Hello everybody, CRED is one of the most fascinating business case studies in the Indian start-up ecosystem. In just 2 years, CRED went from 0 to hitting a $2B valuation and became one of the youngest Indian startups to reach this milestone. Now, the peculiarity of CRED is that in 2020 alone CRED incurred a massive loss of ₹360 crores which is a massive increase of 492% from 2019. And for every rupee of revenue that CRED generated they spent ₹727 which is a massive cashburn.
We all have seen the result of massive expenditure into creative marketing. *beating noises* So now the question is, even with such massive losses how is it that CRED is getting so much funding ? And what exactly is Kunal Shah's strategy ? Well, the beauty of this case study is the that if you only understand what CRED is doing you will more or less understand a large chunk of the Indian startup ecosystem because most of the giant companies like Jio, Ola, PharmEasy also operate in a similar fashion. and the most important factor that is common in all of them is that they extensively work on altering the behavioural design of the society. And the anticipation of that behavioural design, is what makes them billion dollar companies.
This golden strategy works out in 4 discrete steps The first phase is what we call cash burn and here's where The company, first identifies a major problem in the society, Number two, it designs a system to fix that problem Number three, it raises a million dollars in funding and lastly it entices the customers to use the product by giving out unbelievable offers which are almost too good to be true.
A very simple example of the same is Jio. First of all, Jio identified internet accessibility as a major problem in the Indian society and then Reliance spent about ₹1.5 lakh crores into building the infrastructure required for Jio. And then in 2016 when Jio got launched, they gave out offers that almost looked impossible. -free sim cards, free calls and free internet. And the moment this announcement happened, millions of people rushed to buy Jio sims. And Jio did everything in it's capacity to maximise it's number of it's users without even bothering about profits. Which is why, on top of the heavy investment that they made they further incurred a loss of Rs. 31 crores in 2016.
Just like this, when CRED rolled out in 2018 they identified 3 of the biggest pains of a credit card holder which are; number one, hidden charges Number two, late fees due to forgetfulness and number three is the extra interest. And they rolled out massive cashbacks and offers to incentivise the act of on-time payment. And these offers were as amazing as free flight tickets extremely lucrative discounts and ₹1000 cashbacks also Fast foward to 2021, CRED today, has over 30 lakh users and today, CRED is already processing 20% of all the premium credit card transactions.
So this is how within a short span of time, in Phase 1, companies present incentives in order to get customers to use their product, eventually, to increase their user base. And this is what brings us to Phase 2. Phase 2 is all about habituation. Once you bought a Jio sim, you never bothered about talktime, you never bothered about data. And we all recklessly got habituated to this newfound luxury of Internet Similarly, in case of CRED, the people who have 2-3 credit cards found it so simple to use CRED that they stopped using their conventional method wherein they had to go through this long list of their statements or putting in effort to dig in and find out whether there are hidden charges, on each credit card As a CRED user myself, I can't even tell you how amazing it feels as compared to having this terrible feeling wherein you have no idea where the hell your money is going.
In fact, there was a time when I thought that some hacker is stealing my money, alright ? and I'm not even kidding about this. So, this is how in Phase 2, using their super efficient system companies seemlessly get us habituated to new normal wherein we are no longer used to adjusting to the 'hurdles of the system'. Here's where we enter the most crucial phase of all, that is, Phase 3 and Phase 3 is what we can call as Irreversibility.
A classy example of the same is Google Maps Now you might have observed that most of the people of our generation never even bother to remember the name of a landmark, street or chowk In fact, I've got so used to Google Maps that in my own city, if you leave me in some street I will start wandering as if I am in some strange jungle. That is how much I have got habituated to Google Maps And by the way, this does not include those superhumans who have this amazing memory to remember any route, even if they have visited that place only once and you know which friend am I talking about... So the point is,
Google Maps has made our lives so easy that finding a way to a place no longer occupies our headspace and in case of CRED, users no longer have to remember to pay their credit card bills, they no longer have to remember when exactly is their due dates or bother about late fees. Similarly in case of Ola, we are no longer used to finding taxi on the streets In case of Jio, when there is no Internet you all know how you feel So you see, once these companies came in there has been an irreversible change in our behaviour wherein the small acts of booking a cab or paying a credit card bill has changed to such a large extent that we will never ever go back to our past system.
Now CRED is yet to complete this phase which is why all the numbers that you see about CRED is in the negatives now because CRED is yet to change a significant part of the consumer behaviour. After this we come to Phase 4. Now, this is the goldmine that every investor waits for wherein the company starts making profits and if you look at the numbers, it literally looks like a goldmine. For that matter look at the numbers of Jio. In just 1.5 years, Jio became profitable that is in the 3rd quarter of 2017 with a profit of ₹504 Crores From there onwards it has been on a magnificent run wherein in 2020, Jio has posted a net profit of ₹5,562 crore and the reason why CRED is also sitting on a similar goldmine is because the customers of CRED are by default the richest 1% of the country.
These people are literally the dream customers of any company. Their incomes are high, so they make expensive purchases on a regular basis which results into massive profit margins for every company And my sense is that in the 4th phase, CRED could leverage it's golden customer base in three very very powerful ways.
Number one, CRED could become this must have expense management app which will also allow it's users to file their income tax and just like it cured the headaches of the credit card users by saving their money from hidden charges. CRED might also might start saving it's customers a ton of money through their income tax rebate filings by turning the entire process of income tax filing into a very simple and efficient process and if this happens, I don't think any of us will ever leave the CRED club.
So, Kunal sir if you're watching this please help us out over here. Number two, CRED has one of the most valuable customer data in terms of purchase preferences For example, CRED clearly knows that Parsh loves to spend ₹20,000 into sports. Ganesh loves to spend ₹10,000 in education and books. So CRED could use this data to show relevant advertisements with exclusive coupons to get people to spend heavily on the things they absolutely love eventually, to make a comission out of it.
Lastly, CRED could also became a bank for the top 1% of India and the reason why I think so is because there are two important factors that are very very crucial for any bank's existence.
Number one, every bank wants customers who have a lot of money deposited in their bank account after all their investment and expenses. And this money is what the bank uses to lend to businesses and customers in the form of home loans, car loans etc.
Number two, every bank needs borrowers who pay back their loans judiciously. So that they can charge an interest on top of it eventually to make money out of the lending business. And guess what ? CRED literally has these exact people in it's customer base which is why my sense is, CRED could literally extend itself to become a full fledged bank or maybe even become a full fledged portfolio management system for the top 1%.
Eventually to become the most revolutionary fintech start-up of India So to put that straight, for ordinary people like you and me CRED might look like a weird idea but in reality it is a revolutionary idea coming from one of the most amazing entrepreneurs in the Indian start-up space.
And we must consider ourselves to be extremely fortunate that we are getting to witness their processes and we must learn from these revolutionary start-ups that are going to redefine 21st century India forever.
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