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I have been speaking about “Artificial Demand Creation” using the sheer power of money by Uber (India), Ola, Oyo, Flipkart, Snapdeal, PayTM, etc for the last couple of years. The recent Uber-Ola strike brought the entire issue to the forefront again where Uber-Ola drivers went on strike for a week in Delhi and the consumers didn’t even sneeze.

What is “Artificial Demand Creation”?

Let’s assume there are two ways of solving a problem – A and B – with two different price points where A<B. A is “Cheap but inconvenient” and “B is Expensive but convenient”. Based on their convenience requirements and ability to pay, consumers will either pick A or B to solve the problem.

A new player enters the system and solves the same problem using a new way C. Now there are several scenarios with C –

Scenario 1. C is “significantly cheaper than B but slightly less convenient than B”. It is still more expensive than A but way more convenient than A. (Cost structure innovation)

Scenario 2. C is “slightly more expensive than B but way more convenient than B”. (Product innovation)

Scenario 3. C is “way more expensive than B but also way more convenient than B”. (Premium product)

Scenario 4. C is “cheaper than B AND more convenient than B”. Sometimes, C is even cheaper than A. (Magic)

In case of Scenario 1, demand moves from A (partially) and from B (significantly) to C. In case of Scenario 2, demand moves from B (significantly) to C. In case of Scenario 3, demand moves from B (partially) to C. Now Scenario 1, 2 & 3 happen all the time but Scenario 4 also happens every now and then. Mostly in following three cases –

(a) C has invented something magical which makes its solution cheaper as well as more convenient/useful. Example – Gmail was able to provide way more space than paid Hotmail/Yahoo accounts for free because it monetized primarily via ads and the cost of space was significantly cheaper for Google.

(b) The community contributes for FREE which makes C cheaper and more convenient/useful for everyone. Example – Waze, Wikipedia, Linux.

(c) C is actually “more expensive than B and more convenient than B” but it has been artificially made cheaper by giving subsidy & using the sheer power of funding. Example – Uber (India), Ola, Oyo, Flipkart, Snapdeal, PayTM, etc

Because C is both cheaper than A & B and more convenient than B, demand moves from A (significantly) and B (significantly) to C. In case (a) and case (b), this demand is sustainable but in case (c), it is ARTIFICIAL and can’t be sustained once the subsidy goes away.

Why would a new player want to create “artificial demand” ?

Possible reasons for this are –

  • It believes that A and B will die over time because of little demand for A and B. When that happens, it can actually start charging more for C and become profitable. It also assumes that no other competitor will show up.
  • It believes that people will get addicted to the convenience of C over time and won’t stop using C when the prices go higher. It assumes that consumers really value convenience and are willing to pay a premium for it.
  • It “genuinely” believes that it has invented something magical which makes their solution cheaper as well as more convenient/useful at scale. It lives under the misconception that it is spending money to acquire customers when it is actually spending money to maintain customers. In Steve Blank’s words, it doesn’t want to accept that it is not customer acquisition cost, it is actually the cost to run the business.
  • It sells the story of “economies of scale” to its investors and raises more capital for its venture by showing demand growth and revenue growth.

How can the new player know if it has created “artificial demand” ?

The new player can tweak the pricing and easily figure out if the demand was artificial. It may not want to tell the investors though. 🙂

How can investors know if the new player has created “artificial demand” ?

Force the company to take away the subsidy from its existing customers for a period of time and see if the demand sustains.

The recent strike should alarm the Ola investors at least (since Uber is a global company and has much deeper pockets) because the drivers went on strike for a week in Delhi and the consumers didn’t even sneeze. They just moved on to other options. Investors in startups, where the demand has been created artificially, should be equally worried.

The article was originally published by Deepak Goel on LinkedIn.

Image credit.

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