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Several weeks ago Flipkart was the cover story in the July 6, 2012 issue of Forbes India and it was a fairly controversial piece as the sub-title declared “India’s e-commerce darling is headed for a fall.” It was one of the most commented pieces on the Forbes India site and links were flying all over the interwebs.

I think it’s easy to lose sight of what Sachin and Binay Bansal have created in such a short period of time. Indiaplaza.com has been around since 1996 and has not reached the scale of what Flipkart has done in 5 years. Flipkart has created many new online shoppers that would have never dreamed of buying anything online in India. The Bansal’s are true entrepreneurs who essentially re-shaped a market out of thin air with nothing more than a website, books and desire.

I first used Flipkart in January 2011 when I was trying to buy a friends book (The SaaS Edge) which was not available at Crosswords at the time. Since then I’ve used them for countless purchases and delighted with their rock bottom prices and their under promising (estimated delivery in 4-5 days) and over delivering (actual delivery in 1 day). How could you not love that? Having used Amazon.com in the US for over 10 years, I was skeptical of online shopping in India because of online credit card fraud or e-tailers not processing a refund. Flipkart single handedly turned me from a skeptical shopper into an online shopper.

However, since the Forbes India story was published my usage at Flipkart is zero. The simple reason is price, they are no longer the low-cost option when buying books. Recently, when I was about to order some books I checked HomeShop18 and Indiatimes Shopping and found them lower. Even though Flipkart has spoiled me with their delivery excellence I really don’t mind if my books come 4-5 days later…they are books not perishable items. And that’s the issue when you compete on price, someone else can come in and drop their prices and take the hit on the balance sheet if they have bigger pockets. Flipkart spends a lot of money on print and TV advertising which is something that HomeShop18 and Indiatimes Shopping can get at reduced rates since they are part of larger media conglomerates. HomeShop18 is part of the Network18 group which recently sold a stake to Mukesh Ambani’s Reliance Industries. Indiatimes Shopping is part of the Bennett, Coleman and Co. a media powerhouse which owns many media outlets including the Times of India newspapers.

Can Flipkart survive? In truth no one knows, all this talk is pure speculation. The question is – Is my personal Flipkart experience just my experience or part of a bigger trend where online shoppers will always default to the lowest price option in India? With price aggregation services like Junglee.com it takes a couple extra steps to find the lowest price. I’m guessing for many shoppers like it me it will ALWAYS come down to price, it’s part of our DNA – Do Negotiate Always.

Recently I was invited to the TiE Mumbai office to talk about pricing strategies for internet companies. The truth is whether you run an internet company, or a product manager at Proctor & Gamble or an automotive giant like Mercedes, pricing is one of the most unscientific parts of the business.

A handbag at Walmart can be bought for USD 25 or you can blow over USD 150,000 on a custom made Birkin bag. Emotions, brand awareness, limited availability and a host of others factors drive these decisions when buying a handbag.

Internet companies face some of the above challenges and have their own digital issues such as the ability to move to a new product overnight (ex. switching from Yahoo Mail to Gmail). One of the most talked about pricing strategies is the freemium model – giveaway basic features for free then monetize the business via advanced features. Sounds brilliant right? It’s a lot like drug dealers who giveaway free samples to get customers hooked/addicted to the drug and convert them into paying customers.

When people talk about the freemium model two names always come up as executing the strategy perfectly – Dropbox and Evernote. Dropbox gives away 2GB of cloud storage for free and then as users consume more space they will ponying up real money to Dropbox and turn them into paid customers. Evernote is a note taking cloud solution, where you enter your notes on an iPhone and they magically appear on your iPad or other devices and computers connected to the same account. However, if you want some of the advanced goodness of Evernote you have to pay to play. Both are recipients of the freemium award called “Yeah, we know how to scale a freemium business.”

