Tag: competitor

Charades of obscurity

Having “played” dumb-charades (DC for short) competitively at a school and college level, I don’t particularly enjoy playing it casually. I’m prone to getting annoyed when people around me (either on a picnic, or a party) exclaim with great enthusiasm that we should play DC. Till recently I used to think it was like chess – where my enthusiasm for the game has been killed purely because I played it competitively, but now I realize there are more reasons.

The challenge with “competitive” DC is that it is a timed game. You are judged based on how fast you can act out a certain name/place/animal/thing/. Because of this the clues need not be too hard, and there is a fair degree of challenge in acting out even simple things. Apart from this, the clues are set by a neutral third party which means they can all be trusted to be of approximately similar standard, so there is some sort of a level playing field there. Then, you have teams that have practiced well together, and have clues for all the trivial stuff, and you have a game!

With casual DC, there are several problems. Firstly, the games are not timed. Secondly, the teams haven’t practiced together at all, so it takes ages to communicate even straightforward stuff (which is why the games aren’t timed). And then the clues are usually given to you by your competitor. And for some reason, casual DC always has to be movies. No books, no places, no animals, no personalities, nothing.

The f act that the games are not timed, combined with the fact that the clues are given by the competitor, means that the game usually gets into a downward spiral of obscurity. You don’t want your competitor to guess the movie easily, so you give a vague movie. And they reply with something vaguer. And so forth, until teams have to check IMDB to find out if the movies actually exist. By which time all the enthusiasm for the game is lost.

On a recent trip (with colleagues, as part of our CSR initiative. more on that in another post) we played casual DC, and after some 10 clues it had gotten so obscure that nothing was guessable. I’d lost interest when someone suggested we do Kannada movies! Now, that’s something few people would’ve played – DC with Kannada movies as clues, because of which we could give clues while not keeping them too obscure (but it was hard. I completely bulbed trying to act out “Kalasipalya”).

Still, my hatred for casual DC remains, and I try as much as possible to not play it. Maybe next time I’ll impose conditions (like timing, choice of subjects, etc.), and refuse to play if they want to do English movies with infinite time.

Orange Juice and Petrol

So I was reading this article by Ajay Shah about administered pricing for petroleum. He does an excellent (though it gets a bit technical in terms of statistics) analysis about what could go wrong if the government were to free pricing of petroleum products. He mostly argues in favour of deregulation, and that is a view that I completely endorse.

One of the big fears about deregulation that he mentions is the fear that volatility in retail prices of petroleum products might increase, and he argues that this is a good thing and is much better than the government artificially hiding the prices and subjecting the junata to major price shocks once in a while. While I agree with him on this, I don’t think prices will change frequently in the first place.

While I was reading this article, I started thinking about the neighbourhood Sri Ganesh Fruit Juice (yeah there are a dozen of those in every neighbourhood in Bangalore) center. About how the guy keeps the price of orange juice constant throughout the year, despite the price and availability of oranges themselves fluctuating wildly across seasons. Yeah he might do minor adjustments such as changing the proportion of water but he can’t do too much of it since he needs to maintain quality.

The basic funda here is that customers want certainty. Every time they go to the shop for their fix of orange juice, they want certainty in the prices. Even if you are on an average cheaper, you will lose customers if your price is more volatile than your competitor’s. Of course there are occasions when you can’t help it and are forced to change your price – and on these occasions your competitors are also likely to do the same. But as far as possible, you try your best to decouple the price of orange juice from the price of orange which is pretty volatile.

Now I don’t know if the volatility in crude oil prices is more than the volatility in orange prices (it’s likely to be) but considering that oil companies are supposed to be more sophisticated than your neighbourhood juice shop guy, I would expect similar behaviour from them – of keeping retail prices of petroleum products as stable as they can. Of course they are likely to follow long-term trends but they are surely not going to pass on the short-time noise in prices to the customers.

So this fear of increase in volatility of retail prices is unfounded, assuming of course that the oil marketing companies are good businesspeople!

Tranche of wallet

One of the buzzwords in marketing in the last few years has been “share of wallet”. “We don’t aim for market share in any particular segment”, they say. “What we are aiming for is a larger portion of the customer’s share of wallet”. Basically what marketers try to do is to design their products such that a larger portion of customers’ spending comes to them rather than go to competitors (again – they claim they have no direct competitors and everyone else who competes for the customer’s spending is a competitor).

So far so good. But the problem with looking at things from a “share of wallet” pespective is that it assumes that the wallet is homogeneous. That each part of the wallet is similar to the other, and spending for different items comes uniformly from all parts of the wallet. This isn’t usually very well recognized, but what matters more than “share of wallet” (of course that matters) is the “tranche of wallet” that this particular product sits in.

I don’t think I need to give a rigorous proof for this – but some spending is more equal than others. For example, if you are dirt poor and have only ten rupees left in your pocket, you would rather buy a loaf of bread than buy a tube of lipstick. Some goods are more important than the others. “Necessities” they call them. The rest become “luxuries”. Even the “luxuries” are not homogeneous – there are various tranches in that.

So the aim for the product manager should be to get into the deeper tranches of the customer’s wallet (assuming that the top tranche is the “equity tranche” – the one that takes the first hit when spending has to be cut). Targeting the top tranche may be a good business in good times, but when things go even slightly bad, spending on this product is likely to take a hit and thus the “share of wallet” falls dramatically. Getting into a deeper tranche means more insurance, so to say.

In the world of  CDOs (from where I borrow this tranche, equity, etc. terminology), people who take on the equity tranche and other more risky tranches do so only in exchange for a premium – basically that you need to be paid a premium amount (compared to lower tranches) during good times so that it compensates for lack of income in the bad times. So this means that if you are trying to target the most disposable part of the wallet (i.e. the part of wallet that takes the first hit when spending has to be cut), you better be a premium player and make enough money during good times.

So the basic insight is that. The more disposable spending on your product is for your customer, the more the premium that you have to charge. Some products such as high end fashion accessories seem to have got it right. Extremely disposable spending, which leads to volatility of income; balanced by extremely high margins which make good money in good times.

Certain other products, however, don’t seem to have got it right. One example that comes to mind is Indian IT. Some of the offerings of Indian IT companies come near the disposable end of their customers’ wallets. However, to compensate for this, they don’t seem to charge enough of a premium. So they make “normal” profits during good times, and sub-normal profits during bad times – leading to an average of sub-par performance.

So before you enter a business, see which part of your customer’s wallet you are targeting. See if the returns that you will get out of this business in good times will be enough to tide you over during bad times. And only then invest. Of course, before the 2007-present downturn happened, people had no idea what bad times were, and thus entered into risky businesses without enough of a risk premium.