Waiting just that little longer…

By Susheel Aswani, Marketing I, SIBM

In this day and age, the customer is demanding more variety and the manufacturer is realizing that in order to gain a crucial edge he needs to deliver goods at lower costs. The need of the hour is a supply chain which can respond quickly to changing customer needs. This article aims to study the concept of postponement in the supply chain, and explores its applicability in the business context…

The term postponement refers to the process of delaying a decision about a product. Today with the need to provide the customer with as many varieties as possible suited to his/her personal need it is imperative that adequate inventory be maintained. If there could be a mechanism whereby a mismatch between the demand/orders and the inventory on hand could be avoided it could result in great benefits to the manufacturer. Postponement aims to do precisely this. By delaying crucial decisions which could commit to product characteristics postponement enables best possible utilization of resources and creates vital economies.

This concept encompasses building of platforms or modules which are common across product categories, and modifying these to meet the demands effectively. By reducing the period for which predictions are made, demand can be forecasted more accurately. Another strategy is keeping your inventory as “Raw as possible” ie in an unprocessed form. By not processing the material we can reduce the quantity of finished goods inventory and the fact that we haven’t committed to processing the raw material for a specified purpose enables us to customize its usage as per the needs of the customers. The concept of postponement can occur at various stages of the manufacturing cycle. The point of postponement can vary from the design phase and can occur even as late as the packaging, assembly stages.

One of the most common applications of postponement in operations is postponement related to manufacturing and assembly. This takes shape in the form of creation of a platform or a vanilla product which is common across a family of products, on which customization can be implemented to satisfy customer needs. The platform strategy has now become closely associated with the automobile and apparel industry.

Lessons from DELL

Many manufacturers around the world concentrate on their best selling models. As a result the stock piles of these keep increasing. This practice of “channel stuffing” is dangerous. As and when the customer demands for variations or when there are changes in technology resulting in product obsolescence the company finds it difficult to cater to the needs of the customer. Dell through its ‘Built to Order’ model does not have finished goods inventory devaluing on a daily basis. They align their suppliers to deliver components as required and hence minimize raw material inventory. Dell maintains an inventory of 6 days as compared to a competitor who needs to maintain 25 days of inventory on hand coupled with another 30 days of inventory locked up in their distribution channels. This difference of a good 49 days results in cost saving of 6 % of the material cost. To add to this the fact that Dell allows its customer to customize their models and yet offer prices below the competition explains the reason for the success of the company. Let us understand this better with the help of an example. Dell offers over 100 million different combinations of its popular desktop model Dimension 4600C.

Dell is able to forecast the demand for popular combinations based on perfection of its built to order model. By offering discount on popular component combinations for which the components are easily available it can actually shape demand to its advantage. Their systems are configured in such a manner so as to allow for a greater variety of low-cost parts and a limited variety of expensive parts. In this manner they are able to manage components and Inventory velocity to ensure unparalleled success.

The concept of platform manufacturing started off with the automobile sector. Volkswagen builds over 30 automobiles from its 4 platforms. Through its strategy it is able to churn out a flashy Audi TT and a Volkswagen Beetle built on the same chassis. The Indigo, Indica V2 and the Indigo Marina are built by Tata Motors on the same indigenously developed platform. The platform strategy was used ingeniously by Honda to design its cars for their varied markets. The company was initially facing problems with the design of its Accord model. Initially the US customers complained that the car was too small and the Japanese customers complained that the car lacked stylistic features. The company launched the new Accord which was longer and designed for the preferences of the US market. The sales of the company grew rapidly in the US and Honda enjoyed a dominant position but the design failed in the Japanese Market. The company had to produce differently designed cars for its 2 major markets. Honda engineer Yozi Kami realized that the crux of the situation lay in the design of the chassis. He was instrumental in designing the first flexible platform where in the length width and height of the car can be tailored to suit market preferences. The fuel tank was moved to the rear end of the car and the wheels were connected to brackets that could be moved closer or farther apart from each other.

In the apparel market postponement is quite popular especially with regard to team jerseys. The sales of a particular team or a player depend on the performance of the player/team during the course of the season. Thus companies like Reebok keep a ready stock of the basic black/white jerseys. These are then screen printed with the name of the player’s based on the demand for jersey’s which is linked with the player’s appeal.

As mentioned earlier the Raw as possible strategy of keeping the raw material unprocessed for as long as possible is another embodiment of postponement. This is adopted by companies like Subway and Burger King in the fast food business. Unlike McDonald’s which has readily packaged burgers which are meant for immediate consumption a company like Subway offers its customers with the opportunity to customize their sandwiches by choosing the combination of items such as cheese, meat, pickles etc. The platform for each of these products would be the bun and lettuce and these would be readied on the basis of the forecast for each sandwich. This strategy helps the company to reduces wastage of inventory, as it is possible to use the platform across a category of products and meet the changes in demand.

Logistical Postponement takes into account postponement at other levels of the supply chain namely labeling packaging and distribution. If we take the case of a bottler, instead of buying the bottles with the labeling done he could consider the possibility of doing it in-house. This would permit the usage of the same sized bottles for a number of different products. This would enable meeting the difference in demand for cola and lemon flavored drinks based on seasonal demand. Postponement in packaging has been used by companies like Gillette which has made a decision to outsource its packaging so as to concentrate on manufacturing. Bulk quantities of razors are sent to the packaging company and as and when the orders are received different packaging configurations are assembled and sent across to the manufacturer. In the long run the benefits resulting from this decision are a 15 % reduction in the inventory and packaging costs and an improvement in the ability to meet orders on time.


Postponement in distribution has been effective in reduction of lead times. Whirlpool realized that it is expensive to stock heavy refrigerators at local stores as they occupy a lot of space. Thus they ship across the refrigerators and washing machines to a centralized warehouse from where they are shipped across to the customer’s home directly. A little closer to home companies like Aravind Mills and Madura garments maintain central warehouses to cater to their stores across the country. As againt this ITC’s Lifestyle retail business division has suppliers across the country. It has thus set up regional distribution warehouses. These stocking points can cater to the demand of stores across the country within 24 hours. Also flexibility in manufacturing ensures production can be ramped up in accordance with the demand. The company is able to cater to the needs of customers and ensure that the shelves are never empty


Using the above mentioned concepts pf postponement at various stages of the supply chain HP effectively solved the problem pertaining to its deskjet printers. To cater to its different markets ie North America, Europe, and Asia Pacific HP had to manufacture printers with different power supply models, power chords and manuals for operations. HP designed a common platform for the various models of printers. Earlier the printers had to be shipped across to the 3 international markets as per their demand with variations in their power chords and manuals. HP set up local distribution centers (DC’s) to assemble the country wise requirements and perform the final packaging. This resulted in tremendous cost saving for the company.


The Benefits:

Postponement can provide the following benefits to a firm:

More variety: As seen from the example of Dell the manufacturer is able to provide an entire bouquet of products to choose from using postponement.
Inventory Reduction: the quantum of inventory can be reduced by ensuring holding more work in process and postponement of customization. This counters the original notion that variety increases of quantum of inventory to be maintained.
Better quality of forecasts: delaying the customization until more information is available helps to improve the quality of forecasts. With time the forecasts improve and become more stable and hence the standard deviation in the demand for a product reduces. This reduction in variation helps to give a specific time frame to the manufacturer to customize the product.
Reduced logistical cost: shipping products in bulk and then packaging them, reduces bulky transportation problem and ensures reduced distribution cosst.

The above benefits ensure in providing the goods of the choice of the customer, and enhance service levels. But postponement has 2 major costs attached with it. The cost of increased product development and increased manufacturing cost. Creation of a modular design, or a platform strategy would require tremendous investment and may restrict the flexibility for further product development. Also the company needs to tailor its supply chain to fit in customization and these costs need to be weighed in relation to the benefits.

A case in question

Let us examine a case of a manufacturer of liquid hand wash. Let us assume that the product comes in 7 variants. Let us for the moment assume that the demand for the variants in a particular year is as follows:

By running a statistical test such as the Chi square test it can be demonstrated that the sales are not independent of the variant, which simply means that the variant impacts the sale of the product and the sale of all the products is not uniform. Keeping this in mind the company can have 3 options:

a) Stock different quantities of the soaps giving preference to the lemon and peach variant.
b) Advertise the variants which are selling well, and offer the slow moving variants as special combination packs
c) Go in for a postponement strategy such that the color and essence may be added in the final stage of assembly so as to play by ear with market trends.

