The Indian Taxi Industry - A Cost gulping Business?

Hi Guys,

TaxiForSure, Ola Cabs, Uber – three names that have been dominating the headlines of Startup sites in India. If you are living in any of the metro cities of India, there is a lot of possibility that you would have used their services or at least downloaded their App. While Uber is an international phenomenon, the other two startups are home based and are heavily funded by investors.

As the articlein Live Mint today rightly points out, these players are doing the same as that of ecommerce companies. Throwing huge discounts in order to win Customer Loyalty. Deep down, I feel there is a flaw in the entire model of winning the customer loyalty.

There have been too many organized cab models in India before the advent of these firms – Meru, Easy, Fast Track, etc. Many of them were regional players. Though there was some customer dissatisfaction, generally customers were happy since they got a Taxi on call. The price model was good enough that everyone in the model – the owners, the drivers, the customers were happy and satisfied.

Now enter the new arrivals. To disarm the existing players, what can you do? Offer better services – Mobile App, GPS Tracking, etc. Still, Customers don’t switch? Well, then there is only one thing you can do. Play with the cost (in most of the marketing case studies, students’ first option would be cut the price. And any professor would advise not to use that option unless other options are exhausted as price directly hits your margin). All the new entrants reduced the cost by nearly 25-30%.

As the articlein Mint points out, these firms provide the discount to the taxi drivers. That is if the actual fare was Rs. 500 and the passenger paid just Rs. 280 due to discounts, then the driver would have got Rs. 200 less. Ideally the owner should have got Rs. 100 (20% of 500) as commission. But instead they now give Rs. 120 as discount. Imagine the situation – Cost: Rs. 120. Revenue: Rs.0. For the driver, it doesn’t make a difference, the customer wins, the owner loses.

Why are these firms doing it then? All in the hope of gaining Customer Loyalty. If you travel in Ola cabs today and like it, you will become a customer of Ola is their thought process. So, the Rs. 120 they lose today would be compensated if you travel twice tomorrow (when they increase the fares back). But then, what is the logic behind the fact that you would stick with them in future?

Michael Porter in his famous five forces strategy would look at the five forces that drive the competition. A simple analysis of the five forces for the Taxi Industry looks like this (pardon me for the very simple analysis).

What can we arrive based on the analysis?

• Too low switching costs
• No Product Differentiation
• Industry operating completely based on cost factors.

Even if these players can consolidate at some point down the line and increase the price, what is the probability that a new player who has Deep Pockets won’t jump in and give low fares?

Is there Economies of scale in this business? With no Fixed Assets, no employees (in the form of drivers), the Economies of scale boil down to the marketing spends. It does help when you have a large market share, but it’s nothing compared to the economies of scale enjoyed by the retail industry or manufacturing industry.

With virtually no costs associated for the driver or the customer to switch players at a later stage, the industry looks like another cost gulping business, where you are going to lose a huge chunk of money in the name of gaining a false market share. Well the investment might look like a solid pillar, but then the pillar might well be laid on a sand dune waiting for a storm to wash it away.

Till the storm, I think as customers we might well enjoy our share in gulping the money.

Happy Reading!