Bootstrap in Bangalore

Pricing is a difficult art to say the least and is dependent on so many factors that this subject itself may be topic of books. We have the benefit of sticking to the small bootstrapping phase of businesses and will apply our learnings of cashflow and paucity of debt, investment in India - few reasons you are bootstrapping in the first place - to discuss some pricing guidelines.

Bootstrappers take pride in running a tight ship, delaying gratification by not paying themselves enough and being creative about doing things no one thought could be done that cheap. Once your costs are so low its very tempting to look at your price as a competitive tool. Its so much easier to go to a prospect and say ‘hey, for what others charge Rs 100, I can offer the same for Rs 60 – sale done. We need to introspect before doing that – what is the reason you are able able to deliver the goods at 60 unlike your competition. If you have created a new business model with a fundamental innovation which reduces price, thats perfect. However, if the only reason you are lower cost is since your costs are low due to small/stingier operations then playing on price might be dangerous.

A friend once gave me a simple formula – find (if you can) how much is the customer willing to pay and calculate how much you can sell for at a profit, then quote higher of the two numbers. The formula is nice and usually works. Just beware that in the low cost Indian economy many people are simply not able to pay much but want your service also. At times what they are asking maybe 25% more than what it costs you. But in small bootstrapped operations percentages have little meaning. Calculate your costs again if you remove all the subsidies like lower salaries, rentals etc and grow your business to 10x. Does it still look 25% profitable? Now projecting costs for 10x your size with zero subsidies is also not the gospel for pricing since otherwise the customer may as well go to the established 10x players. The reality will need to be somewhere in the middle but closer to the later figure. As long as the following works

1. You are profitable on the small base and can scale the operations while maintaining profits, you are pricing it right. If you are ’subsidising’ the company, thinking that subsidies will scale is going to lead you to a wall.
2. Since you are going to depend on retained profits for growing the company, always try to get a little more profit that you think is enough. It may come from charging higher (by delivering more value) but mostly will come from spending lessor.

Another problem with playing on price is that you get bracketed in that range. A customer which pays you X will refer you to more customer who want to pay X. So if you think it is a temporary affair to play cost, it is not. References are how sales work for bootstrappers and you want the right kind. If you want to play cost to create an initial base be very clear on what you want the projected price to be and then offer a reluctant discount valid for a short period. In fact better than a discount I prefer the try for free option since free is not a price which brackets you. What you really want is the customer to give you a chance even though you have no brand/credibility but buy in to the fact that you are worth the price if your claims are true. What better way to prove the claims than to show/give a free sample. But if the customer can’t even afford the rates you need as a bootstrapper to grow bark up another tree.

You will notice that the above thinking will typically lead to much higher margins than the 15-30% range. More in the 60-80% bracket. Smaller margins workout on high revenues (7.5% EBIDTA works for a Walmart) but to run a small business on a 15% margin is a road to frustration. As you grow the margins will close in to the natural range of your sector or your business. Bootstrapping phase is almost an artificial state which requires a huge stimulus of energy from the founders. With the wrong pricing instead of getting out of bootstrapping you will just end up quitting and going back to a job.

An important question not considered is if people are willing to pay what you want. Once you callibrate what you want with the above, you may want to relook at the business plan’s viability itself.

This blog advocates thinking of local opportunities and bootstrapping your way to success with local strategies. Someone may think business principles are universal so what is the difference in the way a bootstrapper will work in India. Here is an example which I think will not exist in a bootstrapping blog of a western writer.

As customer service standards are increasing in India there is significant demand for call centers serving the domestic market itself. Also with increased phone penetrations, teleselling is a strategy no company can ignore. Its a natural evolution if you consider that all the call centers in India were earlier operating from within US serving their own domestic market. Hence, if you have been associating call centers with only offshoring please don’t. Outsourcing yes. It is an ideal function to outsource to a specialist company since it can handle seasonal spikes, experience from across the customers, investment in call center equipment, recruitment/training of personnel etc.

As a bootstrapped Indian startup you want to minimize investments, think local and be creative. All of these come together if you were to create a call center in a really low cost town like say Allahbad. Hmm … lets list fundamental problems – no electricity so power backups will kill a bootstrapper and no english speaking talent. Apart from that there are pluses – low salaries, low attrition, low rentals, low deposits.

Now what if we were targetting only Hindi speaking customers. That seems nice: suddenly this looks like a niche which is not crowded and being in Allahbad seems like an advantage given that people speak better than average Hindi in that place. Suddenly one of the problems has disappeared and almost seems like an advantage.

The other one i.e. infrastructure seems less tractable. Even in bigger cities a full backup is needed to even start the operation and this doesn’t really suit a bootstrapper. Let’s consider the workings of a call center in a nutshell

1. For customer service an incoming number with multiple lines is needed. A switch is needed to operate the voice menu and route the calls.
2. For tele selling even if each person has an independent line its not a problem
3. The result of the call need to be logged in a computer program

To reduce costs, lets drop incoming at the outset. Becoming a telesales/outbound only call center reduces capital investment and hassles. Its an easier sale to businesses also especially if you create an incentive based pricing. If a phone company in Allahbad agrees to give multiple land line phones there is no need for local power to make calls. You can substitute with long battery cell phones at a short notice when needed. Now also break the process of logging results into paper and online. Create paper based processes which are later transcribed online. Since labor is cheaper in India, the western insistence of full automation need not be followed.

This for me is an good example of a bootstrapped Indian business. We have taken cognizance of a typical Indian problems and have created a ‘thought-business’ in the spirit of this blog. We could really make a detailed business plan out of this and not gloss over details but that is left as an exercise for the more dilligent/interested reader