The company while evaluating the options available may adopt either of the above mentioned strategies. If it goes in for the first strategy then it would have to be wary of market fluctuations. It would moreover to ensure that sufficient base stock levels of the different categories have to be maintained at all times. In considering the second strategy it would push its best selling models and thus try and direct demand towards these variants. It could perhaps manufacturer limited quantities of the other variants and make them available in combination packs realizing that they by themselves do not sell sufficiently. In this case again a few of the customers would be left disappointed as they would find a variant of their choice unavailable in an SKU of their choice. lastly the postponement strategy may be given the preference if the company sees sufficient potential sales of all variants in such a manner that the additional investment in changing the mode of the manufacture would be recovered in a reasonable period.

Conclusion

Postponement is slowly but surely spreading across industries. Companies like McGraw Hill have got into custom publishing where the reader is able to choose the text book extracts and cases he would want in a text of his choice. Even in the airline industry Embraer postpones high value feature additions to its aircrafts till the time the confirmation of sale has been made. Almost any industry where a certain degree of customization would be required ranging from residential real estate, to music retail presents an opportunity for the implementation of postponement strategy and save those precious millions for the company.

References:

Fast Track Supply Chain guide by Safexperss
Research Paper: “Platform strategies in International New product development” by Moreno Muffatto, University of Padua
Research Paper: Regional Strategies for Global Leadership by Pankaj Ghemmawat
http://www.wikipedia.org/
Direct From Dell by Michael Dell
Complete Business Statistics by Amir Aczel, Jayavel Sounderpandian
Frost and Sullivan Research services
http://www.tata.com/
Research Paper: Case studies of postponement in supply chain: Massachusetts Institute of TechnologyHP Transshipment case study

Radio Industry in India

By: Amit Puri, MBA Mktg I, SIBM.

Radio: Is it a pie big enough for everyone to party on?

Radio in India is segmented into MW (Medium wave), SW (Short Wave) and FM (Frequency Module) based upon the frequency of the radio station. It covers 99% of the country’s population and is also the most cost effective mass medium of one way communication. The strength of radio lies in its coverage and cost effectiveness.

The penetration of FM radio is estimated to grow from the current 30% to 60% by 2010. The importance of radio has not been neglected even by the policy makers. The tenth five year plan targets to get FM to 60% of the Indian populace.

FM has gained popularity in India only in the recent past and but much earlier around the globe before that, because:

1. It is a means for low coverage broadcasting, thus best suited for delivering localized
content
2. It can be used to broadcast stereoquality music which is not possible using AM or MW thus
making it a preferred low cost medium to broadcast good quality music and content.

Research suggests that in the “ad-avoidance world” that we live in, radio can be a friend. The radio audience is consistent and loyal, and thus radio works better to build brands. It offers efficient targeting by reaching the right audience at the right time and in the right place! Radio creates strong emotions which when linked with local people provides strong communities. Thus while people avoid watching ads on television (by changing channels, or doing something else) they don’t mind listening to advertisements on radio in one form or the other. Even on the internet, people tend to close advertisement windows as soon as they pop up which is less likely in case of a radio.

With mature mass mediums such as television and print available, why is a rush to get a share of the radio pie observed? Especially when knowing that returns are not as lucrative (the portion of the advertisement spends on radio is a meager 2% of the entire advertisement spend amount across media).

The answer seems to be simple. To reach to the masses and also generate value for the advertiser, radio is an ideal medium. Let us give it a closer look - the potential of the opportunity, the players vying for it, expansion options and what keeps the hopes high after the first phase of radio reforms have left a majority of the players in the red.

At present FM radio is present in 12 cities, and would go up to 87 cities, with 245 new stations being added to the existing 21 stations, and with ad spends to go up to 5% by 2010 in comparison to the current 2%. This in effect creates a Rs.13 Billion opportunity in a short span of 4-5 years.

The opportunity is definitely good enough for several players to try their hands in this field!

Phase I: A learning curve or a lesson in through failure?

Phase-I of radio reforms left most of the players entering in the FM market in the red and several players even had to close down shop. The reason was an extremely high entry limit. In phase-II the entry limit is effectively the OTEF (One Time Entry Fee) which is linked to the revenues that the company would generate. This would ensure that any company entering the market has to pay a lower amount to get in; but just in case it does make it big, it would have to share the revenue.

Annual License Fee = 4% of the revenue generated or 10% of reserve OTEF whichever is
higher

Existing players have been given an option to migrate to the new regime by paying OTEF as the average of the successful bids in that city for the radio frequency/license. Clearly then, it is a step in the direction to increase participation in accordance with the primary goal of increasing the presence of radio as a mass medium.

Although the entry barrier has been reduced to lure a larger number of players, is the strategy sound enough to sustain numbers? The number of players entering the arena in this phase is 43. Considering the size of the opportunity (Rs13bn), each player is left with an average of just above Rs 0.3bn.

The experience in foreign countries shows that radio developed as a medium for the masses before the others including TV and internet, while in India’s case TV and internet are mature mediums already; this could hinder growth of radio as an industry to a certain degree.

The risks:

􀂙 No consolidation possible within the current structure. As one company cannot run multiple station in a single city, smaller players who find it difficult to sustain operations, would have no option at a later stage but to close shop, as there would be few takers for such operations.

􀂙 With generalized targeting and minimal content differentiation, the strength of radio might be lost. Globally, radio’s potential lies in being able to deliver niche content for specific audiences. With one channel percity and high entry barriers, generalized content is the only option that most companies would be left with to generate “hearer-ship”.

􀂙 Rs 5Million per station is paid towards music royalties which would make it an unviable business proposition for the smaller players that too in smaller cities where revenue generation opportunities are limited.

􀂙 News and current affairs content is not permitted on private channels thus further restricting the options available for differentiated content.

At Rs 2116 Cr and 32 stations (13 in A & A+ Cities) ENIL - Radio Mirchi and 1599Cr and 45 stations (8 in A & A+ cities) Big Radio (Reliance ADAG) are the biggest players.

Breakeven analysis:

To check whether it is a viable business proposition for new players to set shop, let’s analyze the costs and revenue generated for one player on a very simplistic basis.

Assumptions and considerations:

1. Each station is treated as a different entity. Thus the performance of one station for a company would not affect the performance of the company’s other stations.

2. The revenue earned per radio channel is taken as Rs. 12244897 which would not be the case for all channels and would differ from one city to the other. But this would be offset by the entry barrier difference between different tier cities.

3. A radio broadcasting setup would require:
i. On Air Studio
ii. Voice Over Booth(Discussion Studio)
Production Studio
iii. Transmission Equipment

Depending on the combination of setup option that a company goes in for the cost would vary between 9 to 29 lack, for the current breakeven analysis the setup cost has been taken as 30 lack. The setups have been recommended by BECIL(Broadcast Engineering Consultants India Limited).

With an estimated earning before tax and depreciation over 1.5 lakhs per station, each station should ideally break-even in the first year of operation itself, but following are the problems with the present policy that could hinder the growth:

1. The earning per station would vary and the stations which earn less than the average revenue as estimated are not left with other revenue generating options.

2. One option for stations is to reduce their expenditure by saving on the music royalty by catering to specific audiences thus reducing the range of music for which they would have to pay royalty. This option would reduce the target audience and thus the revenue as well, inducing a vicious cycle.

Thus, phase-II of the radio policy is a step in the right direction to enable a lot of players to take it up as an opportunity. There are a lot of loopholes that are yet to be plugged for the sustained growth of the industry, including:

􀂃 Option to operate multiple channels
􀂃 Lower entry limit for niche content channels
􀂃 Differentiation of radio station on basis of content rather than just geography
􀂃 Option for companies to collaborate

The size of the radio pie as of now is too small for 43 players to co-exist and grow. The policy needs new thrust either to increase the size of the opportunity (by allowing to operate in the restricted areas) or to collaborate (so that a few can grow to an optimum size by consolidating)

Recommendations:

To plug these possible problems that the radio industry could face, the following recommendations can be considered:

a. Let a company operate multiple radio stations in the same region
b. Distinguish channels based on the content that they propose to broadcast.

If the companies are allowed to operate multiple channels they would be able to cater to different audiences by niche channels, the overall operating cost for the company to operate multiple channels would go down as royalty towards music used by the channel would come down and the company can use the same common infrastructure, e.g. the production studio.

