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Start-ups struggling with costs vs growth dilemma

LiveMint logoLiveMint 03-07-2017 Mihir Dalal

Bengaluru: As investors demand that start-ups show they can build profitable businesses, many of India’s Internet companies are struggling to strike the right balance between chasing sales growth and cutting spending on marketing, discounts and other areas.

Advertising technology start-up InMobi Pte Ltd turned in a profit in the last quarter of 2016, but it did so at the cost of sales growth which slumped to less than 10% in the last financial year for the second straight year, two people familiar with the matter said. For the year ended March 2016, InMobi’s sales had risen just 8% to $283 million, according to filings in Singapore, where the company is registered.

Flipkart Internet Pvt. Ltd, India’s most valuable Internet firm, has been showing strong monthly sales growth since October even as monthly spending hasn’t increased at the same pace. However, the company has achieved this by selling more smartphones and higher-priced products, almost completely ceding categories such as books to arch-rival Amazon India. Flipkart has also slashed advertising spending, leaving it to Amazon to expand the market; this means new Internet shoppers are likely to go first to Amazon rather than Flipkart.

Cab hailing services Ola (ANI Technologies Pvt. Ltd) and Uber India Systems Pvt. Ltd both have been hit by supply shortages since the end of last year. Cab drivers on these platforms struck work in at least three months in Delhi or Bengaluru because the two companies cut driver incentives in order to rein in their losses.

Such attempts are common across the board at consumer Internet start-ups. Investors say it’s a healthy sign that Internet companies are reducing spending on advertising, discounts and other incentives and rather trying to attract customers by offering quality products and service. While no one has yet cracked the code on achieving profits, investors are hoping that if companies continue on this track they will get there when sales volumes multiply over the next few years.

“The most important goal should be to build a high quality product with best in class consumer experience - this has always been the key to success,” said Sumer Juneja, director at Norwest Venture Partners India, a venture capital firm that holds shares in start-ups including Quikr and Swiggy. “To create this differentiator you need to burn cash to build high quality operations and logistics, which with scale and consumer repeat will get covered, and should to lead to a healthy margin business. But if most of the cash you’re burning is on discounts and marketing then you’re going to be found out soon.”

While Internet companies are adopting differing tactics to try and hit the balance between cutting losses and sales growth, one common strategy is to offer exclusive products.

Apart from moving sales toward high-priced products Flipkart is expanding a large private brands business. The company’s fashion unit Myntra, too, is betting on exclusive products to increase margins and reduce discounts. The thinking is products that aren’t available on Amazon won’t need to be discounted heavily. (In contrast, Amazon India’s big bet is Prime, its subscription service that has prompted shoppers in the company’s international markets to shift spending toward Amazon from rivals)

Ola is expanding Ola Play, a content platform, as well as its nascent electric vehicle business to differentiate its services from Uber. Ola Play, which is available on tablets installed in the Prime cabs, offers music, shopping apps, movies and other video content to customers and also lets them control air-conditioning. The company is betting that Play’s unique experience will attract a large number of customers and keep them away from Uber.

“When you have competitors who are spending irrationally, it becomes harder to run your business in a sensible manner,” said Tarun Davda, managing director at Matrix Partners India, an investor in Ola, Quikr, Practo and others. “Matching their spend is one option – but that’s eating into the hands of the competition. A better strategy is to define your own game by providing a unique value proposition, delivering a differentiated customer experience and focus on improving unit economics. Doing this while being disciplined about burn targets is critical because you need to give yourself sufficient runway to be able to weather the storm and attract investors who value this approach to business building.”

InMobi didn’t comment on sales growth numbers for the past two years.

“Our focus will be to drive profitable growth on the back of healthy fundamentals. Video is one //of// the biggest opportunities in the ad tech space today. InMobi’s investments in mobile video advertising are helping the company consolidate its leadership position across key markets,” an InMobi spokesperson said.

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