With the entry of e-commerce channel in India, the concept of burning cash to increase market share came into picture.
Over the period of time, more industries such as telecom have indulged into this practice.
Let us consider two of the most impactful cash burning events in the recent history:
Big Billion Day Sale
I remember the day when Flipkart had first launched their Big Billion Day Sale in 2014. Many products such as smartphones, accessories etc. were sold at Rs. 1!
At that time, most people thought that flipkart was foolish to sell products at such huge losses. With such negative EBITDA in almost all categories, how could a company survive, even in the short term!
The only explanation for doing so was to entice customers in the short term and habituate them into using the then new service.
They did succeed in doing the above. However, over the period of time, new players such as Amazon, Snapdeal etc. were born in India. Now, all these e-com brands were burning cash – not only to entice customers to use e-com channel, but to also kill the competition.
7 years have passed since the first BBD Sale. All the e-com players are still burning cash for either getting customers to use channel (for specific categories with lower e-com penetration), or to kill the competition, or to make the customer stick to their brand.
Jio – Free Unlimited Data and Calls
Jio launched their services for the public in 2016.
As a strategy to build a customer base, they provided free data to their customers for a limited period of time. They also provided free voice calls for lifetime.
Meanwhile, this led to huge disruption in the telecom industry. Market leaders such as Airtel saw their customer base shift to Jio for free services.
Eventually, all the telecom players joined the battlefield and started providing data and call services for dirt cheap prices in order to get back the lost market share.
Once Jio realized that they had a enough customers on their network, they started increasing the prices to sustain. With the increasing prices, customers started moving back to the traditional players such as Bharti Airtel or Vodafone Idea.
As per an article published by the financial express, May 2021 was the first time when Jio’s active subscribers had declined two months in a row. The article also claimed that Bharti Airtel’s active subscribers had increased during the same period.
Long Term Strategy
Going by the above two examples, it seems that the Indian Customer Base is loyal to the lower pricing rather than the brand itself.
If I look at the primitive trends in above two industries, i.e. Retail and Telecom – The leaders in both the industries were the companies which provided superior quality rather than price. But this changed - thanks to cash burn.
The cash burning has habituated an average Indian Customer to look for lower prices and this habit would lead to lower brand loyalty.
Corporate executives should ask themselves the following questions -
Can cash burn help in the long term? Or is it just a way of increasing revenues in the short term for increased valuation and better market image?
Can customers be tied to better quality or services rather than just price?
Maybe brands can have multiple categories/product lines with a few of them having negative EBITDA and the remaining as cash cows for consolidated profitability.
Share your opinion in the comments section.
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