good business – Pertinent Observations

Ok I give this one to North Bangalore. The best masala dosa in town is found at CTR in Malleswaram (ok I’m going by one data point, haven’t been there more often). The thing that goes by the name of masala dosa in Vidyarthi Bhavan is a completely different animal. It is thick, it is literally deep fried, and tasty, yes. But it’s not a masala dosa.

The problem with restaurants having “flagship dishes” (like the masala dosa at either CTR or Vidyarthi Bhavan) is that you are usually loathe to try out their other dishes which could be quite tasty as well. For example, the idli-vada at Vidyarthi Bhavan is quite good, and I’m told that the rava vada is awesome (unfortunately I went there on a weekday morning when they don’t make rava vada). And I don’t know if it’s good business practice for restaurants to have a “flagship dish”.

Coming back to “real” masala dosa and Gandhi Bazaar, you should definitely go to this quaint old little place called Mahalakshmi Tiffin Room on DVG Road, between Gandhi Bazaar circle and North Road. It’s a fairly old-fashioned place, doesn’t serve sambar with masala dosa (only chutney), happily serves one-by-two masala dosa and is generally not very crowded.

It is one of those places with a wooden door, with a wooden shelf in the corner which has pepsi, mirinda, etc. The service is quick and efficient and the food is tasty.

Of late I’m not too impressed by the masala dosa at Adigas, which not so long ago I used to absolutely crave (for example, when I returned to Bangalore after a 10-week trip to London 5 years ago, I went to an Adigas for masala dosa straight from the airport. Now it doesn’t seem to be all that worth it). Or maybe I’m biased in my opinion because the Adigas I most frequent is the one at Embassy Golf Links, where my office is located.

Oh and I need to mention here that I absolutely loathe the Madras masala dosa, the thing that is white and not very crisp, with soggy palya and served with some three varieties of chutney, and flat sambar.

One of the buzzwords in marketing in the last few years has been “share of wallet”. “We don’t aim for market share in any particular segment”, they say. “What we are aiming for is a larger portion of the customer’s share of wallet”. Basically what marketers try to do is to design their products such that a larger portion of customers’ spending comes to them rather than go to competitors (again – they claim they have no direct competitors and everyone else who competes for the customer’s spending is a competitor).

So far so good. But the problem with looking at things from a “share of wallet” pespective is that it assumes that the wallet is homogeneous. That each part of the wallet is similar to the other, and spending for different items comes uniformly from all parts of the wallet. This isn’t usually very well recognized, but what matters more than “share of wallet” (of course that matters) is the “tranche of wallet” that this particular product sits in.

I don’t think I need to give a rigorous proof for this – but some spending is more equal than others. For example, if you are dirt poor and have only ten rupees left in your pocket, you would rather buy a loaf of bread than buy a tube of lipstick. Some goods are more important than the others. “Necessities” they call them. The rest become “luxuries”. Even the “luxuries” are not homogeneous – there are various tranches in that.

So the aim for the product manager should be to get into the deeper tranches of the customer’s wallet (assuming that the top tranche is the “equity tranche” – the one that takes the first hit when spending has to be cut). Targeting the top tranche may be a good business in good times, but when things go even slightly bad, spending on this product is likely to take a hit and thus the “share of wallet” falls dramatically. Getting into a deeper tranche means more insurance, so to say.

In the world of CDOs (from where I borrow this tranche, equity, etc. terminology), people who take on the equity tranche and other more risky tranches do so only in exchange for a premium – basically that you need to be paid a premium amount (compared to lower tranches) during good times so that it compensates for lack of income in the bad times. So this means that if you are trying to target the most disposable part of the wallet (i.e. the part of wallet that takes the first hit when spending has to be cut), you better be a premium player and make enough money during good times.

So the basic insight is that. The more disposable spending on your product is for your customer, the more the premium that you have to charge. Some products such as high end fashion accessories seem to have got it right. Extremely disposable spending, which leads to volatility of income; balanced by extremely high margins which make good money in good times.

Certain other products, however, don’t seem to have got it right. One example that comes to mind is Indian IT. Some of the offerings of Indian IT companies come near the disposable end of their customers’ wallets. However, to compensate for this, they don’t seem to charge enough of a premium. So they make “normal” profits during good times, and sub-normal profits during bad times – leading to an average of sub-par performance.

So before you enter a business, see which part of your customer’s wallet you are targeting. See if the returns that you will get out of this business in good times will be enough to tide you over during bad times. And only then invest. Of course, before the 2007-present downturn happened, people had no idea what bad times were, and thus entered into risky businesses without enough of a risk premium.