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,.