The Power of Reciprocity-Learn how to benefit from this principle of influence

If you are like me, you would have made your annual visit to a large jewellery showroom by now and bought some jewellery. You would have seen that, of late, most of these showrooms offer you a cup of coffee or juice to you during your shopping. Mostly this will be around the time that you are looking to finalise a purchase (notice it is never done as soon as you are seated; almost always it is well past the mid-way point of your shopping experience).

You may think that the shop is being courteous but this small gesture serves a much bigger purpose

Power of reciprocity

By nature, human beings don’t like to be indebted and would quickly want to ensure that they are no longer beholden to anyone. If you recall, in Indian households, we have this tradition of noting down the value of the gifts we have been given.

This is to ensure that we repay their debt by giving something of higher or similar value(depending on how close they are). This kind of reciprocity has been hardwired into our brains for centuries and is the basis for humans to flourish as a race. However, there is a small little detail to this which you may not have noticed.

When we are indebted to someone, it is harder for us to say no to their request! This is the power of reciprocity used by many smart marketers/sales folks. As humans, we are wired to release our indebtedness at the very first instance, which is why we will be willing to make more significant concessions than what the other person has done for you. This is the insight that smart salespersons use. The same hardwiring also makes us do larger favours to people who have done you small favours. Robert Cialdini summarises this principle in these simple words:

Reciprocity: a small favour can trigger a much bigger return favour.

Jewellery shops invoke the power of reciprocity

Once you know the principle and power of reciprocity, it is now easy to see why they offer you a coffee or juice midway during your shopping sessions. By giving you a small concession in the form of coffee, the salesperson is making sure that you are indebted to them. This simple act, which seems like basic courtesy, will dramatically increase their chance of closure in the sale.

I saw this being used very effectively at one of the shops I recently visited. After 15 mins of showing us various designs, the salesperson asked us if we would like a cup of coffee, which we refused (again because we didn’t want to feel indebted to them). However, she insisted that we have the coffee as they make really good coffee (she was selling coffee!) and made sure we enjoyed our cup of coffee and juice for the kids. My wife finally decided to buy at the same shop without realising the power of reciprocity.

FREE samples – remember buying stuff which you don’t need?

The power of reciprocity is invoked in many spheres by smart sales folks. You might have noticed department stores and grocery stores often handing out FREE samples of a product. Let’s say you agree to sample. That’s it. You are hooked! They then immediately follow up with a request to buy the same product.

Sales folks have found that the conversion rates of buying a new product are far higher after a FREE sample was distributed. You are hardly likely to buy a new product when shopping with a grocery list, but the FREE sample enhances your chances of buying a new product. Here too, the powers of reciprocation are at play.

The principle of Reciprocity is powerful and have many ways in which they can be used by leaders to influence people.

PS: This post is part of a series of posts, which I am writing after reading the book ‘Influence: The Psychology of Persuasion’ by Robert B. Cialdini.

Are JIO and Truecaller Killing the Call Center ROI?

Traditional customer service is centred around using both the phone and email as channels to reach out to customers, offer support, and upsell to them. In India, as the cost of a call centre is very cheap, the approach has been of setting up a call centre to handle customer support using the phone as the primary means of contact. This has been the standard operating procedure for the past decade or so. In addition, most lead-gen in India is also supported by the call centre, i.e., leads generated digitally or by other means are screened and pitched using the phone. Thus the phone has become the primary medium for customer service and lead-gen verification. But then a couple of changes in the last 2-3 years are making this route of phone-based customer support difficult. This is leading to a declining ROI in this setup, and we as marketers should take note and look at alternative solutions. In this article, I will talk about the changes and potential directions which one can consider.

Truecaller – Killing the call centre ROI

The Truecaller app, which was created by a Scandinavian company, has India as its biggest market. This is because the app provides a caller ID service and allows people to identify the caller before choosing to answer or reject the call. This has made call connect rates for call centres fall to an average of 25-35 %. This is not a sudden development but one that has evolved slowly the last 3-4 years. The trend has recently been exemplified by the availability of an always-on data connection. This has meant that companies now resort to auto-dialers and sophisticated setups to call the user many times from different numbers. The number of attempts made range from 4 in a week (ideal) to 15-20 in 3 days (bad user experience).