Infrastructure and technology for operating radio is not a constraint as it is a full blown industry in other parts of the world. The regulating policy is the only major roadblock in the growth of the radio industry in India. Limiting the growth potential or even slowing down the growth curve doesn’t make sense. The sooner radio claims its due share of the market the better. After all, marketers and customers alike wouldn’t want to see radio as a lost opportunity!

Loyalty Programs

By: Susheel Aswani, MBA I

When the customer comes first the customer lasts….


Customer Loyalty is what every marketer seeks to achieve. Here’s a look at Loyalty Programs, their feasibility and the requirements to create a successful program…


From delivering to your doorstep those pair of altered trousers, to wishing you on your birthday, from offering you customized meals in the comfort of a private lounge to providing you and your families with the dream holiday of a lifetime, companies are getting the message across loud and clear, You are a loyal customer, and we value you…

Loyalty programs have now become extremely common in the Indian scenario. The need for these programs is based on the simple principle: A customer is the hardest thing to get and the easiest thing to lose. In today’s day and age with intense competition today any firm has only 2 ways to maximize its share of the pie a) Increase its customer base and attract new customers b) Maximize the value from its existing customers.

More than 90 % of the organizations lose more than 30 % of their customers in a given year. The only reason that market share figures remain more or less stable is because the customers are traded between competitors. There thus emerges the need for Loyalty Programs, which when supported by Excellent service, and delivery of value can be a potent force in emerging as true leaders.

The power of existing customers is immense. One good experience can create enough publicity which cannot even be generated through the widest means of communication.

The power of customers is illustrated through the diagram shown here.


The power of existing customers

The numbers say it all when they highlight the importance of retaining a customer:

Reducing customer defections can boost profits by 2-85 percent.(Harvard Business School)
The price of acquiring new customers can be 5 times than the cost of keeping current ones (US Office of Consumer Affairs)
The return on investment to marketing for existing customers can be up to seven times more than to prospective customers. (Ogilvy and Mather Direct)


Unfortunately loyalty programs are not the panacea for all the problems a company faces. They can be tremendous value additions and key component in building up relationships with your clientele. But they can exist only when the core offering ie your products and services offered is delivering value to the customers. No loyalty program can succeed when the core benefits do not satisfy the customer. The pre requisite thus always remains that a company must go beyond the expectations of its customers and strives to achieve Customer Delight.

Disappointment Satisfaction Delight


The current scenario

In the present scenario there are numerous loyalty programs existing, and in many ways the Indian customer is exposed to the “points barrage”. Today the customer is rewarded with points for virtually any scenario be it the frequent flyer miles earned, the points accumulated in the lifestyle and apparel stores, or even at your neighborhood grocery store. No longer is it a novelty and with so many of them around, they no longer influence the purchase decision. Moreover they are an expensive affair and require a heavy investment from the view point of companies. A company needs to break through the clutter and firstly evaluate whether loyalty programs are economically feasible, and if so which customers can it be “special” to.

Getting Started

Today of the numerous loyalty programs existing in the country, only a few of them are actually boosting the sales, and satisfying the customers simultaneously. The process of starting a loyalty program is far from simple. It requires proper planning, analysis of data generated, designing of an offering, tracking the data and transactions, updates and feedback. The most crucial point to be noted is that Investment in Loyalty programs is not a guarantee of success and all loyalty programs which are successful, pay dividends in the long term.

One of the key starting points for designing loyalty programs is deciding the membership criteria. This could be either by making purchases above a standard threshold level set, or by charging an annual membership fees. In either case, the success of the program largely depends on which customers the company decides to target. Setting lower threshold limits is a fairly common practice for ‘frequent use’ products like grocery stores.

Loyalty Programs in the Retail Sector

The concept of loyalty programs in our country was introduced by Shoppers Stop through their First Citizens Program. Today the program has a membership of more than 300000 members. The first citizen members account for 20% of the footfalls but 57% of the sales. Moreover the average cash memo size of First citizen members is twice that of non- members. One of the major requirements for the success of the program is a strong IT Infrastructure. The program was restructured in 2000, along international lines when a 3 tier structure was started based on the annual purchase bill of the customer. Some of the special services offered to first citizen members include: exclusive billing counters for the Golden Glow card members, free delivery of alterations, additional reward points on purchase of private label brands, carry forward and web tracking of reward points. The rewards are further sweetened through exclusive shopping festivals held for the first citizens, and updates on sales promotions and offers through the magazine First Update.



Although the First Citizens club program has been immensely well received it has not gone unscathed without its share of problems. The billing time increases as virtually every customer needs a point update, moreover the customers have realized that the redemption of points comes at a heavy cost. Co-creation of value one of the basics of Marketing is seriously doubted from the customer’s point of view. The heavy investment in terms of IT and back-end infrastructure, and the frequent updations, have recently led to the slashing of points on offer leaving a large number of disgruntled customers.


Loyalty Programs are increasingly being used in other sectors of retail. To counter the advantages of the nearby kirana store, Loyalty programs have now been implemented in the grocery stores, and super markets. A typical example is the “TruSmart” card offered by the Tru Mart chain of stores. A one time purchase of Rs 500 could gain you membership of the club. Thereafter the customer enjoys a discount of 4% on all purchases. Moreover the company is in a position to collect data about the customers’ purchases, and also offer value added services like home delivery.


Making them Work

A company must understand that it cannot be everything to everybody. Although it is necessary to provide a delightful experience to customers it is crucial, that loyalty programs must be optimally designed to be economically beneficial. A company may categorize its customers on the basis of current revenue generated and potential for attrition. Those customers who are currently responsible for a major proportion of the revenue and who have a high potential for attrition are to be categorized as prime targets of the loyalty program. Another way to find out who your target customers for the loyalty programs would be by asking “ How likely are my customers going to recommend my product or service offered to others?”. The ones who would most likely do so are your “Idea Merchants” and they deserve special treatment.


Personalization has become the key: “ To know your customer is to love your customer” and a customer appreciates personalized, customized treatment. For those customers with whom the company has had a large gap between visits, they could possibly consider selling personalized mailers informing the customers of the latest in- store activities, and offers.

Two crucial points are to be kept in mind in the designing of the programs. Firstly if in case the loyalty programs have a tiered structure, then there must be a differential which encourages a customer to upgrade. Aspirations of the customers are to be targeted. Secondly, no one is going to make a purchase decision on account of mere points being accumulated. The customer must perceive value in what he would get after accumulating all the points. It is no longer enough to provide the customers with the run of the mill cash discount, or a gift voucher. If the reward is something which strikes a chord with the customer, causes him to look upon the pot of gold at the end of the rainbow with excitement, which gives him a sense of tangibility, only then would he consider accumulating those hard earned points. Abroad some of the innovative rewards include, a round of golf with Tiger Woods, or a test ride in F1 car! These are the “WOW” experiences which woo customers to be loyal.

The benefits of the programs should be clearly stated. These could be hard benefits in the form of discounts, or soft benefits like provision of toll free help lines, or magazines and free updates. Sometimes complaints arise that the free gifts comprise of the ‘dogs’ of the company’s product line. This is done at the company’s own peril as you can take the customer for a ride once, but not again. Moreover you have lost one precious ambassador, a potential evangelist for your brand. There are also complaints from customers that the data which the company collects, infringes on their privacy and many a time the sacrosanct database is sold to fellow marketers targeting similar customer segments.

Shining Examples

Just to drive home the point we consider 2 success stories. Raymond has long been the market leader in men’s apparel The company has recently launched its Premium Circle loyalty club in the metros. It realized that 9% of the customers account for 30 % of the sales and the average cash memo size of one its club card members is Rs 8000 as against Rs 2951 for a non- card member. The company has a tiered structure with Blue, Silver, Gold classes based on the size of the invoice purchased. The company has made an honest effort in delighting its members by offering fashion tips, personalized services and even free passes to events like concerts at the Belgian embassy, which have proved to be a hit with the customers and have ensured that the cash registers keep ticking away.

Loyalty programs in the real estate sector have been so far un heard of. But the Bangalore based Purvankara Group has innovated and succeeded. Owners and residents of the properties are offered a bouquet of tangible and intangible services right from home improvements to free tickets to movies. Apart from this the company allows its present member base of size 5000 families to earn through referrals. For example a Rs 25 lakh product sold would fetch a reward of Rs 25000. The company has managed to sell about 50 flats with a mere investment of Rs 50 lakhs on its Loyalty program.