A couple days back I was listening to a podcast of Drew Houston, the co-founder of Dropbox, talking about his journey on how he started the company (I highly recommend listening to the podcast). The best part of the podcast was the Q&A session and one of the first questions was “how do you get people to pay” and it was asked by an Indian, god damn I love cheap ass Indians (disclosure – I’m as cheap as they come). Drew starts to talk about the value proposition where Dropbox allows you to aggregate all your data in a simple and easy to use interface. I’m pretty sure as Drew was talking that Indian kid was probably zoning out when he heard words like easy, aggregation, simple, etc…

The truth is what works in the US/Europe does not mean it will work in India. The freemium model is a perfect example of a model that just does not scale in India. Some of the buzzwords that companies use to entice users to their paid product include – easy UI, simplicity, saves time, efficiency, etc… Those “features” usually fall on deaf ears when talking to most Indian consumers and companies, they just can’t look past the price. The mentality is they will have “their guy” figure it out how to use the free version even if the end solution is complicated and convuluted. They don’t mind concurrently using 4 different cloud storage solutions like Dropbox (2GB free), SugarSync (5GB free), Google Drive (5GB free) and Microsoft SkyDrive (7GB free) as long as the overall price tag never exceeds zero.

I would really like to hear Phil Libin of Evernote or Drew Houston of Dropbox to chime in and prove my thesis wrong and reveal the conversion numbers from free to paid for India. Are the conversion rates the same for the US and Europe? However, having seen users jump through hoops to avoiding paying for software, I’m pretty sure my thesis holds true.

India has a large population (1.2 billion) which is great if you have a product to sell. On the downside, India has a large population. It’s a problem because how do you segment and target a specific audience for your product? Rama Bijapurkar literally wrote the book on understanding the Indian consumer. Her book is titled “We are like that only” and drills down into the behavior of the Indian consumer via the socio-economic classification (SEC) system. The SEC system helps you understand WHO your audience is, where they live and how much they earn.

If you are trying to quickly segment the Indian population that’s where the SEC classification system breaks down. One of the easiest ways to segment the Indian population is via a simple phrase – “mass vs. class.” It simply and effectively segregates the country into two buckets. I’ve always hated the term “mass vs. class” because it somehow seemed derogatory but honestly it quickly sums up India with broad strokes.

I really started to understand the power of “mass vs. class” when I was recently on vacation in Europe.  The tour guide was way more interested in India then him explaining the sights and sounds of the city we were touring. The tour guide was interested in learning how the average Indian lives and what their life might be like. That’s when I realized the easiest way to describe India was via the “mass vs. class” phrase.

So who is mass and who is class? If you look at the transportation market it becomes pretty clear. Can you name the number 1 selling vehicle in India? If your brain is going into over drive and trying to run some crazy algorithms over which Indian made car is number one, you have already lost. The number 1 selling vehicle is not a car but a motorcycle.  Last year, 2.5 million cars were sold in India and I would say 80% of those cars were low end cars like the Maruti Alto and Tata Indica. The number of two-wheelers sold during the same period was 11.2 million units. That gives you a grand total of 13.7 million units sold and only about 500,000 units or 3.6% for cars that cost more than 10 lakhs. 96.4% = mass and 3.6% = class.

If you live in Bombay or Delhi you might be thinking I have no idea what I’m talking about because it appears all the cars on the road are Audi’s, Benz’s and BMW’s. But in reality Bombay and Delhi live in their own little world, cut off from the rest of the real world of India. Think about this stat – Audi sold 5,511 cars last year in India whereas in China it sold over 313,000 units and in the US it sold over 117,000 vehicles.

Another example of “mass vs. class” are travel options – planes, trains and automobiles (also the title of a great movie).  If you’ve been to India then you know automobile travel is not the best choice, so that really leaves planes and trains.  Last year, over 61 million people travelled by planes and the good old Indian Railway system setup by the British? Over 30 million people per day. 99.5% = mass and 0.5% = class. For airline travel we are not even talking about 1% we are talking half of that.

After running these numbers I realized the “mass vs. class” phrase is similar to the stance of the Occupy Wall Street Movement whose slogan is “we are the 99%” which means the remaining 1% are the elite or class. The numbers seem to reflect the same in India.

Links to where I got my stats from: Overall market size, Audi, airline and railway.

If you follow this blog then you know I have written about Air India in the past (here) and what a complete clusterfuck it is.

I wasn’t about to write yet another post about Air India or the airline industry. However, when I read this mornings newspaper about the 15 vacant floors in the Air India building in Nariman Point I was speechless…of course, not so speechless that I couldn’t pen this piece.