JIO and Dual SIMs – Killing the number as an identity

The second trend, which is impacting lead-gen, is the availability of cheap dual-sim phones making it easy to switch numbers at the drop of a hat. This means that a typical user may end up changing numbers many times in a couple of years. In addition, due to the dual-sim card, they are less likely to pick up calls made to those numbers which are bought just to avail data offers. The most prolific among the operators is JIO, which disrupted the telecom market. My anecdotal analysis of JIO is that most people keep it as a secondary SIM and don’t answer or make phone calls using JIO. This is the number which they readily give away to anyone, including lead-gen forms or anyone wanting to fill up a lucky draw coupon at the nearest mall. Thus, these secondary SIMs are used just to complete registration formalities like OTPs etc. but are hardly used to receive calls. This change is breaking the very core assumption that phone numbers can be used as unique identifiers for customers.

FB Messenger as an alternative channel

Given that it is becoming increasingly difficult to reach people for customer support and upselling. there is pressure to look at alternative means of customer service. One of the channels which are emerging is chat and here is where FB Messenger is making a bid by offering Messenger for Business and WhatsApp Verified Business Account. With FB Messenger and Whatsapp, Facebook is making a pitch for replacing the existing channels of email and phone with today’s more connected mediums of communication. The idea is good in principle but needs to be tested in the market to see if consumers will accept it and respond positively. To enable quicker adoption of this, Facebook is allowing the following:

  1. Offering a messenger ad format which allows brands to start conversations with potential customers.
  2. Send/Receive API’s which allow you to build customised experiences for your customer. This opens up a million possibilities. An e-commerce company can now notify shipping of their product using FB Messenger. Techcrunch provides a custom feed of stories inside FB Messenger based on your preferences.
  3. Sponsored message – Allow businesses to send targeted messages to people who have already have chatted with the business on FB Messenger.
  4. Customer Matching – It is also now allowing (for US businesses) to match your customer’s phone number from your CRM into messenger. Once there is a match you can start chatting with your customers directly on FB Messenger.

Have you considered using FB Messenger or Whatsapp for business for your business needs? If so would love to hear about your experience with the same.

Online Restaurant – Difficult Problem to solve!

Last week we had news of SpoonJoy shutting down operations in parts and also of Dazo (Tapcibo earlier) shutting down its operations due to lack of ability to make a profitable business.

Having closely been observing Food/Restaurant industry during the last 5 years in Bangalore ( <Starting a restaurant >)and also deeply involved in starting up an online food delivery startup around 7-8  months back for a friend. I think I am qualified enough to comment on the major problems which need to be solved by having a successful Online Restaurant and why it is not very different from running a typical restaurant.

Online Restaurant – Great Food + Convenience 

The online restaurant though seems like a novelty it is still essentially a restaurant which is driven by the quality of food and then followed by timely delivery, payment options, mobile apps etc. So it is still a food play where you need to be able to convince the customer to order your food as frequently as possible (ideally daily, but we will come to that later).  The solution and the odds of getting this mix right is the same as you would have in a traditional restaurant, but we will talk more about that later.

The second part of the online restaurant is the convenience of delivering food to the customer. We are facilitating and adding a convenience to the user by delivering food to him.

Problems to be solved: Delivery

As mentioned earlier the big draw of the ‘online restaurant’ is the amount saved in real estate costs. But what is saved in real estate will come back to haunt in terms of delivery boys. The biggest problem of food delivery startups is that while they need to pay for the delivery boys salary (12k-15k) they have only a small window of time to use them. Let me explain, most of the food delivery would be restricted to 12:00 – 2 pm time window and 7:00 to 10:00 pm window in the evening. A typical delivery takes 25-30 mins (even Domino’s guys tell us that this is best they have been able to achieve). Thus in each delivery boy can make a maximum of 8-10 deliveries (let’s take 10) per day but his monthly cost is 12k (least), thus each delivery would cost Rs 40 !. This means that if you have to deliver food daily to a consumer and hope to have him order daily we need to have food cost at Rs 60 and then factor in Rs 40 towards delivery to make it Rs 100/meal.  This is quite a challenge as you need to address other costs which I will explain in my next section apart from just food cost. According to me with such high costs of delivery, only gourmet food which has larger margins can sustain or you have to find a way to cut the delivery costs.

  • FreshMenu has taken the route of Gourmet food by charging a premium so that they can easily absorb delivery costs.
  • NutriTown has done a bit of both by going on the platform of health foods and having a semi-premium service along with a subscription. Subscription service allows them to deliver 20 food packets in 2 hours due to better route planning.

