A Twitter debate between two of India’s most celebrated entrepreneurs on Paytm’s business model highlights the ‘growth vs profitability’ dilemma that confronts most startups today.
- Serial entrepreneur Ronnie Screwvala and Paytm CEO Vijay Shekhar Sharma were engaged in an interesting Twitter battle on growth vs profitability.
- Ronnie was critical of the unbelievable discounts and cash backs leveraged by Paytm to acquire customers, and believes it is not a sustainable model.
- Vijay Shekhar argued that cash back does work. Indeed, his approach is in line with the general approach adopted by VC-funded e-commerce startups in India over the last decade.
- The model does provide initial returns, but would fall flat if the product is not good enough to sustain in the market in the long run.
The debate on growth vs profitability is as old as the history of business. But it acquired a special relevance ever since the first online business was born. The initial days prior to the dotcom bust of 1999 in US whipped an uncanny frenzy among investors.
Several of them effectively believed that brick-and-mortar was dead, and you could simply lift your offline business and take it to the web, even though there was no precedent in this regard.
The dotcom bust burst many insane dreams, but it is arguable whether people got wiser. Such debacles have played time and again over the years. Adopting a growth heavy strategy backed by deep-pocketed investors has benefited some businesses, but the casualties would be far more.
So where does the balance lie? This became the topic of a highly engaging and enlightening response between two of the most iconic Indian entrepreneurs, albeit from quite different eras – UTV founder and serial entrepreneur Ronnie Screwala and Paytm founder & CEO Vijay Shekhar Sharma.
GOING BERSERK FOR CUSTOMER ACQUISITION
The debate started when Ronnie Screwvalla criticized the crazy manner in which Paytm was offering discounts/cashbacks for acquiring customers. He mentioned how he paid for an ice cream worth Rs 210 with PayTM and got back a huge discount of Rs 75. Vijay gave a tongue-in-cheek response, stating that Rs 75 was not bad CAC (customer acquisition cost) for a customer like Ronnie Screwvala.
We reproduce the conversation verbatim as below.
At the airport and paying a single scoop of ice cream for Rs 210/- BUT if I pay with PayTM I get Rs 75/- Back !!!! Mad mad when will this funding revenues with cash back and discounts and paying out of Equity money end !! @Paytm
— Ronnie Screwvala (@RonnieScrewvala) February 11, 2019
Sir, ₹75 is not a bad CAC for a customer like you ! 😇🙏🏼 https://t.co/FcDofeXazy
— Vijay Shekhar (@vijayshekhar) February 11, 2019
Thanks Vijay 🙏 But I will be a customer only till I get free money back and not thereafter – ever – so how will you ever make money OFF me – the reason your willing to feel I am a good future customer …this is the part I don’t get … and I am not old world so just wondering😇
— Ronnie Screwvala (@RonnieScrewvala) February 12, 2019
Agree on that, not everyone who came to party will be a long term friend!
That said, a question for you as a communication person: what should be on counter message/ offering that makes customer pull out phone and try the product once.
Cashback does work, what else is possible?🙏🏼
— Vijay Shekhar (@vijayshekhar) February 12, 2019
I Can’t offer advise as you’ve done great attracting Scale capital- & built team mandated to Market Make& build Revenue businesses. My submission/learning is-in India once given free (or cash back) its impossible to convert + what works for alibaba in China will not work in India
— Ronnie Screwvala (@RonnieScrewvala) February 13, 2019
GROWTH FIRST, PROFIT CAN WAIT
The model is, of course not exclusive to Paytm. On the back off huge funding/growth capital, ‘growth at all costs’ has been the core philosophy driving the rise of many e-commerce startups in India over the past decade. Flipkart, which is credited for fuelling the rise of many a startup in India, stringently abided by this philosophy.
When asked about profitability plans in 2013 during an interview, Flipkart co-founders Sachin and Binny Bansal had said, “Profitability is not a focus area. It’s a strategic decision. We can be profitable from today if we want… But we don’t want to remain as a small profitable company.”
The same is true for foodtech firms today, which are engaged in heavy cash burn to somehow grab market share, attract further investments and then pump in more money. The sector literally came back from the dead in 2015-16, with a lot of companies going belly up. Even for Swiggy, which was one of the notable survivors, losses increased by 65 times yoy in 2015-16 to Rs 137.18 crore, even as revenues rose by 200 times yoy to reach Rs 23.59 crore. Even as of August last year, Swiggy and Zomato were burning around Rs 200 crore each every month.
This has other unintended consequences, as such startups disrupt the ecosystem where they operate. Flipkart and Amazon have faced the heat on deep discounting. Hotel owners are at loggerheads with OYO Rooms for the 25-30% commissions that it charges. Players like OYO can provide over 50% in discounts, which even hotel owners cannot manage and this spoils their market and brand value. Besides having deep pockets, such companies also benefit from the database that they get to push promotional campaigns.
For deep pocketed investors, the priorities are different. They want to ramp up the subscriber numbers quickly and grow their market share, which helps pump up valuations of a business. That is why the profitability goal keeps getting kicked further down the road. The model keeps working as long as the oxygen of cash and subscriber numbers keep feeding into each other in a virtuous cycle. If it breaks, then demise can be equally swift.
IS CASHBACK THE ONLY WAY?
Coming back to the Paytm model specifically, the company indeed does not count profitability among its achievements so far. Yet, One97 Communications leads the Indian unicorns with a total funding of US$ 2.2 billion and valuation of US$ 10 billion. It counts some of the greatest, including Warren Buffet’s Berkshire Hathaway and Jack Ma’s Alibaba among its investors.
It is instructive to note that Ronnie is not way off the mark on the cash burn by PayTM. One 97 Communications Ltd, posted an increase in revenue by four times in 2017-18 to reach Rs 3.314.8 crore. But losses increased to Rs 1,606.05 crore as compared to Rs 903.09 crore in the previous year. This was primarily due to the rise in advertising/marketing and payment gateway expenses. Its online retail venture Paytm Mall posted a revenue of Rs 774.86 crore with losses at Rs 1,787.55 crore, as it is engaged in a tough dogfight with market leaders Flipkart and Amazon who have a combined market share of over 80%.
In defence of the losses, One97 would claim that its annualised gross transaction value (GTV) has increased by four times as compared to March 2017 to US$ 20 billion. By July 2018, this had increased to US$ 50 billion. It also claims to have cornered 33% share of all UPI transactions with 137 million transactions as of August 2018.
Is this all just a business of buying customers through discounts and cashbacks? Even if the business models have changed, the old rules are not redundant. Some of the Twitter users who joined the debate also admitted that they used Paytm for its sheer convenience across transactions, and would continue to do so even without the cashbacks.
So the crux is that cashbacks may create attraction and help build a new habit in the market, but the strength of your product in the eyes of the customer will ultimately determine sustainability. Otherwise, customer stickiness will remain elusive, and your days are numbered till a better competitor takes over. Indians love discounts, but they may just stop loving you once you take the discounts back!