Just to frame this, Nariman Point had been the business district of choice in Bombay until a couple years ago when it ceded the throne to Bandra-Kurla Complex (BKC).  BKC has become the destination when you are looking for massive floor plates, however Nariman Point still has the cachet.

So this brings me to Air India. What are they thinking? Air India is consistently asking for money from the government yet they are sitting on 15 floors of prime real estate. They may not be in the real estate business but they could outsource that to someone like Knight Frank or Jones Lang LaSalle. The fact they are not monetizing the Air India building seems like a missed opportunity. Granted it might not move the needle much in terms of cash flow for such a debt ridden organization but it’s a step in the right direction.

One way to fix Air India would be to privatize the airline but that of course needs political will and that just won’t happen. Which is really too bad because in the current scenario the Indian government is throwing good money after bad.

In other news, over the past couple of weeks the industry has gotten more bad news:

- Air India needs more money for a bailout
- Fraport which owns part of the Delhi airport wants to exit India
- Foreign direct investment (FDI) for aviation is still up in the air (no pun intended)
- Kingfisher is still bleeding

Everyone is eagerly waiting for the foreign direct investments (FDI) norms for the aviation sector. Even if the rules come out tomorrow, I doubt any foreign investor is actively looking at the sector. They might have been looking at the space in 2007, but today it’s a much different picture. I love this quote from the CEO of Fraport India which sums up the current atmosphere in the sector:

this government doesn’t have any spine or drive. So I personally doubt that anything will happen in the lifetime of UPA-2

I love the candor of foreigners when they don’t have to suck up to politicians. I’m pretty sure with that quote, Fraport won’t be doing any more new business in India.

There is a constant debate between financial services firms and government regulators over financial market regulations – over regulate them or let them run wild and free. If there are no financial regulations in place, you end up with what we have today – a highly unregulated derivatives market. The unregulated derivatives market led to the financial collapse of 2008 and the massive destruction of wealth, yet as of today there are still no guidelines in place to regulate this highly toxic market. On the other end of the spectrum is completing choking the market with financial regulations and deterring business.

In between is that fine line that needs to be in place for markets to be efficient, transparent and trustworthy. In an emerging market like India, the regulators should be first and foremost focused on protecting the consumer. Secondly, in order to attract first time consumers the regulators should be promoting a culture of openness, simplicity and easy to understand language for financial products.

However, over the past 3 months the Indian regulators seem to be going in reverse and making it more difficult for first time consumers to make decisions. They appear to be adding more financial jargon to the process and potentially scaring off first time consumers. For most consumers in India, there are 3 government regulators that have oversight over the bulk of their money:

- IRDA (Insurance Regulatory and Development Authority) – insurance sector
- RBI (Reserve Bank of India) – banking industry
- SEBI (Securities and Exchange Board of India) – oversight of the equity/debt markets

About 3 months back the IRDA essentially shot itself in the foot when it announced new guidelines for websites that aggregate insurance information. Overnight the guidelines killed the business models for insurance aggregators. Personally, if I’m shopping online for insurance I want to be able to compare the various products and understand the pros/cons of the various offerings. However, with the latest IRDA ruling it has banned these websites from providing “opinions” on products or ratings. For first time consumers a rating is such a quick way to decide which product is better. Instead you force the consumer to read through jargon filled insurance material and in the end they will probably not buy anything because its difficult to decipher.

Likewise, SEBI recently introduced new guidelines for the type of information that mutual fund companies can provide in their marketing materials across all mediums – print, TV and web. Specifically, mutual funds companies can no longer provide a rating from someone such as Morningstar, Value Research or S&P. In addition, rankings or testimonials are also off limits. Once again this is moving in the wrong direction, a star rating is easy for someone to understand like a hotel rating – 1 star vs 5 star. Of course, consumers could just goto the websites of Value Research or Morningstar and get the star ratings and rankings themselves.  But, that assumes a first time consumer would know about Value Research or Morningstar which I doubt.

The flip side is that these rankings and ratings were leading some consumers to skip researching these new products altogether. My feeling is if consumers are that stupid to part with their money that easily, then no amount of change in regulations will curb that kind of behavior.