The future ahead

Loyalty Programs have been introduced in numerous sectors. They have done rather well in the Airline Industry, particularly because they offer tangible and visible benefits like free trips, or personalized facilities. Also in the cooperative sector, certain cards have been introduced which require a monthly or yearly payment/fee and offer specialized services with respect to rations, and provisions.

With competition and international benchmarks set, a few loyalty programs are shaping up for the future ahead. Dual cards have become the order of the day. Earlier a few organizations had their exclusive club cards which could be used only at their outlets. For the customer it meant adding another piece of plastic to his already burgeoning wallet. Now the card doubles up as a credit/debit card, which can be used in other outlets. Considerable progress has been made through such collaborations like the Bharat Petroleum Petro Card, which offers convenience to customers by the usage of smart card, and lets them accumulate points which can be redeemed for points.


Another product launched recently was the first coalition program of the country, I-mint. This card brings together 6 large organizations, Airtel, HPCL, ICICI, Indian Airlines, Lifestyle and Make my trip and provides the customer with an integrated solution for his needs. Points are added to the kitty whenever the customer interfaces with the above mentioned companies, and can be redeemed.


Conclusion

Increasingly it is realized that Loyalty Programs need to be Royalty Programs, and they do not work unless a customer feels special to be a part of them. Loyalty Programs have fast caught up in our country and are going through stages of transformation.

With improved emphasis on Data Analytics and CRM, these are being tailored to meet customized needs of various segments of business. But a word of caution, Loyalty does not come easy. It requires a solid structure, heavy investment and most of all an offering which satisfies and delights the customer. It takes a lot to build that magical bond with the customer and Loyalty programs if structured well enough to create a sense of belonging and value in the minds of the customer could be one of those threads which attach a company to the heart of the customer, the undisputed king!

Do you wish to send your articles and contributions to us? Please feel free to mail your feedback and suggestions to forthright@sibm.net.

Microfinance in India

By: Suruchi Chaudhury, MBA I

Microfinance, Micro credit, Self Help Groups, SHG-Bank Linkage Program, Partnership Model, On Tap Securitization Model, Farmer Service Centers, Social Initiatives Group etc. - these terms have come into sharp focus in the present day India and more so after Dr. Muhammad Yunus won the Nobel this October for his pioneering work in the field of Microfinance which began in 1970’s and the subsequent setting up of the Grameen Bank in 1976 in Bangladesh.

“A lot of directed lending is indeed wasteful and hugely inefficient. But microfinance is a form of directed lending that greatly improves efficiency. This is hard-nosed economics, not the bleeding heart variety.” - Swaminathan S Anklesaria Aiyar, Consulting Editor, Economic Times in 2004

According to Dr. Yunus, “Microfinance leads to poverty reduction through a virtuous cycle comprising: ‘low income, credit, investment, more income, more credit, more investment and thus growing income”. He further adds that the impoverished have skills that are underutilized and that they are creditworthy borrowers and hence their financing needs should be adequately taken care of.

The above mentioned benefits as well as inputs from various research studies show that in many cases microfinance has reduced poverty through increasing income levels. It is also believed to result in improved healthcare and nutrition, child education and women empowerment. And so in the recent past it has become a promising way to use already scarce development oriented funds to achieve the objective of “Poverty Alleviation”.

In the context of this increased activity in the arena, it becomes interesting to know more about the state of Microfinance in India, the industry setup, the challenges and roadblocks ahead and the way to handle them best.

Current Scenario

India has 400 million people spread across more than six million villages who are in need of micro-financing. The organized financial sector caters to the need of only 20 million people. Because of the lack of statistical validity of data sets, there are few reliable indications on the reach and demand of microfinance. The UN, in collaboration with the World Bank and the IMF is working on constructing a headline indicator for access to microfinance. However as per industry experts, the demand for microfinance in India is estimated to be around Rs.300 billion. All this suggests that there is a huge unmet gap between demand and supply. This happened because in the past big commercial banks considered small loans as a statutory obligation rather than a business opportunity. These loans were considered as the ones that were difficult to recover, unprofitable and involving high transaction costs.

Industry Setup

With so many Microfinance Institutions (MFI) around, the Indian Microfinance Industry is no longer “micro” in scale. As the Economy is growing this sector is also becoming more organized in comparison to the scattered system of individual moneylenders and loan sharks in the villages.

A case in point is that of an MFI named Spandana. Today it operates with 2,000 employees and serves 800,000 loan recipients at interest rates of 10 to 15 percent a year.

It lends to small Self Help Groups (SHG’s) of 5 to 10 people rather than to individuals and also insists on regular payments to be made weekly so that the borrowing family manages the debt and financial responsibility properly. When a SHG comes together, they save small sums on a regular basis. This serves to aggregate small funds into a sizeable and more importantly- “serviceable” amount. They also learn to handle resources of a size beyond their individual capacities, and get motivated to save more.

In India, there exists a variety of micro finance organisations in the government as well as in non-government sectors. Leading national financial institutions like SIDBI and NABARD have played a significant role in making micro credit a real movement.

India has also witnessed phenomenal development of SHGs in the past two to three years. These are better known as SHG Bank Linkages, as they are credit-linked to banks. The SHGs have remarkable rates of recovery of 98%-99% showing that their credit rating and ability to absorb credit and repay has increased.


New Entries

In the middle of all this, what is interesting about India is that its biggest commercial lenders such as ICICI, HDFC, SBI, UTI etc. to name a few have diverted their funds and attention to this sector in a big way. MNCs like ABN Amro, Standard Chartered, HSBC and the Citigroup are also moving into this sector.

Clearly what drives these institutions is not social responsibility alone. There is a bigger gain involved. What attracts them is a huge market opportunity here with 30% of India’s 1 Billion+ population still living below the Poverty Line and these banks realize that lending to credit worthy rural borrowers is a lucrative business proposition.

As per Ranjan Ghosh, who heads Financial Institutions for India and South Asia at Standard Chartered Bank, "With fewer defaulters in this sector, clearly the risk return rate is acceptable to the banks. We look at it as an investment."

And may be that is why Nachiket Mor of ICICI spends so much of time in India's economically depressed rural hinterland looking for prospective borrowers.
So all in all it’s a good business for Indian banks, given the diminishing market for lending to companies and consumers in cities.

ICICI Bank is one bank that has developed a very clear strategy to expand the provision of financial products and services to the poor in India as a profitable activity.

ICICI Bank's micro credit initiatives involve provision of basic banking services like savings and withdrawal along with micro-investment products like mutual funds and insurance. This provides poor people with safer avenues for saving with little volatility or risk.

Its structures also include buying the microfinance portfolios of MFIs either on a selective basis or buying the complete loans of a branch or a particular area along with partnership arrangements with MFIs. This helps leveraging the operational strength of NGO/MFI with the financial strength of ICICI Bank. In the world's largest securitization deal, ICICI Bank purchased a portfolio of 42500 loans worth US$ 4.3 million from Share Microfin Limited in 2004.

In the Public Sector SBI is doing a commendable job in this area with its innovative products like Project Uptech, SBI Life ‘Shakti’, Sahayog Niwas, Agri SBU, Contract Farming and Kisan Credit Cards.

As has been mentioned earlier Indian Microfinance Industry is increasingly attracting the global attention. Unitus is a case in point. Started in early 2000 by a group of friends with a common mission of poverty alleviation, it is based in Redmond, Washington, with an office in Bangalore. Unitus works in Latin America and Southern Africa, but with one third of the world's population in India, its focus has naturally turned to India.

The structure that Unitus is using is based on what it calls its "accelerator" model, which basically implies acceleration of outreach. To address gaps, Unitus uses three different capital instruments, namely Grant, Debt and finally Equity. Working typically with MFIs, which are NGOs or have originally been NGOs, Unitus first uses grant funds to build the infrastructure in the MFI.

Unitus Equity Fund, along with SIDBI, Vinod Khosla and other social venture capitalists made a Rs 11 crore (Rs 110 million) investment in SKS Microfinance in India. The money would be used to access commercial debt and scale outreach from SKS's current 200,000 clients to 700,000 clients by 2006-07.

