal roads is like Manhattan in that mains and crosses can be easily used to identify approximate locations of addresses beyond which door numbers uniquely identify houses. The problem is that most delivery persons of “private” courier companies have as their domains areas much larger than Jayanagar, because of which they have little domain knowledge of Jayanagar.

The reason why delivery persons of “private” courier companies have large domain areas is the number of packages that these companies deliver – the market is generally quite fragmented and so the number of packages that a single company has to deliver in a particular area is low, because of which the area assigned to each delivery person is large, because of which the delivery person is unable to “figure out” his complete area, which makes the entire delivery process inefficient.

Package delivery can hence be considered to be a “natural monopoly“, in that it is more efficient for one provider to deliver packages in a particular area than for several providers to deliver in the same area. A single provider delivering packages in an area can have delivery persons who are knowledgeable about the area and can hence deliver with low transaction cost.

Hence there is scope for setting up a company that specialises in last mile delivery of packages, with delivery persons with intimate knowledge of small areas delivering packages in that area. This company can then take over the responsibility for delivery in that area from a large number of courier companies, e-commece companies which have their own logistics, etc. But then that will completely defeat the purpose of a “courier service”!

If only India Post increases reliability to a level where e-commerce players start using it rather than their own delivery services.

(Companies such as Uber, which sends you a different cab each time you call for one and thus has no way to exploit this “natural monopoly”, solve the problem by providing their drivers with GPS and turn by turn navigation. Perhaps courier companies can learn from this?)

The trigger for this post was this Amazon delivery person who kept calling me every two minutes asking me to provide him directions to my house. As if I don’t have any better job. I told him that figuring out addresses is a part of his job and he can’t outsource it to me. I’m not at home so I don’t know if he’s even delivered the package. 

Offline marketing of online services

Using snail-mail for marketing is an effective strategy for it grabs more of your attention. But messages need to be more personalised to have effect.

This came in the mail yesterday. If you are an old-timer like me, you will recognise it as an “inland letter card”. The edges are frayed because it had been so long since I’d received one such card that I’ve forgotten how to open them.

bigbasket

You will notice that this inland letter came from Bigbasket, the online grocery shopping firm. At first look, it is bizarre that an e-commerce firm is using snail mail for its marketing. On second thoughts, though, it isn’t that bizarre!

The thing with online modes of communication such as email or SMS is that the cost of sending a message is low, very close to zero. What this leads marketers to do is to bombard you with messages. For example, I bought something from Jabong a couple of weeks back and they’ve since sent me at least an SMS a day. I promptly delete them without reading. On my email, I’ve been unsubscribing wherever possible from promotional lists from which I get messages – for they are too frequent and too “vanilla” (it’s bizarre that even marketers who know much about me refuse to use that information in their communication).

In short, there is too much clutter in online (email/SMS) marketing, and the chances of any promotion really standing out and getting the user’s attention is minuscule.

Sending snail-mail, on the other hand, is expensive. It costs you to buy the paper, print out the letters and then you pay for postage. This means that with the advent of cheaper means of communication, most marketers have moved away from it. What that has done is that you get much lesser snail-mail than you used to a few years ago. Which means that the amount of attention you devote to each snail-mail is actually more!

So with snail-mail being the more expensive form of marketing, it is actually more effective for marketers because it draws your attention! (You can think of it as a multi-player prisoner’s dilemma where the marketer wants to maximise her claim on your attention (relative to her costs), and can do so by either using email or snail-mail. The optimal solution, I believe, is a kind of “mixed strategy” – mostly email, but the odd snail-mail here!)

So an online sales company reaching out to you by snail mail is not that bizarre after all. If only they had customised the mail to put my name on it (not hard to do at all), and made it seem like a personal letter, it would have been even more effective!

There have been two occasions in the last five years when I’ve actually responded to upsell campaigns. One was by Airtel who called and offered me a 3G data plan for almost the same price as what I was then paying for my 2G plan. I had been intending to upgrade and I took it.

The other was by Tata Sky, who sent me a beautifully crafted personalised letter printed on thick A4 paper, indicating I was a “premium subscriber” and asking if I wanted to upgrade to Tata Sky+ HD, and giving me a number of a dedicated call center who I had to call to upgrade. It is likely that had it been email I might have discarded it (or if I were using today’s Inbox, marked it as “Done”). Snail mail drew more attention, and the personalisation made me feel good. And I upgraded.