PayTM business model from recharge website to billion rupees payment system

PayTM is an acronym for Pay Through Mobile.

In early days Paytm ensured that they solve the problem of online bill payments. But they were not the first company in India. They keep perfected their system to the extent that the entire transaction was extremely smooth for the user.

They tied up with multiple telecom operators, government bodies for electricity, water and gas. Customers found that PayTM was their go-to site for any kind of payments and since they had to visit the site every month, PayTM spent less on customer retention but more on giving customer discounts.

Their discounts were substantially higher than anyone had ever imagined.

If you have used PayTM during late 2013 to mid of 2014, you will be surprised to see the level of discounting they gave. People were saving close to 50% of their bill amounts.

Every e-commerce company these days give discounts but few companies have the balls to give 50-60% discounts on bills and products with fewer margins.

In 2013 and 2014, PayTM followed a Customer First approach where they invested on the customer. They ensured that instead of spending on large hoardings or TV ads or SEO/keyword bidding they spend that amount on customers.

Zero to One: Notes on Start-Ups, or How to Build the Future: Notes on Start-Ups, or How to Build the Future

How did PayTM expand so fast?

They had a phase by phase market acquisition approach.

PayTM like many other awesome companies on the planet started with doing one thing and perfected in only that.

Online Bill Payments.

Every great company has started with one thing, pioneered in that, become a market leader with more than 60% market share and then expand.

This competitive advantage is very much needed for a company for 3 reasons:

  1. Their core business will act as a cash flow.
  2. The core business will attract continuous traffic which will save cost to market other products
  3. Since the consumers already like to core business and admire the brand, they will overlook any mistakes that are made by a company while it tries to reinvent.

This is true for Google (They pioneered in the search engine and then ventured to mail and maps. Consumers have forgiven them for G+), Microsoft (They pioneered in OS, then ventured to XBox and cloud. Consumers have forgiven them for Zune, Surface, and Mobiles). Other examples include WhatsApp, Facebook, Uber and much more.

While Flipkart copied the Amazon model and customized it suitable well to suit Indian market, PayTM took it to the whole new level. They understood that among Indians, loyalty is towards the product, not the seller.

Flipkart (Snapdeal and others too) solved the problem of convenience to the great extent wherein one can order the product sitting at home and get it delivered in a day or two. They did all the hard work of educating and convincing the customer.

The time to enter the market was perfect.

Customers are already comfortable with buying online. This paradigm shift was already done by Flipkart and Snapdeal.
PayTM entered e-commerce sector at a time when all other players had exhausted the USPs. They all were having a nice website. They all were giving CoDs, they all had massive inventories and all of them were giving equal discounts of 5-10%.

PayTM enters the market with not 5, not 10, not 20, not 30 but whopping 50% discount on products. If you apply the coupon codes properly, you can see that the discounts on PayTM were massive. This is clearly visible in clothing, recharges, cycles and bus tickets among many other segments.

So why was PayTm giving such massive discounts?

This is one question which most of us cannot relate to. For us, it makes absolute no sense to give INR 200 discount on a product who’s actual cost is INR 400. And even PayTM has to pay INR 400 to the vendor. Then why would a company take so much loss?

Here are few reasons:

1.       Every e-commerce company in India is spending anywhere close to INR 80-180 for each app download, another close to 3.5 times that for customer retention (data shared by market experts in a conference). Now, our traditional companies like Flipkart and gang would spend that money on advertising and other hacks to get the app downloaded. Whereas, PayTM said, let’s not spend on marketing. Let’s give the customer a discount of INR 150 and this will force them to keep the app.

2.      They had WALLET. Every discount on PayTM was not given directly but as a CASHBACK on their wallet. So, if you buy a product of INR 500, you will get 250 as real money in WALLET. Now, you can use this INR 250 again to buy a product on the website. Again a discount of INR 125. And so on..

3.      By doing this, they solved the biggest problem of customer retention. People voluntarily started using their site. The offers spread like wildfire, Word of Mouth was their biggest driver. People started telling (bragging) about the discounts to their friends and families. Nobody deleted the app!

4.      They gave discounts because the customer had to be educated about the wallet. Customers were skeptical about the wallet but since they were getting SUBSTANTIAL discounts on the products, they used it anyway. And they got addicted to it. If PayTM was not giving such a discount then nobody (not many) would have dared to put their cash in the wallet.