In short what the bigger institutions do is partner with microfinance specialists across India who have knowledge of the local villages and can identify worthy borrowers.

Another very interesting phenomenon that is associated with this industry is the creation of a secondary market over time. Under this the Micro loans would be bundled together into larger Bond issues which will be tradable among the Indian and the Global Investors taking Micro lending to a higher level.
The Challenges

All this sounds like a nice combination of corporate interests, fulfillment of social needs and a panacea for India’s balanced development. But this system is not free of complications and challenges.

There have been allegations time and again that microlenders structure their loans with hidden costs to exploit borrowers. The suicides of about a dozen women caught in this kind of a debt trap in Andhra Pradesh illustrates this point. The Government Inspectors had also pointed out four Organizations namely Spandana, Asmita, Umdama Pottu Pedatha and Share Microfin of charging interest rates as high as 40% to 50 %.

On the one hand, the industry is trying to grapple with problems of sudden growth, while, on the other, global social venture funds think that impact needs to be maximized and that institutions with the right professional leadership, governance, and systems need to be supported.

The biggest challenge is to develop a systematic growth mode which can cater to the accelerating demand. In this scenario the two main hindrances to the growth of MFIs are ‘lack of capital’ and ‘lack of capacity’.

Most MFIs are unregulated non-profit organisations, which prevents them from building an equity base. Through a combination of grants, equity and debt, it is possible to transform them into regulated financial institutions with an equity base that then allows MFIs to bolster their balance sheet and access local capital markets. Lack of capacity can be attributed to a variety of factors such as weak corporate governance, lack of management depth, absence of management and strategic planning systems and insufficient business infrastructure.

Another very inherent issue is that the focus of bigger funding organizations is always on mature MFIs, forcing young and mid-tier MFIs to look for capital from local sources, primarily grants. This focus on mature MFIs may be stalling industry growth as only a small percentage (1-2%) of MFIs is sustainable. So provisions have to be made to absorb some initial risk while the MFI develops a track record, relationships and credibility. Along with this what is required is upfront, longer-term involvement. And finally, there is a need for MFIs to work with policymakers on current regulations that limit options for MFIs and investors. Like in India, most MFIs are still NGOs and so they can accept local debt but not equity, and at the same time foreign investors have limited opportunities for investment in the sector.


The Path Ahead

Successful microfinance can be defined by three main characteristics: sustainability, outreach, and impact. Sustainability refers to the ability of a program to continue over time, preferably without ongoing subsidies. Outreach refers to the number of clients reached and targeting of the poor. Impact refers to the ability of a program to assist poor households and individuals to move out and remain out of poverty, and that is the ultimate objective of microfinance provision.

Enterprise growth is much more than just providing credit, it is also about financing a viable business idea. The importance of partnerships between the public and the private sector, as well as between social entrepreneurship groups and microfinance institutions thus becomes critical.

Care has to be taken that borrowed funds feed into a new business. No matter how the loan is described on paper, many families use the money to finance the purchase of a new motorbike or to pay the family doctor.

At the same time MFIs can help to facilitate capacity building consultancy projects to improve MIS/Accounting, technology and human resources. This emphasis on Management Information Systems (MIS) as well as the innovative use of technology (virtual branches, ATMs, credit and debit cards) is extremely crucial.

All this will lead to reduction in costs to clients and the institutions, building new distribution channels, helping clients build assets (not just debt), as well asmobilizing banks and capital markets for microfinance.

Distribution challenges: How will the Insurance Industry

By Banit Singh Sawhney, MBA II Mktg

The Distribution Challenge

India is arguably one of the most challenging and promising emerging insurance markets. Its rapidly growing economy, plus a young and huge population spell ample opportunities for the development of insurance. There is however much to be done to realize this potential. A few challenges to be tackled here would be to improve insurer solvency, raise a standard among insurance practitioners, asset management capabilities, distribution challenges, operation risk mitigation etc.

Reach: The ultimate challenge
More than 50% of India’s population lives in tier II-III cities and in rural India. While tied agents continue to play an important role in distribution, alternative channels like corporate agents, brokers, and bancassurance are starting to play a greater role in distribution.

The Power of Brick and Mortar: The Indian Banks
The penetration of commercial banks in India is unmatched, and no form of agent led sales-force can compete with it. There are around 68,500 branches of scheduled commercial banks. Each branch serves an average of around 16,000 people. The only other national institution with a bigger reach than this is the Indian Postal Service. Banks have expanded not only in urban areas; they have also grown in semi-urban and rural areas. Of the total number of branches of commercial banks, 32,600 branches are in rural areas and 14,400 are semi-urban branches.

Banks therefore provide great potential to be tapped. The HNI and Corporates in India are saturated in terms of product offerings. The growth would come from the 200 million strong Indian middle class. This would principally be from personal and rural banking.

The fastest and the most cost effective way to target this segment would be by selling insurance policies through their local banks. These local banks provide credibility, assurance and unprecedented reach for a life Insurance company.
World View World over where “Bancassurance” brings majority of the business, the full-integration model is in operation. France is undoubtedly one of the countries where the breakthrough in bancassurance has been spectacular. In the space of just two years, Predica, Crédit Agricole’s life insurance subsidiary first set up in 1986, became France’s 3rd biggest life insurance company in terms of premium-income. It should be noted that one of the effects of the rapid growth in bancassurance activities in France has been the creation of new market opportunities rather than weakening of the traditional insurance business.

Today, French bancassurance operators are doing better than insurance companies on individual risk. In 2003, the French Bancassurance Group (chaired by Michel Villatte, CEO of Predica), accounted for 60% of sales in life assurance, with premium income of €55 billion. At the end of 2003, 5 bancassurance operators were amongst the top 10 life insurance companies (base: premium income). CNP is obviously in the top three, but its status sets it apart from the others. Its distribution strategy, based not only on partnerships with establishments such as La Poste, the Caisses d’Epargne but also the mutual insurance companies, financial institutions and even local authorities, makes it difficult to compare with other bancassurance operators active in the French market.

The field of French bancassurance has recently changed following mergers between certain banks:
• The merger of the BNP and Paribas networks produced BNP Paribas Assurance, which encompasses the activities of Cardif and Natio;
• The merger of Crédit Agricole and Crédit Lyonnais, which resulted in a “new version” Predica, combining the activities of Assurances Fédérales Vie and Médicale de France;
• Even more recently, the takeover of Crédit Maritime by Banques Populaires.

In France, bancassurance seems to be at the dawn of a fourth stage-that of concentration.

Hence it can be seen that bancassurance and other distribution channels like the Postal service etc. are actually driving growth in the Insurance sector.

Bancassurance - The way forward: Why?
• Low cost to acquire and process customer applications. Bancassurance provides one of the lowest Cost-per-Transaction.
• The psyche of the Indian customer is to believe in a reputable name. The major banks have a strong relationship with their existing customer base. Hence it would be easier to convince people to invest.
• Average insurance premium in India would be comparatively lower than developed countries. Hence generally agents would not target the segments catered through these banks due to very low margin.
• Easy availability of customer care executives would lend better credibility and
will improve service quality and experience.

The Present Indian Scenario
It is not hard to figure out that the leading insurance players in India are already using the Bancassurance model .A brief overview would show that many leading companies have Ranking As per Market Share Name Distribution

1 8,00,000 agents.
479027 individual agents, 159 corporate agents and four lakh plus agents under
2 Agents 1,00,000 Bancassurance partner ICICI Bank 3 agency channel Bancassurance partnersinclude Standard Chartered Bank. (reason , it had a good customer base of HNIs & corporate customers), Syndicate Bank , Centurion Bank ("B" class city presence).
4 Individual agency, corporate agency including brokers and credit life. Bancassurance partners SBI ( 14000 branches )
5 Personal Finance Assistance(25,000), corporate agents, brokers Bancassurance partners including HSBC, United Bank of India and The Orissa State Co-operative Bank, rural and direct marketing. The company has 140 branch in 60 major cities.
6 It has got 44 branches all over India.

Insurance advisors( 25000)
Bancassurance partners include CitiBank,DCB,Karur Vysya
Bank,BNP Paribas,Syrian Catholic and a few co-operatives
Tata AIG Life Insurance
Company Ltd
BIRLA SUN LIFE
INSURANCE COMPANY LIMITED
Life Insurance Corporation of India
ICICI Prudential
Bajaj Allianz Life Insurance
SBI LIFE INSURANCE

already tied up to foster growth and penetration.
Some Alternate Channels In order to increase penetration into the Indian market, companies could look at :

Medical Tie ups
Tie-up and increase distribution through leading hospital chains e.g. the Apollo Group etc. It could start with a campaign that promotes health care, good living and a secure future. It could be a good move looking at the way the Medical Service Industry is slated to grow.

