This week, I have an interesting observation on problem-solving and economic value creation using existing resources. And why innovations don’t have to be complicated.
In my four years of college - I visited movie theatres precisely three times (Looking back, I am not very proud of that decision I could have visited movie theatres a few more times). But out of 3, two times I watched at ticket priced - INR 10. Yes, in 2014, the PVR Classic ticket price was only INR 10. Why? Because you will have your seat in the front row. It was not the case that the price of the 2nd-row seats was also 10 or 20 or 30. It was directly 120 - and termed as premium. I remember, when I saw available seats at INR 10, I booked 3 tickets and distributed them among my Juniors (LOL).
I don’t know about others, but I was not someone who questioned everything during my college days. I think I was boring and more into books rather than real knowledge. I was a serious student in my college days. I was super focused on my studies. The motivation was - my dad has worked 14 hours a day, 7 days a week to save money for our studies, and I wanted to make it count at any cost. Today is the day when I question everything, we all should. Our consciousness is too short to be in the middle - the most comfortable position. We should always Zoom in and Zoom out.
Today, the price of Classic is 63.73 and Premium is 210
After eight years, the classic ticket price is 63, and the rest is 210. But in comparison still a massive difference - almost 3X. In a supply surplus market, the pricing of movie tickets in old cinema halls works in almost a similar fashion. The ticket prices for the front row would be lower compared to the back rows.
So, here are the reasons why the prices of those front-row sheets were only INR 10 because, in general, these sheets used to be empty (Why?)
I am sure you have observed this while booking tickets on BookMyShow or similar platforms: the ticket bookings always start from the back rows. Because the audience prefers to watch from far to the screen - provided it is not a newly built movie theatre or upgraded front row seats ( I have talked about this in the 2nd part of the essay).
The booking starts from the back rows: If there is no price difference, the front row goes empty. [Not in Patna, it is a supply constrain maket]
You will never see the full front rows and empty back rows. Let me list the different factors.
The subconscious mindset that watching experience is good from far (There is no scientific proof of that)
Watching from back-rows is a status symbol
The third is universal, we all know (Especially for couples)
Even at a lower price in most old cinema halls, the front row seats are still going empty - if it is not a big-budget movie.
Lower prices are better than the empty sheets because resources are getting wasted. But on net economic value, it was still -ve. Even at a lower price, the front row seats were/are going empty.
Things were going the same but not before theatres’ communities came up with an innovative solution.
What if, we make watching from front-row seats a status symbol by deliberately making the watching experience superior. To achieve that: The new movie theatres used recliner seats instead of the regular sheets for the first row seats. Now visually the front row was a status symbol. But that was not enough - they deliberately kept the prices of these front row seats higher compared to the rest of the row’s seats. (LOL) Now, this was a perfect symbol of status and subconsciously motivated the audience to pay more for the same space that was being empty at a significantly lower price. Can you believe it - humans are paying more for watching a movie from the same row at a higher price than they avoided even at almost zero cost earlier? It was a perfect money heist without any planning. :)
The price of front row seats is INR 50 higher compared to back row seats. (Amazing). Also, there is no space between Lounger and Miller - it is just for representation.
Let's compare economic values before and after:
Before: Front raw seats were either going empty or getting sold at a significantly lower price. And hence, loss in potential revenue.
After:
Investment = cost of recliners (we need to reduce the cost of regular seats) + Losses in seats due to larger size of the recliner + Electricity cost because more people inside the hall (Extra load on AC).
But now: The front row seats are getting sold at a higher price compared to other seats. If we compare the net +ve, it would be 10X each time for the lifetime of the cinema hall. (WoW)
This is a perfect example of creating net +ve economic value using existing resources with little or no investment. And this observation also tells a lot about us (Humans). We often make irrational decisions.
The above innovation was not in the categories of humanity's top-50 innovations like Wheels, Paper, Printing Press, Plow etc. But the fact is not every innovation has to be a breakthrough. The innovations using existing resources are the best suitable for fellow humans. The Theaters’ community used available resources, and without a massive investment - extracted the best possible outcome.
I see this getting played out every day in our Startup ecosystem - in the name of technology. We try to complicate existing solutions, using technology, rather than making them efficient. And then expect customers to purchase or pay more - especially operation heavy businesses. They do make a purchase till the time they are getting incentivised. I have written about why the cost component can't be removed from the system in my past essay.
Of course, can’t comment much about other industries except retail. At this juncture, we have - a 6% eCommerce penetration. And thinking in terms of retail may bring more fruits for the entire ecosystem.
We all know this, and discuss this every day: the real innovations are not by adding more resources, it is how can we remove resources so the net could automatically be +ve. And therefore if anyone is simply preaching - Online channels are deflationary. I can’t talk about other industries, but online commerce is not deflationary. We can simply list out the number of activities - offline commerce and Online commerce - and compare.
If online retail would have been deflationary, in the USA there would have been eCommerce players for each category. But that is not the case. You can read Jeff’s 2001 Shareholders letter - Amazon let the category based eCommerce players die. Even though Amazon had invested money in those companies. And Jeff had explained the reasons in the shareowner's letter.
Again, would like to avoid commenting about other industries and other Target groups. But I can vouch, that online commerce for ZILA’s Target Groups is not deflationary - till the time we are not making massive investments in different components and achieving a sizeable scale. If this would have been the case, Amazon could have offered products at a lower cost compared to Costco. This is not the case - Costco offers lower prices on 70% of SKUs compared to Amazon ( Without going much into details).
Online commerce needs deliberate efforts to make it deflationary. Every time I do my math and find it inflationary - I am not including companies at scale. There are multiple factors behind this, of course, can’t talk about all. But one of my favourites - is Operation & Supply Chain.
As of today, Hub and Spoke Supply Chain model accounted for 99% of the deliveries. The Hub and Spoke model is a 70 years old Supply Chain method - with no substantial change. You go and talk to the SVP and VP of Operation & Supply Chain - they will tell you efficiency will be at scale. Sure, but isn’t - this is the time, we should give a new Supply Chain model to the world because we have a perfect geographical structure and diverse consumer base (This doesn't mean ZILA has a new supply chain model :) )
There are multiple factors behind this. But one factor that was highlighted by Binny Bansal on the GGV podcast - was the employee base. In general, once a startup achieve PMF, they raise fund, go and hire an experienced SVP/VP of Supply Chain. The JD includes 5 or 10+ years of experience in the relevant field. And the transition of Operation and Supply Chain SVP/VP from one mature company to a new growth stage startup take place.
Let’s say if someone has worked as VP in FedEx/Udaan/Flipkart etc. - they will get absorbed in a growth-stage startup as SVP or one level higher from the previous position. And they apply/implement the same processes/methods - because that's what they have been hired for. And the same processes/methods/model are getting repeated without first principle thinking. I am not against experience, I understand the value and importance of experience, but it would be amazing if the team structure could be a combination of experience + fresh mind (Who can think from the First Principle).
The reason, I can vouch for this approach is because ZILA’s SVP of Operation & Supply Chain (We have not signed the documents yet) has 14+ years of experience. And thanks to him, I got access to the inner world of current methods. But we have not implemented (or will implement in the future) even one old method if it was not satisfying our needs. And therefore, online commerce is not deflationary - it needs deliberate efforts from operators and a mindset to save costs to make that happen. Scale is just one aspect of that.
This is a wrap for the week. If you find the essay useful, please share your feedback! :)