India has about 600+ million mobile phone users with about 800+ million subscriptions (SIM Cards base). About, 60% of these users are in Urban India. Now, imagine converting all those mobile users to smartphone users.
Thanks to its population, India is a huge market for smartphone manufacturers. In the coming 2 years, smartphone manufacturers look to cannibalize a large pie of the feature phone market in India, and supply trends like the narrowing price-gap between the feature phone and smartphone, and the entry of more handset makers are accelerating smartphone adoption in India. Smartphone has a very high aspirational value, and people will adopt it in the first opportunity. It is only time that smartphones will be everywhere in Urban India.
So, how is a smartphone defined, how many smartphone users are there in India, and what is the growth?
According to Nielsen’s report released in Sep’2013, there are 51 million smartphone users in Urban India. Nielsen’s definition of smartphone is ‘phones with operating systems that allow installation of applications’. According to IDC APEJ Quarterly Mobile Phone Tracker, companies have shipped 12.8 million units in Q3’2013 and 10 million units in Q2’2013. There is a 229 percent y-o-y growth compared to the Q3’2012 number of 3.8 million units.
If we assume a quarter on quarter growth of 20%, the number of smartphone users in Urban India will reach 105 Mn by Sep’2014.
Deloitte’s technology, media, and telecommunications predictions revealed on 31 Jan, 2014 say that the number of smartphone users in Urban India will cross 104 million in 2014.
City-wise breakup of the smartphone users in India
According to Internet and Mobile Association of India (IAMAI), Mumbai has the highest number of smartphone users followed by Delhi.
Where does India stand in the global smartphone market?
According to a recent report by the market research firm Mediacells, there will be 1.05 billion smartphones shipped in 2014, and 70% of those smartphones will be bought by new users and 30% will be bought by existing users as replacements.
Mediacells estimates that India (Urban & Rural) will add 172 million smartphones in 2014 to have a total of 250 million smartphone users. Even if India is going to add about half that number of users (90 million – Urban 50 + Rural 40), India is going to have 160-170 Mn smartphone users by the end of 2014. 170Mn is a huge number, and remember this is a semi-optimistic estimate. India will be the second largest smartphone market in the world, surpassing U.S. and behind only China.
Startups typically have three broad ways of funding their companies. They are incubators/accelerators, angel investors, and venture capitalists (institutional investor). Generally, Incubators and Accelerators help the start-up team to set-up the company, and shape the start-up’s Go-To-Market strategy. This article is limited only to explain how the equity dilution works and won’t get into the details of valuations of start-ups.
The typical amount of money different investors pump in and the equity they take is as follows.
Understanding Equity Dilution with an Example
Let us take a start-up named XYZ Labs, and we shall walk through how the equity of the founders and the early investors gets diluted as the company goes through various rounds of investment. For the sake of simplicity, lets say the company has gone through an Angel round and one VC round (Series-A). Let’s say the angel investor took 20%, and the venture capitalist took 30% of the company for $N and $M post-valuations respectively. Let’s see how the equity gets diluted.
In any round of investment, if an investor is taking x% of equity, then the equity of all the existing equity holders will come down by x%. So, if I say y% goes down by x%, then the calculation is: y%*(100-x)% Or y%*(100-x)/100
Let’s start with Founders of XYZ Labs holding 100% of the company, and having a first angel round of 20% for $N valuation.
Let’s say the angel round is followed up by a Series-A round of 25% and $M valuation.
So, as mentioned above, at each stage of investment, the equity of the earlier investors or founders (equity holders) will get diluted. But, with higher valuations in every round, the diluted equity will have more value than in the previous round. Also, typically in Series-A there will be an additional 12.5% of Employee Stock Option Pool (ESOP) that is to be allocated. I haven’t considered ESOP in the above example to keep things simple.
The typical equity dilution at various rounds of investment looks as follows.
So, how does it happen in practice?
In practice, your earlier investors won’t like their equity to be diluted too much in the further round of investment.So, they would like to put some cap on the dilution.
The other important thing to notice is – the type of equity that the investors and founders hold is different. Lets understand that with an example. Let’s say the company XYZ Labs is being acquired by some other major company ABC Labs. So, will all the equity holders of XYZ Labs be paid at once? The answer is No. Typically, the order of payouts is as follows:
1. You first clear out any debts that XYZ Labs owes to any banks or other investors.
2. You then start paying out the equity holders in the following order:
a. Preferred Stock
b. Common Stock
The stock that the founders hold is called Common Stock. This has the least priority during payouts in case of bankruptcy, mergers & acquisitions, etc. As the investor would want to have an early and safe exit, the investors’ stock comes with certain preferences over the commonly held stock, and it is called Preferred Stock. Preferred Stock could have preferences such as conditions on future dilution, priority during payouts, option of investing in future rounds, etc. Additionally, preferred stock can also be converted into common stock to maximize investors’ returns. Also, since debt is payed before equity during payout, some investors will give you money in the form of debt (debt note) and not in the form of equity. Because investors know that debt has the highest priority during the time of payout, and hence they can have the earliest exit .
