Building for Bharat: Segmenting by access and enabling middlemen
PM Crosstalk #1 (Part 2)
Crosstalk brings together the best practitioners across domains in the tech ecosystem. These notes are from the Product Manager roundtable.
Last time (Part 1) we uncovered inefficiencies in the agriculture sector in India. In Part 2 below, we discussed the subtle nuances of the vast Indian SMB sector and specifically how:
Startups need to think of technology as an means to enable the middle men rather than disrupt them.
Having spent the last few years at Instamojo, a payments startup focusing on the Indian SMB sector, Dalan and Manik added a lot of insight into dealing with entrepreneurs in the segment.
Below is an edited transcript for Part 2 and here is an unedited audio version.
Abhishek: As much as we have been talking about these ‘inefficiencies’, at this stage of inefficiency, we are throwing truck loads of onions and charging 30% brokerage and 20% interest rates.
The internal trade in India is 54% of GDP. Cross state border trade. So we are talking about north of a trillion dollar industry.
Just because we’re talking about the bleak points doesn’t mean the market is slow. As the middle class rises and the migration increases, it’s slowly going to double over the next 10 years.
Nazz: You know, I’ll give you classic example of a company from Jayanagar called RubanBridge. They wanted to create jobs for the rural area by solving the supply chain problem.
So they started doing deliveries for Amazon to Hosur. Initially, 10 packages every day. Over some time, that grew to 30, 80 — suddenly they were delivering 100’s of packages everyday.
And when it says Amazon Hosur over there, people were like, “Oh, trusted brand”. They set up one guy there who would just take orders from people.
Now, they’ve flipped the situation completely, where villagers can go to their representative and place an order for anything to be delivered from the City.
They have found that people are doing that even for high ticket products like two wheelers, JCB’s, tractors!
Abhishek: By the way 2016, was when rural FMCG Market overtook Urban FMCG Market.
Kartic: (To Nazz) The Business model you described there. There’s a startup called Storeking that does that. They do the same at post offices in rural areas. Basically there is one tablet and one guy to help villagers shop online.
Ujjwal: What is that company?
Kartic: Storeking
Ujjwal: Yea. Right, right. I’ve heard about them.
Abhishek: It’s also “I want a scooty, which one should I buy?” “You know, go with Activa, there are three service centers.” Since this guy has been buying for so many people, he serves as an aggregator in an omni channel sense.
How do you digitize and empower these people to expand?
Nazz: He’s only doing villages. Must be over 200 villages.
[silence]
Abhishek: While on one hand every e-commerce company — Flipkart, Amazon, everybody combined, has been struggling with last mile delivery, I think the FMCG’s have cracked it.
Parle-G sells one biscuit packet for 1 rupee. It’s the most produced biscuit in the world. They manufacture and sell it for 1 rupee and make a profit on it and it also has their branding.
So you know there is a lot to be learned from the Indian FMCG sector.
Dalan: Parle G and products like that — they actually end up selling more but that’s not what they make a profit on.
Abhishek: Correct. It’s more of a branding exercise.
Dalan: You buy Hide and Seek. You buy Minute Maid, etc., that are more expensive — they sort of subsidise it. Imagine if I give you free internet, but I make money off of these other services on top of it.
Abhishek: It’s like I’ll sell you Rexona…
Get you used to a branded soap. And then tell you Lux smells better.
And then slowly move you up the–
Adam: Wait, are they hiring the distributors?
It must be that they hook the retailer first, right? By selling like, “Here’s this really cheap product, you’ll be able to sell it.” But then they get to own that retailer.
Nazz: Very true FMCG, because what happens is a retailer will only sell your product if you give him something that sells fast. And Parle G would sell much faster than any other biscuit. So you got this retailer hooked and then he would say, “Oh, why don’t you push this other product as well?”
Abhishek: And credit lines are offered because you know this guy is not going to run anywhere, right.
Moving on, the bus ticket aggregation thing. So our estimates are that there are 2.5 lakh bus tickets get booked everyday, in India. And the prime market is South India.