The reason for SpoonJoy, Dazo etc to close down lies here, cost of delivery is way too much for their price of food costing ~ 100 Rs per meal.

Problems to be solved: Food 

The second end of the problem is the ability to create food choices which encourage users to order your food as frequently as possible. Many entrepreneurs in this section believed that the lure of the online restaurant is because we can get the user to order food more frequently due to the convenience factor of delivery. This is quite a challenging affair because the only food which you would not mind eating regularly is your own home cooked food, else with a restaurant food you tend to get bored with the same flavouring and cooking style. Thus even if you make fantastic food in your central kitchen the user is going to get bored soon and is less likely to order the same kind of food. To solve these many online restaurants tried to increase their inventory by having many types of offerings which left them handling unsold inventory at the end of the day thus eating into their already precarious position in terms of margins.

According to me one way of solving this issue of boredom of food would be to get homemade food made by entrepreneurs in their own homes and then serve them to people. But this has its own problems of scalability as sourcing of food becomes a challenge. So solving the food problem by trying to be a replacement for daily food is quite challenging. The other route would be going the Gourmet route which means serve specialized food at premium prices which is the route which FreshMenu has taken and been happy with being ordered once in a while.

Problems to be solved: Packaging

The 3 rd problem which needs to be solved is that of packaging. The typical packaging used for serving a meal costs ~ 20 Rs , but even with this high expenses, one is not able to serve the food to the user so that it is hot after he/she receives it at his place. The warmth of food is something which we have always associated with fresh food and we often make a fuss at restaurants if the food is not warm.  Thus even after accounting for costs of 20 Rs towards packaging it still close to what a restaurant serves you because it is not warm.  Many online restaurants have gone the route of offering microwavable food packaging which adds to the cost of the packaging as microwaveable packaging is more expensive. Despite attempts by many startups we are yet to see a solution which makes a cost-effective way of packaging while keeping the food warm.

Solutions?  – Possible ways to solve them.

The above are all the problems which need to be solved? But what could be the solution to this?  I believe that there are many ways to solve this problem, a couple which spring to my mind.

  1. Go the premium way (Rs 150+) in offering and then get entrepreneurs(housewives/chefs) to make Gourmet foods to offer a decent variety every day. By going premium, we can tackle the high cost of delivery and packaging and be getting housewives/chefs into the mix addresses the boredom part of the mix. Would like to mention that InnerChef is using this route by having entrepreneurs to make gourmet offerings.
  2. The second approach would be to offer a niche product which enables the user to sign up for a subscription to a unique product. The niche offering is something for which the user yearns for and values so much that he/she is willing to subscribe to this by paying in advance comes to mind as it offers healthy food for diet conscious people looking to weight. I think there is scope for offering regional specific food which people would yearn (Bihari/Oriya).

Do leave your comments below if you think  I  have missed some aspect of this problem. The above article is a summary of findings during the creation of the food startup and wanted to share this because many of my friends are still evaluating to start a restaurant or getting into it. In the last couple of months have got calls from 4-5 friends regarding the same hence this article to help them.

Swiggy – Why they would SHUTDOWN soon!

In all the hype about startups and funding, people seem to forget that businesses exist to make a profit and they are not about growing at breakneck speed to capture market share first. Unit economics must match up very soon in the business else it will end up in a spiral of fund raises reaching nowhere.

What is unit economics?

By unit economics, I am not talking about breaking even or becoming profitable. But it is whether a transaction in business ending up at a breakeven level without considering other costs like support staff, engineering, product management and initial marketing costs. At a very granular level is the transaction breaking even.  To understand what we mean by this let’s take the example of Swiggy app which has got funded and is being touted as the Uber of delivery. In order to push the product, Swiggy is spending huge amounts in terms of discounts and offers to first time users. These are marketing costs which Swiggy will hope to recover in the later stages. During the calculation of unit economics, one should not take these costs into account because to change the user behaviour it is sometimes necessary to role out such offers and these are necessary evils of doing such businesses.

Unit Economics or Costs are costs involved in fulfilling each request and these are costs which get incurred every time an order is fulfilled and these would not go away regardless of any changes in the product.

