Google and Slack choose the third option

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Good Morning Dear Reader,

I’ve been overwhelmed with some things this week, so today’s edition is a bit shorter than usual. However, I’m working on a more ambitious piece which I expect to publish sometime soon, so hopefully that should make up for today.

Anyway, last week, Google did something curious in India.

And this made a lot of people unhappy.

After a recent revision of pricing for Google Workspace offerings, several Indian Micro, Small and Medium Enterprises (MSMEs) raised concern over increased costs. One of the companies wrote an open letter to Google India’s senior management on August 17, saying that such pricing policies would cost Indian MSMEs an additional Rs 2,000-5,000 crore every year for certain services they would never use.

The letter written by Synersoft Technologies was targeted at Google India’s country head Sanjay Gupta, head of industry—agency partnership Mayoori Kango and Sales Director of Google Cloud India, Amit Kumar. A copy of the letter was also sent to the Competition Commission of India, and the ministries of MSMEs, IT and broadcasting, science and technology, industry and commerce, and finance.

Explaining the fallacy, Synersoft Technologies CEO Vishal Shah said that earlier, for each enterprise user they would pay around Rs 2,500 annually for G-Suite Basic 30 GB storage space plan. In case, say, two senior team members needed more storage space, only those two members could individually upgrade their plan to get 100 GB of additional storage space for an additional cost of Rs 1,300 per year per user.

Indian MSMEs raise concerns over new pricing of Google Workspace, Moneycontrol

Look, companies increasing prices isn’t that unusual, especially at a time like this when inflation is sky-high. I imagine all those data centers must be more expensive for Google now, and they need to pass some of the costs to the customer.

However, what is unusual is that they are doing it in India.

And they aren’t the only one.

Slack joins the party

As my colleague Soumyajit wrote a few weeks ago, Slack also did something similar.

For a long time, Slack had a different pricing in India, as compared to its global rates. As Soumyajit points out, it was offering a “62% markdown on dollar prices”. Just in India. And it maintained this even while it raised prices across all other markets globally.

But then, last month, Slack suddenly decided to change tack. It hiked prices here too.

Previously, with all the discounts offered to them, Indian companies could get access to the Pro version for their teams at just Rs 262 per user. After the hike, this went up to Rs 700 per user.

Hmm.

Why are both Google and Slack raising prices in India?

And not by a little, but by a lot.

Why?

I have a theory.

A few weeks ago, I wrote about why businesses never pay for software in India. Initially, I wrote about this in the context of Tally, which has a massive market share, but relatively low revenues.

There’s a general theory in software and the internet that once you lock-in the users, the money will follow. Acquire now. Engage well. Monetise later. Every growth strategy teaches you this. Many successful companies have been successfully built on this theory, from Snapchat to Facebook. Among modern consumer internet companies, it’s not a theory. It’s a law as immutable as gravity. There’s a variant of this, for enterprise SaaS, that suggests that if you make your product so compelling that it’s able to create an ecosystem, where everyone all across the value chain uses your product, trains others on it, and hires for it, it practically becomes the standard for everyone, and then you make tons and tons of money. Look at IBM, and after that, Microsoft. And SAP. And Salesforce. The list goes on and on. Again, it’s like gravity. It just works.

Tally shows us that you can do all of the above, and you still can’t make money. Gravity in India works differently.

Nobody wants to buy software in India, The Nutgraf

In India, getting businesses to use your product does not naturally lead to you making money from it.

Many companies deal with this reality in one of two ways.

One option is to make money from outside India. This is what companies like Zoho, Freshworks, and Chargebee do. By one estimate, less than 5% of Zoho’s revenue comes from India. This isn’t an accident. It’s not like Zoho is sacrificing a massive market in India to chase down something abroad. It’s simply that it’s not worth trying to win in India, because it’s much harder than it looks.

The other is to leave India altogether. This is what Intuit did when it announced that it would rather kill Quickbooks than try to fight it out here, facing tremendous losses.

But of late, companies are picking a third option.

And that is to extract more from paying customers.

There are trade-offs with this approach. It’s unlikely that this will lead to significant expansion of revenue or market, because you are essentially squeezing existing customers harder. However, the one big advantage with this approach is that it’s easy to do, inexpensive (there’s no customer acquisition cost), and above all, it cuts costs. If the world is going through a slowdown and you need a quick win, this is the way to go.

Breadth is expensive and expands the market.

Depth is cheap and expands margins.

And right now, a lot of companies are choosing depth.

I’ve written about this in the context of consumer e-commerce companies like Amazon and Flipkart who are trying to increase repeat transactions from their existing customers. Similar strategy. In their case, they are doing it by adding categories like groceries, increasing unit sales, and by creating fungible brands.

Then, there are companies like Cleartax, which have started charging for income tax filing, mostly because they want to shake off the freeloaders.

On the consumer side, Clear has decided that if the size of the market of paying users in India is tiny, then it won’t bother trying to get to millions and millions of users.

Why create a big, wide funnel if most of the users who fall through it will never, ever pay for Clear?

Why build a product for the free-riders?

The first limit tells us that after a certain point, free user acquisition becomes a liability.

Maybe it’s better to cut them off and try to capture revenue from the high-value users. These are the users who have money. They are on the top end of the pyramid. And these users are likely already using Clear for free.

I mean, why bother trying to expand the pie, right?

Why Cleartax isn’t free anymore, The Nutgraf

For both Google and Slack, the thinking is likely similar. There’s no point in trying to offer deep discounts and subsidies to drive adoption if a big chunk of those customers aren’t going to pay for it. Since the pyramid is top-heavy, i.e., a small number of companies have a disproportionate share of money, it makes sense from Google and Slack’s perspective to focus on them and try to win that market.

Can any company do this?

Not quite. There are a few pre-conditions.

The one thing that’s common to Cleartax, Slack, and Google is that they are fundamentally non-substitutable products. Sure, they may have competitors, but each of these products have a lock-in effect for users that increases switching costs tremendously. I imagine this is an important prerequisite. If consumers believe you are exactly like someone else, then there’s no way you can hold on to your price premium. I suppose this is what makes your product inelastic, at least for a significant number of your customers.You can raise prices, and many of them will still stick with you.

And if a consequence of this is to make several others unhappy, well then, maybe that’s a price Google and Slack are willing to pay.

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Take care.

Regards,
Praveen Gopal Krishnan

The Nutgraf is a paid weekly emailer that explains fundamental shifts in business, technology and finance that happened over the last seven days in India. In a way you’ll never forget.

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