Automobile Tie ups
Distributing life insurance through automobile companies like Maruti, Hyundai, Honda, Toyota etc. depending upon the target customer segment, could be another option. The auto industry is booming currently thanks to the rapid consumer spending of the middle class. As it is the Per-Capita-GDP to Insurance Ratio and the Population to Lives Insured Ratio is abysmally low compared to other emerging markets, such an agreement would take the company to a place where target customers frequently visit in sizeable numbers.
Innovative advertising should help the cause as people could be made to realize that if they are taking a car insurance, their lives are more important than the car and hence the requirement for a life insurance too is advisable.

Rural Partnerships
The company can look for possibilities of a tie-up with various micro-finance organizations, Self Help Groups, and NGO’s. A partner like ITC’s e-choupal could help make inroads into the rural markets.

Indian Postal Services
As soon as the regulation is passed by the government to allow partnership with postal services of India (which practically reaches every household in India), the companies would move in to exploit this channel.

Conclusion
The insurance market today is seeing cut-throat competition, with new entrants like Reliance turning on the heat on existing players, not just in the customer market but even in the job market. The industry will definitely see a round of consolidation in the near future with minor players either merging into each other or forming a bigger company.

The company that survives in the long run will not be the company that offers the highest returns, advertises the most or earns huge margins, but a company that sticks to its strategy, adjusting it when the situation demands and constantly innovating its offering and reach to suit the customers’ changing requirements and segment demographics.

We will be delighted to receive feedback, ideas and contributions on forthright@sibm.net . Please feel free to contact any RF member regarding your
suggestions and thoughts. Once again, have a very Happy Diwali!!

Is advertising becoming more manipulative?

By Mrunmay Mehta & Rohit Hanjura, MBA II Mktg

“Most advertising tends to be”, Edward Kosner once said, "a trailing indicator of popular culture".
This might have been true 30 years ago, but the scene today is different. Advertising is actually CREATING culture(s) and is more and more targeted at changing the basic psyche of the target customers.

Let’s define advertising right away. According to Philip Kotler, “Advertising is any paid form of non personal presentation and promotion of ideas, goods, or services by an identified sponsor.”

Ads thus serve some standard purposes like:
• Advertising differentiates products
• Advertising communicates information about the product, its price and location of scale
• Advertising induces customers to try new things and induces reuse
• Ads stimulate distribution of the product
• Ads increase product use
• Ads build brands preference, value and loyalty
• Ads decrease overall cost of sale etc.
For understanding how ads influence consumer choice, it is imperative to understand the phenomenon of needs, wants and demands.
To understand the importance and structure of needs, Maslow’s framework can be used, as shown. However, Maslows’ theory has a major drawback; as today most physiological needs are already satisfied. A better idea of consumer mindset can be obtained by McClelland’s Trio Need Theory, also shown above.

Once, this is established, let’s understand the reasons why ads have adopted the
“emotional manipulation path” for ensuring brand success.

Changes in nature of Needs
“Advertising is found in societies which have passed the point of satisfying basic animalneeds.” - Marion Harper Jr.
Today, most basic physiological needs are satisfied amongst the most common target audiences for advertising. Thus, the “need” behind consumption is most often NOT basic.

Also, the higher order needs are increasingly becoming more “basic” in nature amongst common TGs (Target Groups). Even the basic needs are used as a vehicle to address higher needs. E.g Food can range from a simple off-the-road burger, to an expensive Subway sandwich. What it does is, use “food” not only to satisfy hunger, but also certain other “higher” needs related to social class consciousness or ego. The functional utility remains the same.

These higher needs are more emotional or behavioral in nature, as the basic needs are mostly similar at the core. Thus, the manner in which these new needs can be addressed have changed for marketers.

Effect of too many choices available to consumers:
With the shift from basic needs, it is also observed that the choice available to consumers has grown exponentially. Where few choices suffice, the consumer is faced with a frightening array of options. This makes an essentially simple decision process unnecessarily complex, as the consumer now has to think subconsciously before makingevery decision. Emotional ads provide the right vehicle to deliver the brand-payload right where it strikes the most – in the consumers psyche, in their self image, in their confidence etc. This is exactly what has compelled marketers to resort to manipulative advertising.

Effect of changing nature of offerings from marketers and a hypercluttered
market-space:
Today, most offerings are not unique. Their USP is not sufficiently different from the next me-too product. Competing products are increasingly more similar in their functional attributes. Thus, the positioning has moved from the functional plane to the emotional/intangible plane. This increasing product commoditization has seen marketers running for cover under advertising and non-functional positioning. In fact, not only are products getting common, even product categories are becoming “commoditized”. Companies no longer have a sustainable competitive advantage in the functional difference of their offering. The next company follows suit in an astoundingly short time frame, thus destroying the first mover advantage.

However, if the first company succeeds to place its offerings by changing the attitude of the consumer towards its offering itself, it gains an upper hand. Advertising is increasingly being used as the sole differentiator in a plethora of me-too offerings, as functional differentiation is no longer a position of advantage.

Also, newer categories are being created to shift from a cluttered market (Blue Ocean Strategy et al). However, how does one create new categories? There must be a need from the customers to create such a position. THIS is done through subtle/blatant advertising, by changing consumers’ wants into needs (Teenagers-“But Dad! I NEED that mobile handset.) or by creating entirely new needs (Indian women had been doing quite well even before they were educated by HLL-quite blatantly- that dark skin was a detrimental factor in their careers for success, and that Fair & Lovely is a dusky woman’sbest friend.)

All this has led to an increasing number of ads taking the “manipulation” route to reaching into the consumers’ normative buying behavior.

Effect of changing communication environment:
The communication scenario in today’s world has also radically changed. This has resulted in a fundamental shift in consumer behavior. In the words of Schwartz (1973) “Most important, this characteristic of the new environment eliminates the time between receiving information and responding to it. People do not think out decisions.” This acts a cue for advertisers, and thus the one who manages to be a part of the consumers selfimage itself, wins hands down.

Ads also have thus departed from promoting solutions to the “basic” needs to the “emotional” needs in an attempt to keep pace with the changing consumer psychology. According to Dr. Sandage (1951), "We live in an economy which is dependent upon the psychological needs and wants of the consumer".

Changing role of advertising:
Our hypothesis is that indeed ads have been increasingly using methods to manipulate customer’s behavior. The evolution of the role of advertising (from the initial organized ads in the 1840s) in the consumer buying decision process is captured in the scale shown below.

To illustrate the changing role of advertisements, we have some examples in each broad category, which are present today in the Ad-space.

• Informative: Ads of computer brands like Lenovo focusing on the physical
attributes of the product.
• Impressive: Ads of Sonata focusing on impressing the consumer and peers
• Influencing: Ads featuring celebrities endorsing a product. E.g. the Parker ad
showing Mr. Bacchan and driving the fact that if Mr. Bachhan uses Parker so should you.
• Persuasive: Ads on the theme of Pester Power, i.e. targeting the kids in the
family who are a major source of influence in buying decisions. For example,
Maruti Esteem ad with the tag line “My Dad’s Big Car”
• Manipulative: Ads in this category can be divided into two sub categoriespositive or negative. An example of positive manipulation is ad of Pepsodent trying to inculcate the habit of brushing teeth in the night. An example of negative manipulation could be an ad of Rexona deodorant wherein a college boy is shown as a smelly goat since he does not use the Rexona deodorant.
• Brainwash: This is more on the lines of Pavlov’s conditioning experiment,
where unconditioned stimuli cause a conditioned response through psychological manipulation. They differ from manipulative ads in degree of intensity and frequency of administration on TG. Is this the dark future of manipulative ads?

So how would one describe “Manipulative ads”?
“Some elements of such ads are designed to influence consumers without consumers having any possibility of rejecting that information.”

“Advertising is a negative influence when it dictates what an individual should do, rather than just inform or persuade a consumer about a product.” – Dr. Sandage.