Swiggy Unit Economics

In the case of Swiggy, the unit cost of each delivery is essentially the cost of each delivery which Swiggy incurs. The main components of Swiggy delivery are the salary of the delivery boy and the fuel that he/she claims as per the distance travelled. Based on data from Babajob.com, in Bangalore the salary of the delivery boy with two-wheeler is around 8000 – 10,000 Rs depending upon his English skills. In case of Swiggy, most delivery boys are semi-fluent in English let me assume a cost of around 10,000 Rs and additional Rs 2000 towards fuel costs for deliveries(this is data from speaking to a couple of delivery boys from Swiggy). With 6 days of duty, the cost of the delivery boy on a daily basis works out to be 12K/26 days= 461 Rs.  As per Swiggy, the cost per each delivery is Rs 30, this means that for Swiggy to break even on unit economics point of view they would need each delivery boy to make 15-16 deliveries on a daily basis.  This is just to recover the unit cost of delivering food and not including the other overheads in business.

Unit Economics, not Working Unless…

Now coming to actual data on the ground by speaking to delivery boys in Koramangala and Bannerghatta road (considered to be an ideal ground for such services) i understand that they are ending up doing around 6-8 deliveries on an average with peaks of around 10 deliveries. This brings us to the real question of whether Swiggy is a business which can sustain in the long run despite massive amounts of money being raised. My answer is that unless we have a massive uptick in orders made on Swiggy they are not going to be unit positive and don’t forget that the Bangalore traffic is another added headache for these delivery companies because in the peak hour of 12: 00 to 2:00 pm and 7:00 pm to 10:00 pm there is only so much deliveries which a delivery boy can do. Given that on an average each delivery takes 30 mins, we have space to make only 10 deliveries on an optimistic scale. The other option is  Swiggy would have to charge higher amounts (say 60 Rs) for each delivery which kills the frequency of ordering.

The other way they make money is to be to get some money out of the merchant for the delivery services which they are providing. While I don’t know much about them my understanding is that they are signing up restaurants partners at 10 % of order value. But given that order values are less than Rs 200, we are talking about additional revenue of Rs 20 for each order.

For Swiggy to break even on Unit Cost lever they need the following mix daily (not just weekends !!).

  • Each Delivery boy manages to make 10 deliveries / day = 10* 30~ Rs 300
  • Each delivery earns a commision of 10% of order value = 10*20 ~  Rs 200

 

While they may be able to meet these targets on some days, I suspect they will not be able to do this on all days and in all localities that they operate in! This is where it begins to become a difficult problem to solve as they have to face losses on each delivery.

Regardless of the funds raised I suspect that this problem will not get solved because when you lose money on each basic transaction there is only so much you can do!

This is a continuation of my series of articles on my views on startups, the previous version of this is <Online Restaurant difficult Problem to solve>

 

PS: This article was written in 2015 December, since then my views on this have changed but I still believe the Swiggy will need to solve this problem if it ever wants to be a profitable venture,.

Entreprenuership : Wanna start ur own business -Wait Read this..

During a general chat last week one of my friend (Colleague ) told me that he is frustrated with the daily routine of the jobs and would like to start a business of their own. Have heard this familiar ruse for umpteen number of friends and relatives over the last 10 years. But I guess people have not really thought of the what are the risks and sacrifices one has to make to start some business of your own.

Let me share with you an analysis which I made with one of my friends on starting a small restaurant (size of a small Dharsini ). The idea of the analysis was to analyze how easy/ difficult it is to set up a business at a later stage.
Hope this example analysis will sensitize the readers on the costs/ risk/sacrifices one has to make to take up the route of Entrepreneurship. The intention of the article is not to scare you, but to sensitize you to the risk involved in setting up your own business by giving up your cushy jobs. One of the reasons why am writing this is that of my relative took up a business venture without realizing the costs involved in it and is now facing big losses. So let’s get sensitized to the costs/risks involved.

Note: All Data used here is actual data collected 2 years back and are not assumptions
Dharsini in Malleswaram :

The intention was to start a Dharsini for my friend (small quick service restaurant )in Malleswaram Area keeping in mind the daily traffic around 8th Cross – 12 th Cross Malleswaram. The intention was to offer things which are not normally available in a dharsini along with the regular fare at Dharsini

Cost of Real Estate: Upon an extensive survey we hit upon a really good place in 10th Cross Malleswaram. This place was available for a rent of  36k/ month with 11-month advance and was right on the main road.

