Asia-based pricing experts may have a prescription for ailing unicorns and worried backers who are seeking answers on how and when cash-burning billion-dollar startups can record a turnaround and be profitable.
It seems the answer lies in staying away from promotions and lock-ins and driving topline growth via other differentiating factors to make customers stick longer or pay more.
The subscription model or the lock-in method – opted by digital firms like ride-hailing firms, food delivery apps or others who follow the Amazon-like strategy to capture market share – are destroying profitability the most, Singapore-based pricing experts Dr Jochen Krauss and Jan Weiser at consulting firm Simon-Kucher & Partners told DEALSTREETASIA in a recent interaction.
“With promotions, the company is getting the un-loyal user (customers generally choose the lowest price when services are the same). With this strategy, the only way to be profitable is when the companies are mature and if there were no other market players fighting for shares with these similar promotions. So, the only way to compete with that [for market shares] will be to offer better/more promotions,” said Weiser, making a point about ride-hailing applications like Grab, Go-Jek and Uber or food delivery applications like Deliveroo, Swiggy and others that continue to be in the vicious cycle.
The only way to break out of the cycle, he adds, is by putting more money towards more “crazy promotions” or to think of angles to drive top-line power by using a differentiating factor that makes people stick or at least have a group of these customers willing to pay more.
In fact, Krauss, who is a widely quoted pricing expert, went on to say that even though one may argue that Southeast Asia’s ride-hailing unicorn Grab (valued at about $14 billion) has the best loyalty scheme, he felt the region’s celebrated company actually went a step backwards by introducing the new scheme.
Grab has been bringing to the table loyalty programmes with the latest one coming two months ago where its platinum and gold-tier members get privileges at major Southeast Asian airports.
“You create a lock-in system, a subscription model, as you create a sense of belonging to a certain brand/company. Psychologically, the threshold of only going for the lowest price goes away,” he added.
Further, he added that with cheap money floating around and expected to continue to exist, these companies may keep being funded and burning cash as a consequence.
Krauss, a Partner at Simon-Kucher, heads the company’s operations in Singapore and specialises in developing market entry and pricing strategies, optimizing pricing processes and designing innovative price and product structures.
Weiser, also a Partner at the firm’s Singapore office, leads Simon-Kucher’s life sciences practice in Southeast Asia, China, and Australia/New Zealand.
Have you seen a growing interest in Asia and Southeast Asia from global PE players based on your work on commercial evaluations of prospective deals? Which countries have you seen get a lot more attention?
Jan Weiser (JW): We have done a lot of support optimization for companies in the US who have teams here. Lately this year, we see India as a strong market where we have got a lot of [evaluation] requests. We have got a couple of assignments from VC side as well as PE. Some of the large VC firms are highly active in India and many companies are funded. In Southeast Asia, it is mixed so we do projects in the more mature markets.
Are you also active in China?
JW: We are not very active in China. We have done a couple of deals that we supported in China so it depends more on industries. We have done a lot in the region however for trade fair companies – not PEs but for their M&A department.
How many of your due diligence engagements actually result in a deal?
JW: It is on the lower side, and it is not always due to the commercial aspect. Part of the success is also on how to integrate the company and work with the management. Sometimes the commercial side is good but there are other bottlenecks and since we are not getting involved in the actual negotiations, we do not know of them.
It could also be that they cannot agree on a price. It is also impacted by the fact that in many deals there is no exclusivity, so a deal may have more bidders looking at buying a target company and we can only work for one. Generally, the ratio is low.
Exits have been difficult. In your experience, have you faced cases where you have seen exiting [an asset] being tougher?
JW: Divesting is much harder than investing. The better the company is, the more sound it is, the better structured it is, the easier it gets in the end. It is also one of the things we have seen that when a PE player buys a company, it either flies and is successful or it drags along and is not so successful. In the second case, it is better to divest earlier.
Do you see a trend where PE players are trying to sell earlier than say five years?
JW: It is not a general trend but the smarter PEs are following that scheme. Everything that works we keep. Everything that does not work we exit before the five-year time frame.
How do you assess the pricing models and strategies among Asian investors?
JW: We have to be careful not to talk about all the companies in one breath since they all have different challenges. A trend that we, however, see in Asia and also elsewhere is that companies have changed their price models. There was an original price per unit and now it is based on customer’s subscription, it is more opex vs capex-based. They sell something and it is pay per use. These things we see much more and changing the price models and price metrics has been highly successful.
Is this also because they have to compete with the digital platforms and e-commerce ?
JW: Digital players play more on the convenience part. In the taxi service, now there are apps like Grab or GoJek or Ola [for instance]. They have been growing and most of them burning a lot of cash. It is a typical hockey stick curve – most of the digital players are well funded but not profitable. They have to invest in platforms and expand. At some point, when they grow the customer base and manage costs, they can turn profitable. A typical Amazon story. In the VC space, they are now getting impatient so many of those unicorns will go down and get bought and probably at some point turn profitable.
Joechen Krauss (JK): What has changed is that many players are putting more emphasis on customer experience and trying to create ecosystems that would benefit them a lot. We just mentioned Grab which is vying for an online banking licence now. It is doing this to increase the convenience aspect [for the consumer] and, from a supplier perspective, it is good to create a super-app. Customer experience and consumer centricity is now the trend.
What is your take on these unicorns burning cash and still a long way from being profitable?
JW: There is a war out there to take market share but, as a consumer, we have all of these apps and we compare. This is typical consumer behaviour and not a negative thing. Consumers all over the region are not loyal and go for value for money. It is a fight for market share and users.
These companies buy one into short-term packages, promotions and tie you in for future. That kind of promotion destroys profitability the most. With promotions, you get the un-loyal user. The way towards profitability is when they are quite mature or they could be profitable [with the same promotions] if there were no other market players fighting for share. So, the only way to compete with that is to offer better promotions.
Many of the firms were actually scratching the surface of profitability already but then new players came in and these new players were well funded. Profitability went down again so it is part and parcel of getting market share. The solution is to keep innovating and trying to see how can one serve the customer better instead of driving people into subscriptions and loyalty schemes.
JK: A large part of the market will actually go for low prices because if a customer has the same service, she could not care less who the driver is and what type of car one is driving as long as the driver comes and the car goes from A to B. These products being so similar, price becomes the only difference here. To turn subscribers into loyal customers allows one to break through that barrier.