At present, manipulative advertising seems to simply represent poor ethical standards and lack of consideration for members of the public. In future, with the development of new technologies, it may become more effective, more manipulative and more difficult to detect.

This question of manipulation by ads can be viewed from different angles. The question is-WHO or WHAT is being manipulated. On a very mundane level, consumer behavior is being manipulated through some advertisements. This too can be classified into positive and negative manipulation.

Positive Manipulation: In layman terms, these are ads that carry the message “If you do this/buy this, then you will achieve XYZ benefits.” This may actually lead to betterment in the lifestyle/personality/psychology of the target. The absence or non-use of the offering does not hamper the target in any way, and this is not suggested in the communication. Thus, ads of products like Dettol actually benefit the target with the inculcation of cleanliness as a regular habit. This ensures that the target’s manipulation can only result in betterment, and not in feelings of inferiority.

Negative Manipulation: These would go to suggest that if some product is not purchased, then the target chances the risk of non acceptance, or unsuccessfulness, or some kind of negative repercussion. These brink on the edge of using fear psychosis to induce people to purchase the offering. Worse, these actually may alter the ego/personality or confidence levels of the target. E.g. The Fair and Lovely Ads clearly mention how a female will NOT succeed (in a field not even related to beauty) if she does not apply the product, while if she does, she achieves instant success (and can buy a coffee for her father). There is no proven correlation between the skin color (not comparing ethnic races, but within a homogenous market like India) and the chances of success of a female individual. These ads use more of Neuro-Linguistic Programming (Ref: Pavlov’s Experiment).

Studies have proven that such ads have an enormous influence on susceptible targets pecially youth and children. Thus, manipulative ads not only affect comparative buying behavior of the currently adult TG, but also form the normative behavior pattern of future consumers, by targeting kids today.

Role of advertising and sustenance of the global economy & society: A debate is emerging amongst the neo-economists about how advertising encourages high-level consumption and squandering of resources on the macro economic level. This assumes all the more importance when the sole differentiator amongst similar and superfluous offerings is only advertising. Thus, it is not about manipulating individuals, but also manipulating the entire economy. A special congregation of experts from the UNenvironmental program have mentioned in their report how sole reliance and success through advertising as the only differentiating element, can negatively affect e conomies, when the same resources can be spent for more constructive purposes. Thus, advertising is not only a marketing effort, but it also has a social responsibility to play, by encouraging “Sustainable Consumption” (First UNEP meeting, Paris 1999).

Also, the same manipulative ads that are used to advertise tobacco products and alcoholic beverages can be used for social causes using similar creativity and insights into consumer psychology and behavior. This puts a great responsibility on the shoulders of the modern advertising personnel.

Conclusion:
In today’s world, while purchasing a product, a consumer takes it for granted that the basic need-solution derived from that product will be satisfied (it’s a hygiene factor). So what is going to drive a consumer towards a product? What will it take to equate a brand with a common name? It’s whether his/her emotional and ego needs are going to be satisfied from the offering or not. So in order to influence his behavior for that offering, an ad has to necessarily appeal to (or manipulate) his/her emotional/irrational behavior.

Manipulative ads are here to stay for now. As markets get more and more cluttered in increasing number of categories, such ads are going to spill into many domains. With the burgeoning information overload, manipulative ads offer a good path for the marketer to ensure loyalty. However, this trend also shall die its death as NOT every product can participate in the consumer’s normative thinking process. Manipulative ads are NOT the ultimate panacea for all marketing needs, only a time-adapted solution in accordance with the current market-customer variable mix.

When every ad tries to manipulate customers’ behavior, a time will come when customers shall refuse to let every other marketer to mess around with his/her mind, and marketers will have to find a new method to ensure sustenance of the growth curve.

References:
1. Marketing Management, Phillip Kotler
2. Olson, Erik L. "How Magazine Articles Portrayed Advertising from 1900 to 1940" Journal of Advertising, 1995
3. www.ciadvertising.org
4. Changing face, by Ajita Shashidhar , The Hindu Business Line, 2004
5. “Can ads impact popular culture?”, Guest Column, O&M, www.rediff.com
6. “Advertising and Sustainable Consumption”, First Expert Meeting Report, UN environment programme, Paris 1999
7. “The Fall of Advertising and Rise of PR”, by Al Ries
8. www.wikipedia.org

PRICING A BOON OR BANE- AIR DECCAN ?

The article discusses the use of Price in the marketing Mix in the Airlines Industry. We discuss Deccan Aviations single point obsession with price and the present turmoil in the Airline Industry. Is the First Mover advantage sustainable for the Airline in the Low cost no frill airline space . Who would trump in the end ‘a Customer focus approach by full service airlines’ or ‘Price penetration by low frill airlines’. The article explores the competitive forces in the Airline Industry and steps taken by Deccan Airlines to remain on top.

The Current Scenario….

Deccan Airways has blazed away to become India’s second largest airlines with a 21.2% market share in June. Over the past one year, the number of passengers flown by the airline has swelled 230% from 2 million in September, 2005, to the current 6.6 million. With better services, new colours and an attitudinal shift, the pioneer plans to unseat Jet.

The picture on the ground in the aviation sector looks very different from that in the books. After Jet reported a disappointing performance, and warned of yet another tough year ahead, Deccan Aviation’s results seem to indicate that India’s aviation sector will take some time before it turns profitable.

Deccan’s turnover is a respectable Rs 1,352 crore during the 15 months ended June ’06, but comes with a sizeable loss of Rs 340 crore. During the June quarter, its income was Rs 430 crore and loss Rs 110 crore, indicating that more than a third of the loss was incurred in the last quarter. At an EBITDA level, Deccan’s loss was Rs 95 crore.

Deccan’s load factor for the past fiscal has been 75% with lowest operational cost. That is a good occupancy level for an airline, and compares well with the market leader Jet. But if Deccan cannot make money at these occupancy levels, then the key to profitability does not really seem to lie in filling more seats. Given the current capacity of airline companies and planned additions in the Indian market, it seems unlikely that domestic airlines will have pricing power in the near future.

Air Travel has grown by 230% since 2002 .It is unlikely that the demand growth rate is going to be better than the one shown in the previous years. That is, unless demand grows exponentially or some of the weaker players fold up the airlines would not turn profitable.

Pricing ‘The troublesome Marketing Mix”

In every Industry Prices are usually Sacrosanct and should not be dropped unless in Dire circumstances. The Marketers shall try all weapons in there arsenal such as Advertising, Trade and consumer promotions. However in the obscenely growth sectors the price takes a beating in view of the Top line growth .This is true for the Indian Telecom sector but the problem does not seem to be so acute with major players showing signs of profitability.

In case of the Airlines sector the future does not seem to be so promising. The sector is expected to grow at around 15-20 % in the next year. With competitors matching prices and bracing dog fight it is unlikely that there would be a substantial increase in topline or margins as compared to others. Air Deccan does expect its market share to move up by 25-28% in the next few years.

The Components of Pricing Includes

1. Basic fare
2. Fuel Surcharge (Rs 750/- per passenger)
3. PSF (Passenger Service Fee) Rs.225/- per passenger
4. Transaction fee of Rs 50/- if booked online through the website
5. Transaction fee (5% of basic fare) if booked through any other point of sale apart from the website

First Mover Advantage..Is it sustainable?

A first mover advantage can be simply defined as a firm’s ability to be better off than its competitors as a result of being first to market a new product category. We often find it difficult to distinguish durable first mover advantage and those that are short lived.

In the Airlines scenario where the market is leading (ie the pace of demand growth outstrip the total capacity of existing players) it is very important to dominate a category and hold onto your customer base.

To build a sustainable competitive advantage it is necessary to address all the market segments as they emerge. This would not be done by Air Deccan single point focus on price. New emerging segments such as ‘small businessmen’ travel would value on time flights and less flight cancellations. Here I believe that Kingfisher a late entrant (2004) which has 9% of the Indian market has taken a large chunk of this segment .

Low Cost Issue….A strategic Advantage

Air Deccan has built up a sustainable competitive advantage in the Airlines Industry. The case in point is that there is no way to squeeze more margins from existing operations to generate the savings that would justify the price charged.

Air Deccan utilizes an aircraft for close to 13 hours per day with an average load factor in excess of 70%.This is 10% higher than market leader Jet. This as also considered high when compared with International low cost Airlines such as Ryan Airways. The growth in this is limited.

