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Companies get built independent of what’s going on in the markets. The guiding light of the intrepid entrepreneur is his need to find a niche and fill it profitably. As he finds his niche, the markets will, to an extent, shape his strategy for profitability.
Back in 2008-09, when the markets were bearish, entrepreneurs were looking at unit economics. Costs of production needed to be brought down in order to increase profitability. This changed as the markets turned bullish. By 2013-14, the onus was put on growth at any cost.
We’ve been seeing the outcome of this aggressive pursuit of growth. Many digital startups, even the well-funded unicorns, have failed to reach any degree of profitability. As a result, we’re seeing several startups going through financial and legal issues. So many startups have had to reduce their headcounts to cut costs.
Now, in 2017, we see that the markets have come full circle. There is heightened emphasis on profitability again. The markets are saying, grow at a reasonable pace, but profitably. Macro factors such as demonetisation have also played their part in slowing down growth and making the business environment challenging.
This brings us to the all-important question: How will the markets reshape business strategy in the near future, and what will a successful digital company of 2020 look like?
Here are three thoughts that may help answer that question.
Paperless, Instant & Customisable Offerings
The successful, digital company of 2020 would have offerings not available through traditional channels. It would be able to cater to customers without papers and instantly. In addition, it would also be able to develop a deep learning of the customer’s preferences. It would be able to do this by analysing the customer’s data, which it would then use to create customised offerings in real time.
There’s a great example of this instant, paperless model in fintech. Earlier, if a customer wanted to buy a personal finance product like a life insurance plan, he would have to submit his cheque, put a signature on his application and file his paperwork along with his KYC documents. The manual processing of his payment and paperwork would then take a few days, and the delivery of the product would take a few days more. Now, fintech has worked to remove two major barriers to instant verification and delivery. One – the KYC process can be completed through the OTP-based e-KYC. Two – the signature has been replaced by the e-Sign, which allows customers to digitally sign their applications for instant delivery.
Progressions in fintech show us that more and more customers in the future would buy personal finance products without paper work, instantly, and even without physical presence. These are traits we would seek in other successful digital businesses as well.
Positive Unit Economics The past five-odd years have taught us that digital businesses need to be profitable and can’t sustain themselves merely by customer acquisition through discounts and deals. Therefore, positive unit economics is key. Digital businesses must develop the ability to deliver higher revenue per sale than the sum total of variable costs. By digitising and automating business processes, companies can keep their fixed costs frugal. However, variable costs increase as a business scales up. Therefore, being in control of variable costs can lead to greater EBIDTA profitability.
India is rapidly adding new internet and smartphone users each year. As per current growth estimates, the country is expected to have 730 million internet users by 2020, doubling from today’s numbers. This week, the minister of communications, Manoj Sinha, said that as per Trai’s statistics, there were 391.50 million internet users in India as on December 31, 2016.
Of these, we believe about 50 million Indians have the capability to shop online. But these numbers too are expected to grow in tandem with the total number of internet users. So as more and more people turn to the net to complete daily tasks like buying grocery, paying an insurance premium or calling home a plumber, more and more businesses and services will need to be internet-ready. Companies that are able to scale up rapidly and frugally in order to acquire this gigantic internet-connected user base will be ones best placed to succeed in 2020.