Redbus is a Level-2 aggregator is what I realise today. We have Level-1 aggregators, also.
These are smaller firms that follow the “pen drive” models. They go and install the software for different fleet owners — 20 to 30 buses.
This software then plugs in to Redbus.
The top 10% owns 50% of the market and funnily enough, the rest 90% percent owns the remaining 50%. This is a proxy for how fragmented this space is. 5 buses, 10 buses, 15 buses — there are a lot of people like this so the lower 90% is extremely fragmented pockets of individual people.
Ujjwal: And they have their own websites.
Abhishek : I don’t know that.
Ujjwal: Yeah, I’m telling you. I was surprised when I found out as well. I asked them how to book. They simply told me to go to the website and do it. And they take a 100% of bookings online. No other mode!
Nazz: They have the SMS service integration, locater, everything.
Manik: A couple of them are using Instamojo.
Nazz: Instamojo model works very well for these guys.
Manik: Last time we tied up with a guy who was giving the software to these companies and he onboarded some 250 such aggregators in one shot.
Abhishek: What is this company called? What kind of software?
Manik : Travel Booking, it’s a basic booking software. You can put it in hotel or bus booking software.
Nazz: It’s the same thing with all the restaurant tiers.
Manik: He’s been doing a lot for hotels, bus bookings, and truck bookings for your goods transportation. Any sort of booking basically. So we got him at Instamojo, he was not willing to share his database with us.
He had to come up with a model of pay-per-use where he was taking a cut from the bookings which were coming.
So when Instamojo settles the payment, 90% of the payment should go to the final vendor, and 10% should go to the booking software guy. He was not able to sell it as a SAAS subscription. Because nobody wanted to pay upfront.
Abhishek: What is it called?
Manik: BitlaSoft
Dalan: This what I realised. One of the advantages that Instamojo had was the pay-as-you-go model.
Paying for using software is completely alien to people in India. They would always find a pirated copy or a crack, etc. Software was always free.
Taking a cut is a lot more digestible to the SMBs
Manik: There is a booking agent for everything. There are still small cinemas screening B-grade movies and they have their own website which you can book tickets (50–60 bucks), and pay via wallets.
This is only possible because there are a lot of less known software providing companies that we don’t know of. They’ve been actually meeting these people and selling it in person and building these relationships.
Abhishek: That exact thing was mentioned in a Harvard Business Review Case study. They call it “segmenting by access” in strategy terms.
Carmike Cinemas in the US selects towns with less than 200k people, where you have no malls or anything, and the biggest competition they have is the local basketball team. They don’t have a variety of films being screened, there’s only one film being screened every month.
The local manager, like you said, maintains a personal relationship with the locals. Figures out the vibe and says “Hey, we need an action movie next month.”
They control the whole streaming process using software. So rather than having 10 people on the grounds doing all of that, they need only 2 people. And unlike most other large cinema retailers, their corporate salaries are less than 2%. Typically it’s 5–6% percent. There is no competition, they are just printing money like that.
So segmenting by access is like this guy has been able to do it for one market.
What is required to enable it for 50 other markets?
Because he understands the space, right? So this is exactly the kind of solutions we have to start thinking about.
Adam: There is cost to it as well. The nature is that it is very fragmented software, right, throughout the market. My last company, we had an invoicing software. So we wanted to integrate with the accounting solutions that businesses were using. There were just all kinds of ridiculous accounting solutions that small businesses were using.
Manik: Was it Tally?
Adam: Well Tally is the most popular, absolutely. But what’s the rest? It’s just custom software. We saw a tremendous amount of custom software. It was also terrible because it was so poorly designed. There was one guy I remember, he couldn’t print his invoices. Forget how he ended up getting physical copies of invoices. He couldn’t print!
Manik: I mean, if it’s free then it’s fine.
Adam: No, he paid for it! I think there are a lot of drawbacks to that. I think it also creates bad consumer behaviour.