Now, you see that not all of us in the company are equal, and not all money is equal. But, remember that investors are putting their money on you at early stages and are taking high risk. So, it is justifiable for them to look for a safe and early exit with maximum return. As an entrepreneur, you will hear many terms such as convertible debt, participating preferred stock, etc. These are various payment preferences for the investors to have maximum return, and a safe and early exit under various situations of bankruptcy, mergers and acquisitions, or dividend payouts.
If you’re interested to know more about the start-up terms, please refer to the below link to a Forbes post.
Hope you found this post useful. Thank you.
At any period of time, the consumer base of a brand is comprised of two sets of buyers: New Triers, and Repeat Purchasers.
The terms are self-explanatory. To put it simply, Repeat Purchasers are consumers (or households) who repeated the purchase of the brand, and New Triers are consumers (or households) who bought the brand now, but who didn’t buy earlier.
A little more detail
For example, lets take two annual periods 2007 and 2008. Repeat Purchasers of a brand X are those who bought the brand atleast once in 2007 and also who bought the brand atleast once in 2008. New Triers are those who didn’t buy the brand in 2007, but bought the brand atleast once in 2008. Lapsers are those who bought the brand atleast once in 2007, but didn’t buy the brand in 2008. So, it is evident that whenever we refer to the terms New Triers, Repeaters, and Lapsers, we should always have two periods for reference. These periods can be an year, a quarter, a month, or a week. Similarly, the terms New Triers, Repeaters, and Lapsers can refer to the number of consumers or households depending on the industry. In Telecom or IT, typically it might refer to the number of consumers or users of your device or app, whereas in FMCG it might indicate the number of households that bought the brand. So, whether it refers to consumers or companies or households depends on the industry data, but the philosophy remains the same.
Various Segments of the New Triers of a Brand
So, continuing with the previous example, New Triers are those who didn’t buy the brand in 2007, but bought the brand atleast once in 2008. The important thing to notice is the criteria ‘atleast once‘, which means some number of new triers might have bought the brand multiple times in 2008 (say once in February, June and October of 2008). Don’t get confused with Repeater because the Repeater has bought the brand atleast once in both 2007 and 2008.
So, a New Trier of a Brand X in 2008 comprises of all consumers (or households) that have:
- Not bought the brand in 2007, and bought the brand in Jan’2008 and never bought the brand again in 2008.
- Not bought the brand in 2007, and bought the brand in Jan’2008 and repeated the purchase in Jun’2008
- Not bought the brand in 2007, and bought the brand in Feb’08 and Aug’08 and Dec’08.
- Not bought the brand in 2007, and bought the brand only in Dec’08
- Not bought the brand in 2007, and bought in ………………
So, regarding New Triers of a brand, the marketer is interested in finding out:
- How many New Triers have bought the brand in the year 2008?
- Out of the New Triers of 2008, how many consumers (or households) went on to repeat purchase my brand in the next 12 months? For example, if a New Trier purchased the brand in May 2008, then did he repeat purchase my brand in the next 12 months or in 2008. You can define the period as you wish. This shows us the effectiveness in understanding if the problem is in converting the new trials to repeat purchases or is the problem of the brand not getting enough trials? (Please note that these repeaters are different from the brand repeaters in 2008).
- How many First Time Ever Buyers? If you observe carefully, the new triers in our example are consumers (or households) who didn’t buy in 2007, and bought atleast once in 2008. So, the consumer (or household) could’ve bought in 2006, but didn’t buy in 2007 and then bought in 2008. So, these type of consumers are also New Triers in 2008, but they are not buying the brand for the first time.
So, First Time Ever Buyers of Brand X in 2008 are those who didn’t buy the brand anytime before, but bought the brand X in 2008.
- Among the New Triers (consumers or households) that my brand got in 2008, how many of them are category entrants (consumers or households that were not using the category before, but entered the category with my brand), and how many of them are brand entrants (consumers or households that were using some other brand in the category, but not using your brand). This is especially important for SKUs that are launched to drive the category and brand recruitment.
- How many of the New Triers of my brand in 2008, were using some specific brand ABC before. For example, if a user was using a brand Cinthol in 2007, but now she bought the brand Dove of the same category in 2008. So, this will help the marketer understand which are the brands that I am pulling consumers from?
- What is the Average Revenue Per User (ARPU) or the Average Volume Consumption of the New Trier? Am I recruiting the high category volume consumers? Do my New Triers increase the volume consumption along the line?
- Is my New Trier also buying some other brand? Is he buying both Cinthol and Dove ?
Similarly, there are a lot of things that can be done on the New Triers, Repeaters and Lapsers. So, one can slice and dice the data in anyway we want to look at and analyze for key insights. I will write down more details in another post.
Wikipedia defines price undercutting as: ‘Price cutting, or undercutting, is a sales technique that reduces the retail prices to a level low enough to eliminate competition‘. It is obvious that price under-cutting happens mostly to boost volume sales. This article is about how undercutting works in the context of Indian FMCG.