5.      Bus Tickets and Uber was something which other companies did not offer. This was a unique model which they pioneered in (1 year is a too short time to use the word pioneer).

And all this increased their GMV.

One thing that is true about every e-commerce company in India (at least in online marketplace segment) is that none of them are profitable. Their operations far exceed the revenue generated. They all have to be dependent upon investments for survival. Flipkart, for instance, has to raise $100 million every 6 months or so. Same is the fate of other big companies. Snapdeal, for instance, has the hand of Softbank on its head.

The reason VCs are investing money in companies is because:
1.      The online market in India is at the nascent stage and there is ample potential for 2-3 players. Also, down the line, only one or two can survive.
2.      The companies are showing good traction.

The yardstick for measuring traction is GMV: Gross Merchandise Volume. There are also other factors like user base, product line, services and the like but GMV still tops the chart.

GMV refers to the total sales happened over a time period irrespective of the profits. VCs bet on present transactions for the future market. This is what happened with the US in 1999 when every dot com company was increasing the GMV and got funded at crazy valuations. And this is the reason Naspers and Softbank invested in India.

To get investments, PayTM had to increase the GMV.
Flipkart is in business from 2007. Snapdeal is in business from 2010 as daily deals platform but in 2011 they expanded to the online marketplace. PayTM started in 2010 as a recharge site. It was only in 2013 that PayTM started online marketplace.

So basically, PayTM had to do what other companies have done in 3-5 years.

Now, PayTM did not have time to go by traditional approach of trust building and loyalty and excellent customer service and blah blah.

Discounting was the best option to show traction, to increase the user base and to build up wallets. Of course, they never compromised on systems and technology. They never gave a sub-standard user experience.
The deals given by PayTM were class. None of the coupon codes had hidden meaning. If they said 50% off, that means 50% off. Not like other companies where they said 50% off and max off of INR 50 only. Doesn’t make sense.

For example, if PayTM says you get 50% off on bus tickets and if a ticket is costing INR 500, you will get INR 250 in your wallet. As simple as that. Whereas, other sites will say 20% off. Then put a cap.
(The above examples are for pre-2015. Post-2015, PayTM has a cap!)

All this coupled with execution. PayTM executed it in an excellent way. They played the cards well and got the right traction. Got the right user base. Early adopters, innovators, laggards everyone was going gaga on the offers.

All this compensated for the slow delivery and other minor problems. While other companies gave 1-2 day delivery PayTM was in a 5 day to 1-week delivery schedule (sometimes even more). However, as the customer was getting the product at half the price, he was not worried.
Returns at PayTM were very smooth. No questions asked.

With all the above hacks, PayTM was able to increase its GMV and has over 25 million users with over 10 million app downloads.  And since it had such great stats, many companies and people including Ratan Tata and Jack Ma of Alibaba to get investments of over $575 million.

Can PayTM sustain this for long?

If Flipkart, Snapdeal can sustain, PayTM also can sustain for as long as it takes. All 3 are backed by solid investors. And Amazon India has the parent company to support. The only company that can survive is the one that can sustain long enough with burning too much cash.

Why is tech team so strong at PayTM?

This is the second part of the question. Yes, tech team at PayTM is excellent. And same is with other companies. Though India does not have world class products like Uber or Facebook, we are pretty good at e-commerce sector. The loading time is good, the customer history is safe, wallets are smooth, customer support team is good.
UI is different for each site, though.

Basically, there is absolutely no difference in the technology of these companies. Hence no differentiating factor. A lot of companies are going with analytics for a product recommendation. They are also using statistical models for coming up with discount options but that’s it. No further rocket science innovation is happening per say. Oh, the drones from Amazon are not flying yet!

So basically, if any company that gives discount can reach the level where PayTM is?

Now, summarizes that since PayTM gave massive discounts and executed properly, they got a fair market share with substantial funding. This directly indicates that any new company which is capable of burning another $100 million and can replicate the exact model of PayTM can also succeed? The answer is Yes and No.

Yes because if PayTM can do it, anyone can. There is no secret recipe.

No, because nobody has that kind of money. There are hardly any big players in the global market who can invest such high amount and wait for 2-3 years to hoping to get returns.

And what is the exit option are we looking at? Flipkart is valued at $15 billion. Who’ll pay such an amount to buy it? Amazon was the only capable company which aren’t shopping anytime soon!


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