This essay is the 2nd part of “The Crazy possibilities of 10 minutes Cab”. If you have not read the past-1, you can read it here: https://www.linkedin.com/pulse/crazy-possibilities-10-minutes-cabs-part-1-suman-kumar-jha/
The Post Pandemic scenario: Pandemic disrupted demand and supply. As the end game of the Pandemic is near, demand is slowly coming back, but there is not enough supply. It is also a problem of demand - I have explained this below. I think the TAM itself will be super low at the actual pricing. That disrupted the flywheel: fewer drivers, longer wait time for riders - a larger first-mile distance for drivers - high uncounted cost. Hence unhappy drivers, more cancellations, and more unhappy riders. This created a negative Flywheel - that companies always try to avoid.
The main flywheel generated a child flywheel, and I can promise companies would like to avoid that. It is a problem of squire root one. Startups have thrown money and fueled the flywheel, in the past. But current market dynamics - IPO, profitability pressure, Longer Cash cycle etc. – are not in favour. Throw money and solve a problem can't be a solution.
The Uncounted cost is not new in the startup world. Startups hide and investor ignores in pursuit of crazy growth: We all are chasing audacious goals and believe, at scale, business optimization and processes refinement will improve economics. And this is true: we have enough proof of that. But India is a difficult market if founders are not careful - things can go south at any point in time. And hence at some point, founders must consider it. The way at scale, price and process optimization can improve the bottom line. Ignorance of the cost component can trouble the bottom line similarly.
First, let’s understand the impact of uncounted costs on Riders, Drivers, and the Company. [This is true for any operational heavy business: Ecommerce, Food Delivery, Grocery Delivery etc.]
Driver’s distance from the Pickup Point = 3 KM
Destination from the Pickup Point = 10KM
ETA (T) = 9 minutes (5 minutes for the first 80% part of the first-mile distance and 4 minutes for the last 20% of the first-Mile distance, let’s call this Last-First-Mile Distance (LFMD).
Actual Travel Duration (N) = 25 minutes
Ride Fair (25 for initial 2KM, 15/KM, and 1per minute) = (25 + 8*15 + 25 = 25+120+25 = 170)
Company’s Commission (30%) = 51 + 9.18 (GST) = 60.18
Actual Amount Paid to the Driver = 170-60.18 = 109.82
Average Milage of Cars run by Drivers = 20
Cost of 1 Lit fuel = 105
Per KM fuel cost = 105/20 = 5.25
For 10KM, fuel cost = 10*5.25 = 52.5
The actual earning = 109.82- 52.5 = 57.23 (In let’s say 35 minutes).
The INR~100 per hour and 1000 per day if the drivers work for 10 hours a day. The actual earning per hour is still okay, but that is not the actual earnings. We ignored the First-Mile cost = 3KM.
First-Mile Cost (FMC) = 3*5.25 = 15.75 (This is uncounted cost)
Actual earning (After subtracting First-Mile cost) = 57.23-15.75 = 42.07
The FMC (Uncounted cost) has been ignored by the companies and riders, from day one. This price point is not sustainable for drivers.
The idea behind the math is to highlight the importance of uncounted costs for drivers. The actual numbers can be different.
Cost is something that can’t be removed directly from the system, partially like the First Law of Thermodynamics. The good news is that we can minimize the costs through innovation and efficiency. Sometimes founders make mistakes by incentivizing one side of the user by neglecting the cost component or cutting genuine compensation from another side. For example, do Online Cab operators ever consider drivers' First-Mile delivery?
As the flywheel was disrupted due to the pandemic, the First-Mile cost has increased significantly and hence a surge in Cancellations (Surge in commission by the Cab operators is also one of the reasons). Startups even overcompensate both sides by burning their own money for future profits.
Meanwhile, there is a very nuanced difference between investing and burning. The problem with burning money is that - you can’t certainly promise its future ROI. But when you are investing money in the business, the long term ROI is 100% - giving companies, much necessary, the Right to Win. I also agree at the beginning of the business - everything is alright. Because you need data to measure your hypothesis - if you can't measure, you can't improve.