Cost of Setup for Cooking & Serving: Once the real estate is taken we need around 2 months before we can start offering food. During this time we need to work on the interiors, cooking setup for this place. This costs on an average of 3 lakhs for a small dharsini.

Cost Of Employees: On discussing and visiting an existing hotel of a close friend of my dad realized that to run a small scale dharshini we need to have 5 full-time employees with + 1 head cook.  On an average, a head cook would charge around 8-9k / month and the 5 employees need to be paid 4k + accommodation. Even after this, it is difficult to retain people with employee turnover being highest at the lower levels. Apart from this, we need to provide accommodation for the employees which costs around 5k/ month.  So the total costs of employees is  9k+ 20k+ 5k = 34k
Monthly Costs: Apart from the cost of employees you need to factor other costs like GAS, Electricity, Mamul to Food Inspectors and the daily cost of rations to cooking food.  This on an average comes to  15k/ month.

All the analysis is fine, but the most important aspect is that you don’t make profits from the day you start your business. This is the fact where people who are starting off on their own make the biggest mistakes. They stretch themselves up to start the business, but no business is profitable from day one because it needs to achieve a critical mass before the fixed costs of operations are supplemented by profits from selling goods.   On visiting and discussing with existing owners of hotels/ dharsini we realized that on an average it takes  5 to 6 months for regular visitors to start coming to a joint and the critical mass of only reached after 18 months (optimistic assuming that u are serving the best food fare).

To make an analysis of costs involved we assumed that during 12 months we will not be able to break-even (i.e start earning enough profits from the sale of food to recover fixed costs like rent, salary). Let’s now see the overall costs involved.

Upfront Investment ~ 7.5 lakhs :

  1. 4 lakhs for Advance of Rental
  2. 3 lakhs for Interiors & Cooking setup
  3. BBMP License, Cooking Gas, Electricity connection – 50k

Running Costs Till Break Even period ~ 10.8 lakhs:

  1. Salary Costs –  34k * 12 Months ~  4 lakhs
  2. Rental Costs –  36 *14 months   ~  5 lakhs( 2 months to set up place)
  3. Monthly Expenses – 15*12 months ~ 1.8 lakhs

Thus we need to have around 19 lakhs of capital to start a small dharsini of your own.

Now to give an idea of the number of customers who have to visit your restaurant to make it profitable assuming 1 single customer spends Rs 25 in your restaurant and that your gross profits on this are around 15 Rs (i.e you spend 10 rupees to serve an item which costs 25 Rs). You need to recover Fixed costs of Salary + Rental from the profits we need to serve 4700 customers ~ 160 customers/day.  If you imagine this is quite a lot of customers to serve on a daily basis, so you break even only at this point.
But wait… what we are missing something!.
All this does not include your costs, BECAUSE you cannot continue to work with your cushy job while trying to start a business on your own. ADVICE which I got from several restaurant owners is that this sort of business cannot be made successful without fulltime involvement of the owner because trusting others with the management of a business is suicidal. So you need to quit your cushy job (would have done anyway right ? remember you are frustrated with ur corporate routine). Now here comes the most difficult part of the equation which needs to be solved. The moment you decide to quit it means that your monthly bank balance will no longer receive that nice salary cheque of xx thousand monthly. But starting a business does not mean you starve right? So u need to keep money aside for your daily expenses which we can safely assume is at-least 30k (remember kids education, house rent, EMIs. Could be higher if u have the burden of a big house EMI).

So you need to keep aside money for the same. Assuming an optimist view that business will break even in 12 months and you spend 2 months in setting it up and keeping a good buffer for another 12 months to cover up ur costs we are looking at 26 months * 30k of expense ~ 8 lakhs. So start you need to have a corpus of  19 lakhs + 8 lakhs.

Surprised!  -> BTW I am talking about a small dharshini only here. You may extrapolate this example to any other business which you wanted to get into.  The basic idea of this article is to sensitize one that we are all enjoying the benefit of assured salary every month and it is easy to forget about that one. As they say, the grass is greener on the other side, but it is not always so as the grass on another side may have many more thorns that one can imagine from here.

So the next time you make a loose statement that this 9 TO 5 Job is frustrating I want to start some business of mine, keep in mind costs involved

ps: This is the article written in 2011. My blog has since been backed and now am restarting this blog at a new destination.