One, it makes the market really fragmented so it makes it more difficult to build an ecosystem to build on top of.
And then, two, I think consumers (small businesses) just start expecting inferior quality products.
There is no appreciation for what’s a better designed product. It’s all just built as strictly functional. I guess in some ways, that’s Tally for you, right?
Nazz: As long it can run on Windows XP!
Arvindh: This is actually very interesting because you try to sell something based on UX. To the person who is not using the product, it is extremely hard. But to a cashier, he understands that it only takes 20 seconds to do a billing because he understands the UX.
Manik: That’s a selling problem.
When you’re trying to sell them something that is just making it convenient for them, it won’t work because time is cheap in India.
If you made a product, and you explain to that person how he’s going to make more money out of that product, it will sell. But if you’re simply making it more convenient for the person, they don’t want it.
Nazz: There is one more thing for UX. At Vidyanext, we designed the product for tutors as well as students. Students are very tech savvy, tutors are not.
We put a vertical ellipses to update marks on the students’ tests. That three dot thing on a card. You just click it and you get a CTA.
The tutors couldn’t use it!
“What is this thing?”
We actually had to put a huge, ugly button on that card saying ‘update marks’.
Manik: You can’t blame them for that.
Abhishek: I guess it’s like selling fine dining to someone who is looking for a simple meal!
Manik: A lot of people are trying to cut out the middlemen. They don’t realise that these middlemen have been earning their bread out of this whole thing.
There is a relationship at every level. The wholesaler with the distributor, the distributor with the retailer, the retailer with the customers. If you simply try to acquire those customers directly, you won’t get them.
MLM or channel partnerships work really well in India because that’s how people create jobs. And everybody is making a cut at their level.
If you go to tier 2 you won’t find people working as executives or managers. A lot of them are small time entrepreneurs themselves. The middlemen, basically. C&F agents are just that.
Adam: What’s C&F?
Manik: Carrying and forwarding agencies. So, if Bluestar makes an AC, they give it to a C&F agent who puts it in warehouse. He further distributes to a wholesaler who distributes it to a retailer. Each of them take about 2–5% cut that is passed on to the MRP that a customer pays.
Now if a big company says I’m gonna own the final shop, hire the middleman — the C&F agent, the wholesaler, the distributor and final selling guy, put them all on pay rolls, and take a margin. It doesn’t work out. You cannot control the leakages. Its highly inefficient.
Bluestar, a national brand, doesn’t even have a showroom!
All these ideas of trying to cut the middle man and finally give value to the end customer. I don’t ascribe to them. The challenge is to educate the middle men, get them on board and work with them. Middle men make it easier.
Kartic: I agree.
The idea should be to enable the middlemen not disrupt them.
Manik: Exactly.
Kartic: In India, you can’t get rid of middlemen. Solutions like Instamojo for example enable that guy (referring to the BitlaSoft example) to manage bookings of his clients.
Manik: We never had the intention of having his clients onboarded and finally cutting him out. We were offering him a percentage x and his clients were paying x + 10% or 20%. We never thought of offering x to his clients and cutting him off.
In fact, we went the other way round and went ahead and created a channel where we empower these guys and tell them, “OK, this is how you sell it. This is how you’ll make money out of it. You should create value. This is how you should go ahead and get more people onboarded.”
Dalan: That’s the thing — middle men grow and add value at a lot places. For example, there is a lot of information on the Internet. So if I want to learn about Blockchain, and there’s a newsletter than sends me the top 5 articles on the subject every week, that’s a lot of value.
Ujjwal: Information dissemination is if made efficiently will definitely help.
Manik: [chimes in] There’s no doubt about it.
Kartic: That’s how you enable the middleman in any way. You give them the information, you allow him to use technology to optimize.
Special thanks to abhishek tiwari for leading the discussion and Dalan Mendonca & Manik Singla for sharing their insights. Special thanks + ❤ to Esther Fell for helping put all of this together from behind-the-scenes.
Follow Crosstalk on Medium where we talk about opportunities in the Indian SMB sector.