An example of burning and investing money: Southeast Asia Cab Decacorn Grab - the company has burned $1.782 billion on Customers and Partners' incentives. ($1.065 for customers and $717 million on Partners) in 2022. One billion-dollar customer's incentive to generate a revenue of $675 million. Now the problem with this kind of burning is - that there is no promise of future ROI for the business. It also signals the demand side problem as well. What if this is a manufactured demand?
Let’s have a look at a few investing examples. Flipkart invested billions of dollars in building fulfilment centres, automation, and technology. In FY-20, Flipkart Wholesale sold goods worth INR 34170 Cr with a minute INR 158 Cr of Warehousing expenses. I am assuming this is supply Chain expenses because there was no other expenses column. If it is the Supply Chain expenses - WoW! This is less than 0.5% of the total expenses. Imagine the possibilities: minimizing the largest cost component of your business. Udaan has around 7% of the logistics cost in terms of revenue.
TikTok’s parent Bytedance invested close to $1 billion in 2014 - competitors were burning money on acquiring and retaining users - building recommendation engines. The recommendation engine was the biggest mote and allowed Bytedance to outperform resourceful competitors. I think there is some confusion between investing and burning.
I think the whole concept of investment in accounting is flawed: We consider a cost component as an investment if it has a long term impact on the company - a minimum of one year. But most of the financial reports that I read burning is with the purpose to display the next year's numbers. I am still learning how to read financial reports of large companies. We should consider a cost component as investing if that expense has, on the company, for a minimum of 2.5 years. A subtle change might be difficult - but we can start from some place.
Cost neglection is one of the reasons companies struggle to achieve sustainability/profitability. And sometimes create a negative flywheel as well. According to Management Guru Peter Drucker: When creativity replaces muscle power and knowledge manipulation as key features of economic production, we will witness a creative revolution, moving one step beyond the knowledge revolution. But most companies limit themselves to muscle power and knowledge manipulation.
The fact is, the negative flywheel changes the narrative 180 degrees: Sharing economy to ownership. As the frustration is going up and up from both the fronts - experience and price - folks from metro cities discuss Cars, ownership etc. I thought of validating my assumption through Google trends: And it is true.
Car search trends
Ola-Car search trends
The reality is more cars can’t be the answer to this negative flywheel. There is no way we can increase the real estate dimensions. Our cities are already compact: We already have enough traffic, and car ownership will fuel the traffic. So, we must figure out the solutions?
To figure out a solution, we need to Think Again - old methods. The solution must be driven from the first principles and avoid incentivizing any sides. If you look hard at the old methods and apply technology, 10 minutes sustainable cab is possible.
Disclaimer: None of these I can think of in a few days or weeks. The reason, I can write all these is because when I decided to build trust-based commerce for the next billion consumers, I couldn’t find available business processes suitable for the target consumers (TG). I along with a few interns tried multiple sprints on the ground. Not having any pressure to perform allowed us to think deep and uncover the unknown unknowns. And reimagine the problem from the first principles thinking. We have built processes and solved one problem at a time. And there are hundreds, if not thousands, of problems in line to build the largest trust-based commerce.
Before building solutions, we should quickly list the key controlling factors.
Customer’s Wait time
Driver’s First-Mile distance
Driver’s First-Mile time
Actual Travel Distance (Middle Mile and Last Mile distance)
Actual Price (Ride Fare)
Meanwhile, I have the best cab experiences at the Airports. I land, book a cab while coming out of the Airport, Walk a few hundred meters, and get in a Cab. This is an ideal scenario for both riders and drivers. My experience has been similar before and after the Pandemic.
The online Cab operators eliminated almost all the frictions and optimized the entire process. The problems were left to solve on Driver’s First-Mile Cost (FMC) and Last First Mile distance (LFMD). We will focus on solving these two problems. If you can recall Method-2 and Method-3, we didn’t have any first-mile for drivers. Let’s say, I have historical data - riders, drivers, location, movements, geolocation, ride history, waiting time, frequency etc.
The proposed solution has three key focus areas
Reduce Driver’s First-Mile and Last-Mile distance as much as we can
Avoid one side compensation
We have crossed 1600+ words, and hence I will write the proposed solution in the last part of the essay - Part-3