Vijay Anand | The Startup Guy.

Selling to the Unaffordable. Part I

Posted on: March 26, 2008

Most enterprises in India look to “more economically viable” markets abroad as their target customers. If you ask them why is it that we are never focused on local demands, and the market that is seemingly so huge and is often quoted to be one of the fastest growing, the response is usually the same: “They Cannot afford this service”. Despite, seemingly valid claims, the stability of an economy depends on diversifying your target markets and India being this large pool of potentially huge market is being eyed by foreign companies as a last hope and last stand for their company stability, all this while we are still looking elsewhere for our hope to shine from.

An average television viewer cannot afford the cost at which shows are produced. A startup cannot afford to get a paid mentor onboard though it might essentially be the secret sauce of success. Most developing countries cannot afford the lifestyle that developed countries take for granted. Most booming economies still cannot afford the price tags of “brands”. Folks in Chennai, bangalore and most of the growin ‘n’ emerging urban centers cannot afford housing within city limits. Most people in rural India cannot afford most of what urban india consumes and produces. If you really think about it, in the economics of transactions, very little is part of the category where people can really afford it. For everything else, there is mastercard 🙂 I wish it was simple as that.. But nope, I can only wish for that.

This is also a train of thought that has been going on in my head partly because I work with two verticals. Startups and Rural India and both of them have a small and interim cash flow problem. Alright, perhaps a slightly bigger and long term cash crunch problem. They are both probably at the extreme end of the “affordability” spectrum but they are very much alike. Both are valued and perhaps looked upon as the fastest growing, and the next big thing to happen and corporates are rightly looking at both of them for their next big growth. The parallels are really strong, and almost face the very same issues.The issue is, who pays for the services rendered to them now so that we can cash in when they grow strong.

That’s when the thought process deviated to look at other case scenarios of transaction, and I do realize that there is very few a time when there is actually a transaction where there is exchange of cash. In most cases, its a promise of payment in installment, someone else guarantees for the liability, or in most other cases, the revenues come from someone else because those third party companies benefit by this medium (perfect example, Google, Television, Radio Channels). There is definitely the phenomenon of Free, that factors in somewhere here as well.

But Free is just one form of marketing and selling. It cant and doesn’t work for everything. The Price of certain goods cannot be cheapened. Brands cannot be cheap. Houses in Urban centres, because of the demand will rise and will always seem unaffordable. Startups cannot afford the hardware, the talent, the mentorship, the marketing support, the legal fees, the infrastructure – all of which are essentials for their survival. Rural India cannot afford some of its core necessities, and free (AKA Aid) is not a solution to their problem since it seeds the cause for several other issues in the long run – the lack of a vision of self-sustainability being one. How do you tackle all these issues?

There is a method to all this madness though. This is probably one of the complex problems in economics and I in no way am an expert on the subject, but there is a lot to learn from observation, I reckon. My understanding is that in economics, money is a unit that is traded against. Anything which is of equal value to that, though might not be actual money, has the same weight, calibre and power to it. If it can be quantified, then it becomes something that can be traded. Thats observation number one. The proof for that is how you trade your car registration certificate for a loan, your assets to liquid cash, your equity to working capital etc. That’s the simple one and one that applies for those who have something to trade. What about those who have nothing but aspirations, and nothing that is tangible enough for a trade?  (Think too poor, Too young, and thats essentially two of the biggest markets in the world)

There are probably no solid answers, and especially not a one stop solution for all those issues, but there are certainly answers. If you do look at what it has taken for “luxury” goods and services to be sold in countries such as India and other developing nations you will understand a key element in all of it. How did five star hotels manage to survive 20 years ago in India when there was barely excess cash flow in people’s hands. How did people manage to sell cars and motorbikes when the average income of an indian showed no feasibility for them to afford it – atleast not the major market. Take a close look at it and you’ll learn quite a few things. As I always say, there is more than one thing to learn from across Industries, and this is a very valuable lesson and one that I am definitely not going to spoon feed you on.

Let me hand you some hints. The cost of that ultra cool gaming machine that you have in your living room, either be it an XBOX or a Playstation costs way more than its retail price. I am told that its sold at a loss (I have yet to verify that, though the BOM for a cell processor and hardware of that power would certainly cost more). Why, is the question? They sell it at that price, so that people can buy them, and will then go buy the expensive games, out of which the game makers pay a percentage in royalty to the hardware manufacturers. Sooner or later you make money, and you make multiples (depending on how many games a player buys). The same parallel goes for the printer companies. Printers are made cheaper, so that ink cartridges can be sold. If you are skeptical about the profit, do the math. A litre of Printer ink costs around a Rs. 90,476 (21 ml for Rs.1900 – HP Deskjet Color Catridge). I am sure you don’t crib about rising oil prices anymore. There is also some very nifty magic that goes behind these pricing mechanisms. You have to strike the balance between keeping it affordable and letting people buy them so that they can sell more machines, and hence price the ink reasonably, and sell more making more money. Lets imagine that we ran a game station company and decided to price the console at so cheap a price so that we can flood the market and get rid of competition. That’d be very smart, and we might even outsmart the competitors, wouldnt we? Hmm.. Nope. Most probably you’ll be feeding a market which will be too cheap to buy consoles and will get them at bargain rates that they would almost never buy original games. And all that math you did about recovering that lost money would just go down the drain.

Pricing is almost THE one thing that would drive or stiffle the rate of adoption. And that’s a statement.

So what’s the conclusion of this matter. There is a lot to dig on this, and I realize that this will break into several volumes. But the first insight is that there is magic in the way you price a service. Something now, a lot of little payments later is an option that would work, and would encourage usage, and the markets being conversational would drive transactions, enabling opportunities for more marketing and selling, and the cycle would continue. If you are a corporate which is trying to sell to a startup, you most certainly might want to take heed to this. There is magic in this madness.


3 Responses to "Selling to the Unaffordable. Part I"

Excellent read. Until you the 3rd-last para, I was wondering, how do you do the math about the uncertainity (or rather certainity) of cheap-workarounds, e.g. pirated movies, games, cheap-refills, substandard replacements etc. However you did cover that finally. Would look forward to the rest of this series.

[…] my previous post on this, I talked about how pricing defines everything – or atleast one major element of it. The […]

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