Cost of fuel which is a constant for all airlines accounted for 33.7% of Jet’s expenses against 42% for Deccan’s. The obvious conclusion is that other expenses for Jet are higher.

Another area where Air Deccan scores is selling and distribution. For Jet, this cost worked out to 11.85% expenditure against 5.2% for Deccan. The latter sells most of its tickets online or via its call centre — which cuts out the commission paid to travel agents. The commission paid by the airline to travel agents is also lower.

Traffic on off beat routes has been growing at 50%, albeit on a smaller base. Air Deccan flies to 55 airports out of which 35 are small airports. At present, besides Jagson Airlines Ltd it is the only other carrier tapping this market. Coimbatore-based Paramount Airways operates all-business class flights to small-town destinations with its 50-seater Embraer regional jet ERJ 145. Kingfisher Airlines, which will soon be taking deliveries of ATRs, is also eyeing this sector. SpiceJet wants to keep out of this market because of the hassles involved in maintaining two types of aircraft. So, for the moment literally has the entire market to itself as Jagson is an insignificant player.

Air Deccan is partnering with government to increase air travel. States like Andhra Pradesh and Karnataka have announced a reduction in sales tax for no frills regional airlines to improve air connectivity in those states. While Andhra has completely abolished sales tax, Karnataka has reduced it from 25 per cent to just 4 per cent.

With all avenues cost already low, an easy way to improve profitability would be to hike prices, but that would affect what Air Deccan epitomizes

Customer Focus…The new paradigm

The Airline has planned for a rapid expansion. It plans to overtake Jet with the kind of operation expansion his airline has planned over the next few years. For this it needs to set its flight path to it is higher service standards and a complete makeover of image.

It goes way beyond just switching the colour of tee-shirts worn by employees from blue to yellow. The airline is now looking at improving its on-time performance and passenger service; reduce number of cancellations and customer complaints even as it maintains the lowest fares in the market. Being the best, however, may take tremendous effort on the part of Deccan; not just in terms of financial investment but also in terms of attitudinal shift.

Nonetheless, the airline has already kicked off the exercise.

Over the last nine months, the airline has brought down its flight cancellations to less than half from 597 in January to 234 in August. It has also improved on-time performance during the same period from 58.61% within 15 minutes and 87.11% in an hour to 76.40% and 98.33% respectively.

Last three months have seen its on-time within 15 minutes range between 76% and 79% and within an hour, it is hovering at around 98%. The no-frills airline has also pruned the percentage of complaints per 1000 passenger from 13.6% (on 3.19 lakh passengers) in January to 6.82% (on 4.21 lakh passengers) in August.

Such performances are giving it the confidence to commit to passengers on service standards. It is kicking off a month-long WOW campaign beginning September 19 under which, if an Air Deccan flight is delayed over three hours flyers would unconditionally be getting a free ticket (except in cases of delay due to fog), and in case of cancellation, he would be put on another flight, subject to availability.

And as it embarks on the campaign, the airline has entered into Rs 460 crore ($10 million) agreement with Lufthansa for component and maintenance repair and overhaul (MRO) support and another Rs 230 crore ($5 million) agreement with aerospace companies — Airbus ($3 million) and ATRs ($2million) — for engineering support. It has also bought a hanger at Chennai airport.

Customer Lock-in are being used effectively .The airline has introduced two new schemes, Super Flier and Super Flier Plus, which offer 30 and 36 tickets, respectively, at reduced rates to passengers. Under the Super Flier scheme, a passenger gets 30 tickets for Rs 50,000, which can be used in any of the short haul sectors that the company operates with the ATR aircraft. The Super Flier Plus scheme comes with 36 tickets for Rs 1,00,000 which can be used in any of the sectors that the airline operates. The tickets are valid for 12 months from the date of purchase of the package. The packages can be used for business or personal use and includes family members as well.

Continuing with its strategy of strengthening its distribution through
new channels, India's low-cost carrier is gearing up to launch an option
of booking, payment and re-scheduling of flights through SMS. The airline had tied up with Reliance WebWorld to offer an option of booking air tickets through a nationwide retail chain of 241 real broadband centres across 104 cities in India. The initiative
is being termed as the "first ever and a major e-ticketing initiative of
its kind in the country, leveraging the retail presence and broadband
capabilities of Reliance WebWorlds."

Outlook

Deccan Airways continues on rampant capacity addition by adding five aircrafts. This would affect load factors and also the yield and the expenses will be up for these five aircraft operations. If one looks at the past twelve months, Air Deccan introduced seven airbuses and around eight ATRs, last year based on growth rate of 280% in the last year. This year industry expects to grow around 15-25% , the repeat looks unlikely by Air Deccan.

The load factor would improve as the flights start achieving maturity. Hence load factor always depends on how the mix is skewed, whether it is skewed towards the newly introduced routes or the mature routes, which determines the average load factor and the average yield. With Air Deccan initiative to start new sectors the load factor might not improve.

It needs to be seen whether it is able to maintain its competitive edge and break even keeping the prices at current level. Although the airline is moving towards a more customer centric approach rather than a single point price strategy, It needs to be seen uptill how long the investors and debtors are willing to wait for the return on their investment or would allow Air Deccan to keep losing money.

The shift in Indian Television Industry

India consists of 179 million households out of which 70 millions have a TV. The figures seem to be great in terms of penetration and also have an ample amount of scope for growth. The advent of private players, foreign investment, and growth in technology has brought this industry to a tipping point of an entirely new era.

The Key Growth Driver

Subscription revenues are projected to be the key growth driver for the Indian television industry over the next five years. Subscription revenues will increase both from the number of pay TV homes as well as increased subscription rates. The buoyancy of the Indian economy will drive the homes, both in rural and urban (second TV set homes) areas to buy televisions and subscribe for the pay services. New distribution platforms like DTH and IPTV will only increase the subscriber base and push up the subscription revenues.Industry estimates feel that industry will grow at a rate of 24% in the coming 5 years.

Evolution

The Indian TV industry seems to be evolving from three different stages and would reach a point where conversion of TV into a PC and into a telephone will not be distinct anymore. As the market matures the television wars will first compete on price in which mode of connectivity is going to play an important role and then on content and quality of picture and sound. Each of these stages has been studied in detail, keeping in view the initial investment and the feasibility in the Indian context

1. Stage One- It is more than obvious that sooner or later CAS will be rolled out considering its advantages over the present form in more customized offering, more transparency and better market pricing (Demand and supply of individual channels can be easily measured). CAS will involve an initial investment which can be broken down into monthly installments.

2. Stage two- Direct to Home; holds distinct advantage in terms of low involvement by the consumer with the cable operator (E.g. problems of power failure and poor picture quality). Direct to home model operations which uses direct satellite communication and major players like Tata, Zee & Reliance have invested in this. This model supports two way connectivity as well as a reach to any corner of India, thus increasing the connectivity in the non urban areas(successful launch of igo tv, with DD direct package). DTH also is a beneficiary of content makers as it would reduce piracy. The hindrance to acceptance of this model by the consumers is the initial investment to be incurred by him, high switching cost and less amount of flexibility(in terms of the preferred content). However we feel that there would be a gradual shift towards acceptance of DTH once CAS is rolled out.

3. Stage Three- Convergence, with a rapid change in technology and everything from camera, phone and radio becoming one, possibility of convergence of telephone, internet and TV into one in Indian context is no longer a dream. IPTV has been at the fore front of this convergence and has done very well in the developing markets of Malaysia and Taiwan. After about 20 years the Indian consumer will no longer be satisfied only with streaming content (which is being directly broadcast), but would demand interactive-ness and options like customizing his TV viewing on his choices to individual programs at his convenient time. For ex. A consumer would be able to buy a stock news from CNBC, and headlines from Aaj Tak, sop operas from Star while songs from MTV. With massive investment already being made in bandwidth & infrastructure setup; a set of new players in TV market would emerge mainly the Telecoms & ISPs. So Hutch TV might just not be an advertisement, but can also turn into reality.

Note: The current state of FDI in the Industry

Cable networks- FDI limit is up to 49% inclusive of both FDI and portfolio investment. Companies with a minimum 51% paid up share capital held by Indian citizens are eligible for providing cable TV services under the Cable Television Network Rules, 1994.

Direct-to-home- Maximum 49% foreign equity allowed including FDI/NRI/FII Within the foreign equity, FDI component should not exceed 20%