Startups and Their Customer Acquisitions – Who is Paying?

CCDThis is a guest column by Anil Kshatriya, Assistant Professor – Finance, IMT Nagpur

My love for coffee keeps taking me to all possible places where they ‘sell’ the beverage. No wonder now this ‘sale’ is happening online too. Yesterday I purchased a coupon on Paytm for a cup of cappuccino sold at Cafe Coffee Day. I paid Rs. 29 for a regular sized cappuccino of CCD which usually costs around 100 bucks! Though I was skeptical about validity of this coupon which comes with lots of *terms and conditions*, I daringly walked into a CCD store near my house and flashed my discounted deal to the store manager with pride. “Of Course, you are welcome”, he said with a sluggish smile. Well, the story does not end with me enjoying a freshly brewed cup with a sense of ‘Customer is The King’.

The story actually started when I was about to take my last sip from the shiny white mug branded with an red coloured inverted comma of CCD. I got a cashback of Rs. 28! So, I paid Re.1 for a cup for which a man sitting on adjoining couch paid Rs. 102 inclusive of all taxes! That’s unfair, I thought. A cool saving of Rs. 101 for having bit of an extra information apart from having a smartphone with internet connection which the other guy too had. So, I hurriedly finished the drink and walked to the store manager filled with curiosity to understand how things are working here. I was told that CCD stills earns its 102 bucks. The discount is borne by Paytm and another App which supports this deal (called Little). Well, back in 2010 most people would have ridiculed this kind of an customer amazement experiment as senselessly short-term marketing gimmick. But today it is ubiquitous. From apparel to beverages, it’s raining discounts and cashbacks. The question is who bears the cost and for how long?

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Startups are on a funding prowl. Wealthy investors who are funding these startups are betting on one possibility. They hope to see young entrepreneurs build a strong customer base and serve customers profitably in coming future. These investors are pouring humongous amount of money into new ventures full of  bright ideas and skilled minds. These funding partners believe, it makes more sense to risk their hard earned money on funding futuristic concepts rather than park their wealth with good old large-cap companies in the form of equity investments. The probability of success is really small but if their bet turns good, they earn returns in multiples of what the beaten routes like equity investments offer on an average. And of course they are prepared to lose and lose some big bucks. So, if a startup eventually fails to deliver after burning tons of cash raised from VCs, the investors take a hit, the founders definitely take a hit and other business partners like suppliers too take a hit. One who wins is the guy who gets coffee of Rs. 102 for Re1. Who might not even hesitate to delete the app after he stops receiving attractive deal notifications. Simply because there will be five other players waiting to woo him in this game of customer acquisition. They too will have their business model and their set of proteges waiting to raise a toast in anticipation of reading the ‘Net Profit’ figure on Liabilities side of the Balance Sheet. If that does not happen, the funding dries-up, music stops and then the party is over. Till then, let me have a ‘Little’ more fun.

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About the Author:

Anil Kshatriya works as Assistant Professor in the area of Finance at Institute of Management Technology, Nagpur. His teaching and research interests include Managerial Accounting, Management Control Systems and Strategic Management.

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  • Ritesh

    Please don’t use ‘bucks’ when you refer INR.

  • nitin khanna

    all in the hope of making multiple X of returns as Prof Kshatriya has highlighted…but who’s complaining? in this particular case paytm funded by softbank, the japanese conglomerate…with zero or even negative interest rate in japan they want to invest money anywhere and everywhere you just need to get to the right guy !