## Road Widening is NOT the solution

The other day, walking down Dr. Rajkumar Road in Rajajinagar, I saw several signboards on the road, on shopfronts, on buildings, etc. protesting against plans for widening the road. Apparently they want to widen the road and thus want to demolish shops, parts of houses, etc. Looking outside my own apartment building the other day, I saw some numbers written on the compound wall. Digging deeper, I figured that they want to widen the road I live on and hence want to claim part of the apartment land.

Now, the logic behind road widening is not hard to understand – due to increase in traffic, we need more capacity on the roads and hence increasing their width results in increased capacity in terms of vehicles per unit time and so it is a good thing . However, before going headlong into road widening and land acquisition for the purpose, road architecture in the city needs to be studied carefully.

There are two primary reasons why trafffic bottlenecks happen. The more common reason at least in western nations is road capacity. Roads just don’t have the capacity to take more than a certain number of cars per hour and so when more cars want to go that way, it results in pile-ups. The other problem, which I think is more common in India is intersections.

It is going to be a tough problem to model but we should split up roads into segments – one segment for each intersection it is part of, and one segment for each segment between intersections (ok it sounds complicated but I hope you get it). And then, analyzing capacities for these different segments, my hypothesis is that on an average, “capacity” of each intersection is lower than the capacity of road segments between intersections.

Now how does one calculate capacity of intersections? Assume an intersection with traffc coming from all four directions. Suppose traffic approaching the intersection from north sees green light for fifteen seconds a minute. And in each fifteen second interval, 25 cars manage to make it past the intersection. So the capacity of this intersection in this direction becomes 25 cars per minute. I hope you get the drift.

I’m sure there will be some transportation engineers who will have done surveys for this but I don’t have data but I strongly believe that the bigger bottleneck in terms of urban transport infrastructure is intersections rather than road width. Hence widening a road will be of no use unless flyovers/underpasses are built across ALL intersections it goes through (and also through judicious use of road divider). However, looking at the density of our cities, it is likely to prove extremely expensive to get land for the widened roads, flyovers etc.

I don’t see private vehicle transportation as a viable solution for most Indian cities. Existing road space per square kilometer is way too small, and occupation way too dense for it to be profitable to keep widening roads. The faster we invest in rapid public transport systems, the better! I’m sure the costs borne in that direction will be significantly lower than to provide infrastructure to citizens to use their own vehicles.

## 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 ofÂ  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.