Does Freemium Work in India?

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.

Mass vs. Class

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, Audiairline and railway.

Pilgrimage to Stuttgart

Definition of pilgrimage:

a journey or search of moral or spiritual significance.

Stuttgart is ground zero for Porsche. It’s the world headquarters and since 1963 every 911 has been built here. Visiting the Porsche Museum in Stuttgart was akin to a pilgrimage of sorts for me.

Although there have been various Porsche models throughout the years, for me the 911 was the one that got me most excited…almost like a school girl seeing Justin Bieber in concert. It’s had the same basic design since 1963 but keeps getting refined. Currently, the 911 is in it’s 7th generation and known internally as Type 991 and was launched on August 23, 2011.

Having grown up in Southern Indiana I didn’t see a lot of Porsche’s but I remember reading every magazine article I could find about the 911 – Car & Driver, Road & Track and Motor Trend were my friends.

It feels like yesterday when I first saw pictures of the 911 and salivating over it. It was 1988 and I was a freshman in high school thumbing through a car magazine at the school library. Porsche had just announced their next generation 911, the 3rd generation 911 known internally as Type 964. It was just simple and beautiful with clean lines. The car magazines would always compare every new 911 to the American sports cars like Corvette, Camaro, Mustang, etc… However, as Porsche marketing back then suggested and as Tom Cruise famously said in the movie Risky Business – “Porsche, there is no substitute.”

Anyways, back to the pilgrimage. When we visited the Porsche Museum they had a special exhibit called the “Identity 911” showcasing the 7 generations of the 911 and the origins of the 911. The 911 was designed by Ferdinand Alexander Porsche, instead of blood this guy had engine oil running through his body. His grandfather designed the VW Beetle which is the best selling car of all time. When you stop and think about it, only 2 cars have maintained their same basic shape through the years – the 911 and the Beetle. The 911 is fast approaching it’s 50 birthday next year and yet if you see any of the previous 911’s you know they are part of the 911 family, hence the exhibit name “Identity 911”. The iconic 911 is like fine wine, it just gets better with time.

Download an excellent PDF showing the visual changes of all 7 generations of the 911.

More Air Turbulence for India

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.