Brief Overview of the supply-chain and the trade schemes
As mentioned in earlier posts, the typical distribution line for an FMCG product in your area looks like: Stockist -> Company Distributor -> Wholesaler -> Retailer Or Stockist -> Company Distributor -> Retailer. Typically, the distributor gets a margin of about 6-8% and the retailer gets a margin of 10-15%.
Just like the way the FMCG company brings out various promotions to the end consumer, the company also introduces various trade schemes or trade promotions as incentives for all the partners in the supply-chain. Typically, the incentives are based on the quantity of the volume purchased or the value purchased. There are many different types of incentives such as, but the major ones are:
1. Quantity Purchase Schemes (QPS)
A few examples are below:
a). Buy 25 pieces, get one piece free; 50 pieces, get 5 pieces free; 100 pieces, get 12 pieces free; 200 pieces, get 25 pieces free
b). Buy 25 pieces, get 1% discount; Buy 75 pieces, get 3.5% discount; Buy 150 pieces, Get 7.5% discount
2. Value Purchase Schemes (VPS)
Example: Buy Rs.5000 get 4% discount, Buy Rs.8000 get 7% discount, etc.
So, the formula seems simple: the more somebody buys a particular product the more the discount. Bargaining Power!
But, this is where the problem starts.
Undercutting by the Wholesaler
We shall walk through a common scenario of how undercutting happens. For simplicity of math, lets say, a product has an MRP of Rs.15, and the retailer gets it for Rs.13.50 and the distributor gets it for Rs.12.50. Lets say the wholesaler also is getting at Rs.13 as he typically buys more. So, simply just say the distributor margin is Rs.1, the retailer margin is Rs.1.5 and the wholesaler has a margin of Rs.0.50.
Lets say Mr. Lal Babu is a a very big wholesaler who caters to certain number of retailers locally. When the distributor goes to Mr. Lal Babu he says there is a new scheme. Lets say the scheme is: Buy 75 pieces, get 3.5% discount; Buy 150 pieces, Get 7.5% discount.
So, Mr. Lal Babu decides to buy 150 pieces. So, apart from his actual cost, he gets a bonus 7.5% discount. So, instead of buying the product at Rs.13, Mr. Lal Babu buys it at Rs.12 (7.5% discount over Rs.13). So, now instead of selling it to the retailer at the usual price of Rs.13.5, assume Mr. Lal Babu sells it to the retailer at Rs.12.50, taking his usual margin. The company distributor is selling the same product at Rs.13.5 to the retailer. So, you see what the problem is?
The retailer would be attracted to buy from Mr. Lal Babu as he gets more margin compared to the company distributor. One might think it is only Rs.1, but when they buy a couple of cases, it translates into good savings for the retailer.
Is undercutting only relevant to wholesale?
The answer is No. The philosophy of under-cutting is the same, but it can be done by anybody in the supply chain. So, the salesman himself, in order to reach his target, can make this happen. He makes an invoice against one such large wholesaler Mr. Lal Babu and he passes the benefits to his retailer. But, this is going to be a problem in future for the salesman, as the retailer will get used to these benefits and he stops buying in normal situation. In a way, the brand or the particular product starts to become more driven by the wholesalers.
Various channel partners do under-cutting to boost volumes at his/her own level. Territory Sales Officers who will be in-charge of certain stockists too sometimes bill it against a certain stockist ABC, but he actually sells it to a big wholesaler. The distributor too can have his own share of price undercutting to attract the retailer.
Undercutting is a very common phenomena in the field. Though FMCG companies have various strict mechanisms to curb them, new loopholes are invented continuously to take advantage and undercut. After all, price matters to everybody.
Occasionally, we all get into a situation where we have contrasting opinions about two individuals, even when we don’t have any contextual evidence to prove it. We all fall prey to these mistakes in our everyday decision-making. Based on my observations, I want to share with you what I think are the three most common fallacies that we witness daily in our lives.
1. The Halo Effect
The Halo Effect comes into action when we like or dislike something or somebody. Often, we use an easy to obtain or remarkable feature or information and we use that information to interpret the entire picture. Wikipedia says “The Halo Effect occurs when a single aspect of something shines out in such a way that it affects the way we see the whole picture”. For example, if we like a person, then we see the attributes of that person as more favorable. The opposite is also true.
2. The Confirmation Bias
Research has proven consistently that people have a tendency to confirm their beliefs. Confirmation bias is the tendency of people to favor information that confirms their beliefs or hypothesis. This is extremely evident in today’s social media as you might commonly find people posting articles that confirms their beliefs and hypothesis, though you can always find an article that says exactly the opposite. Wikipedia says “Confirmation biases contribute to overconfidence in personal beliefs and can maintain or strengthen beliefs in the face of contrary evidence”.
3. The Affect Heuristic
The affect heuristic is in play when we are weighing the benefits and risks of something. If you like something, you believe that the risks are smaller and the benefits are greater than they actually are. The opposite is also true. One’s emotional reaction to some issue (say, public education system) determines how one weighs the benefits and risks of the issue. Wikipedia says “it is the equivalent of going with your gut”.