Recently, food-tech apps that do home delivery have been in the news due to their restaurant partners taking issue with the culture of ‘deep discounting’ prevalent across the industry. An excellent article on the impact of this on restaurants was published recently on Telegraph India.
This issue of deep discounting is not restricted to food delivery companies alone. In fact, most of the leading online Business to Consumer (B2C) organisations in India regularly resort to this ‘strategy’. I find this concept very worrying for many reasons:
- Lack of strong Value Proposition – Having ‘discounting’ as an always on tool leads to the question – do these businesses not have a strong value proposition for their customers? If customers indeed value the product or services these businesses are offering, then surely they would not need to discount daily? I can understand that discounts might be required when you are in a new market segment or have just recently launched and are looking for some early traction. But many of these businesses have now been operational for many years. Do they have a strategy on how they could continue to grow and become sustainable businesses in the near future?
- Lack of brand loyalty – As the article I have linked to earlier mention, discounting has led to users using multiple competing brands offering the same product or service. The choice of which brand to use seems to be based on which one is offering the lowest price. This is nothing but a race to the bottom where the deepest pocket will win. Surely, building a brand and business has to be largely based on delivering a unique value proposition to the customer and continuously defending and enhancing that value proposition rather than just relying on brute (investor) financial power?
- Low focus on customer delight – If the assumption is that customers will only shop with the brand offering the maximum discount, what incentive exists for brands to continuously innovate and provide new features / services to customers? Business slacking because customers are moving to competition? No problem, increase the discounts!
- Marketplace distortions – In many cases, deep discounts can lead to distortions in the marketplace impacting the various other players in the ecosystem. The app-based personal transportation market provides a recent example of this. The significant ‘incentives’ provided to drivers led to many people taking out loans to purchase vehicles and run them as taxis on these app-based businesses. The discounted fares offered to consumers also led to high demand. Everything was rosy initially, but as the discounts and incentives reduced, many of these drivers found themselves with lower monthly incomes but still saddled with loan repayments. This problem might have been lessened if the dynamics of the marketplace had not been discounted by the artificially high incentives (and low fares).
So why do businesses indulge in this practice? I am no expert, but I strongly believe that pressures to justify investor valuations and demonstrate the type of growth required to provide meaningful exits to investors could be one of the key reasons driving this behaviour.
There is no doubt that the consumer is benefiting from this. One way to look at this is that it’s a form of modern redistribution of wealth with money flowing from the (rich) investors to the (not so rich) consumers. But what about the impact of this artificial distortion on the many other businesses that have not been fortunate to receive investor wealth? This and other questions arising from this practice have to be addressed if we are to see these businesses establish themselves in the long-term.