In the last part of this article, we discussed the advent of Indian hyperlocal startups that are executing customer tasks on-demand through a fleet of drivers and runners that are paid per task. These startups unsustainably incentivized drivers and runners to acquire and retain them, but once the incentivization decreased, these startups started running into big problems with their drivers and runners. Drivers and runners were not loyal to a single platform anymore and they started to game the system adversely affecting the startup’s customer experience and unit economics. In this part, we are going to diagnose the problem using VentureBasecamp’s Critical Success Elements of a Business and offer possible solutions.
The VentureBasecamp’s Critical Success Elements of a business can help us understand this problem and potential solutions better. However, before we start, let me briefly explain what the VentureBasecamp Critical Success Elements of business are. With the help of the Capria Venture’s network and its partners’ investment expertise built over 45 years, we identified 12 critical elements that make a startup investable. Following are the 12 elements. For more information on the Critical Success Elements, you can head over to this article.
For the purpose of this blog post, we will look at “Unit Economics & Business Model” and “Sustainable Differentiation” to understand the problem better and find potential solutions.
Unit Economics & Business Model
A lot of startups justify the heavy discounting with economies of scale. But can you really achieve meaningful economies of scale to compensate for the heavy discounting in a country where 73% of the wealth is held by 1% of the population (Oxfam survey, January 22, 2018)? If a customer can’t pay today, there is a rare chance he/she can pay tomorrow. If the only motivation for a customer to stay is the price that you can’t afford sustainably, then your product brings no value to this customer. DriveU’s founder Rahm Shastry who has built a gig economy business connecting drivers and car owners and bringing positive unit economics since its first month says “From the get-go, it’s important you are acquiring the right type of customer. If you offer steep, unsustainable discounts (read negative UE) to attract sale of your product or service, then you are not really acquiring a customer. You are simply acquiring a ‘bottom feeder’ who may never use your product or service in the future if you set a business-sustainable priced solution. So, watch out for that!”
Business model failure comes when CAC (the cost to acquire customers) exceeds LTV (the ability to monetize those customers) – that is, you are spending more on servicing your customer than you are earning from that customer. When your LTV/CAC < 1, it means you need to take a hard look at the efficiency of your sales and marketing strategies or the retention of customers and the value (price) of your product. This should be a good starting point to devise strategies to tip the balance and become a profitable startup.
Sometimes, having an LTV/CAC ratio below 1 is not necessarily a bad thing, given you have a good enough reason to expand your user base to kick in a network effect. The monetization can come at a later stage, and the network effect will help you significantly reduce your CAC thereby increasing profits. Think, Facebook. That doesn’t mean praying that you make up in volume what you lose in profit. It means, you have a clear, defined, finite time and volume that you see a CROSS-OVER into profitability.
Typically, you should aim for an LTV/CAC ratio greater than 3, which is a good indicator that your company is focused on achieving profitability. This a number that would get most investors excited about your business model.
This also applies to drivers and runners. Heavy incentivization leads to recruiting the wrong group of people for the job. It becomes a stop-gap job or a short-term engagement for a lot of people who want to make a quick buck and take care of immediate financial needs. Therefore, the attrition rates are quite high. The average life cycle of delivery personnel is just around 4-6 months which again messes up the LTV/CAC ratio if the driver or runner is considered a unit. A focus on positive Unit Economics from the beginning can help set the right expectations and therefore, help hire the right person for the job. DailyNinja, a startup that delivers daily need items like eggs and milk to people’s doorstep everyday uses milkmen for their deliveries. Milkmen are in the delivery business for the long term, understand the nitty-gritty of the job and have the right expectations set for them.
Another reason why heavy discounting and incentivization becomes necessary is fierce competition. Although some might argue that there is not much uniqueness that a ride-sharing or a food delivery or an e-commerce startup can create, it is certainly not true. Services like the Amazon Prime and Ola Prime Play have been huge hits and offered a sustainable competitive advantage to these companies. However, this is only consumer-facing and there is not much being done for the drivers and runners. If there is no unique value proposition these companies offer to the drivers and runners, why should they stay loyal at all? Why should they not game the system? What is in it for them except the payouts?
What is important for these startups to note is that their drivers and runners are a big contributor to their moment of truth. A moment of truth is a moment when a customer interacts with a brand, product or service and forms his/her impression of the brand, product or service. Therefore, startups need to invest in their drivers and runners to ensure a better customer experience.
Family insurance benefits, stock options, quarterly bonus, etc. are one way to get the drivers invested.
Professional education and creating a clear, desirable and achievable career development plan for them is another way to keep them happy and loyal.
In conclusion, if startups want to create a great customer experience and become profitable businesses in doing so, they need to set the right expectations for customers as well as drivers and runners from Day-1. They also need to find more ways to become differentiators for drivers and runners as well instead of doing unsustainable incentivization.