How do companies make money, if most of the Indian's don't make money?
I am Aarihant Aaryan! Welcome to the Iron sharpen Iron newsletter,
Every week I share my homework from my startup journey, learning about human behavior, and sometimes decode industries and business models for fun,
I can’t control my curiosity :) )
Last few weeks I was thinking, If most people don’t make enough money in India, then how are companies making money?
I started researching, then I was curious to learn about revenue breakups in different businesses.
Then I got the “AHA” moment as I spent more time on this by talking to a few people from different industries and investors - the insight became stronger.
The “AHA” moment was - The business of advertisements.
Before we deep dive in, understand that advertisements are not limited to google ads, Youtube ads, or redirection to any websites - it’s much more than that.
Why advertisements?
When you can’t make revenue from the consumer’s money, you will have to make money from the consumer’s time.
The above is much more likely to happen in 3rd world countries or in places where time is not valued.
People in India don’t mind advertisements, they are happy to watch ads for 10mins for 30mins of serial or listen to ads between every 4 songs.
The advertisement business isn’t an exposure business, it’s a business of hope.
I remember Kunal shah saying, every company will be a fintech company.
Adding to that every tech company will be an Ad-tech company, they will have the business of ads involved - it will be a feature.
Which company does advertisements?
E-commerce: Amazon and Flipkart make massive money on advertisements, these platforms help increase sellers’ sales by ranking them higher or adding them as a value-added service, or getting them placed on the platform will shopping takes place. Both of these companies made 3940.2 Crores of revenue on ads in FY21.
Amazon made Rs: 2554.2 crores and Flipkart made Rs: 1637 crores respectively.
Fact: Alimama which is an ads platform for Alibaba generates 60% of their revenue, estimated at $12.05 billion per annum
Food Tech: Zomato and Swiggy make super money on advertisements, they help their partner restaurants rank/place higher in categories search - which helps them increase their total number of orders.
Property Tech: Companies like No broker and Magic bricks have no brokerage fees but they have an advertisement income setup. They list/place / rank properties higher when a property owner pays advertisement fees.
Fintech Companies:
Payment Apps: I know we all thought how will UPI apps make money, they are making money on value-added services and “Ads” - all the coupons you are given are ads not offers / all the other apps listed on their platforms - that’s another way to make money for them.
Thought: If payment apps instead of giving away coupons, integrated commerce - they would have had a decent market share in the commerce space. CRED did crack it really well.
Payment gateway: The payment gateway charges a certain fee, to place your BNPL app and payment app on the top. If your product has highly opted as a mode of transaction, I assume there is no fee.
Entertainment :
Close to 50% of revenue for Hotstar is through ads that are placed while you are streaming something, the only reason Hotstar has an advantage to their ad business is because of the constant live streams they host for sports and now for some movies.
Amazon Prime: Prime has piloted something interesting, that is enabling you to buy movies as rentals and “Enabling you to buy other OTT subscriptions on the platform” that is an advertisement - I assume amazon should be making money as commission per subscription or Cost per click.
Mobile Phones :
Mobile phone companies don’t just make money on selling mobiles and don’t just sell mobile phones - they sell you apps.
If you buy a mobile phone, you would have observed there are apps pre-installed, and mobile phone companies get paid per install.
I have always observed phones that are sold at lesser prices have too many apps pre-installed compared to expensive phones.
Ad Tech 101:
Before we move to how these ads are different, ad businesses make money on these 4 aspects - there can be more but I believe these 4 are primary.
1. CPM - Cost per mille / the cost incurred by the advertiser for 1000 impressions
2. Cost per click - Cost per click made by the consumer, next time when you click anything - just remember someone is paying for your clicks :(
3. Cost per acquisition / Lead - The cost per lead that is received by the advertiser.
4. click-through rate - Click-through rate is the ratio of users who click on a specific link to the number of total users who view a page, email, or advertisement.
But how are these ads different?
Remember I shared at the beginning of the article that Indians are okay with ads - but when they come across ads their intent goes down, they “don’t pay attention”
“Advertisement businesses will only work when the consumer doesn’t know it is an advertisement” - Tech companies have cracked this really well.
Thought: The reason people didn’t like Facebook is not because of privacy, it’s because consumers had too many to encounter, and Facebook said those are ads / instead of that imagine they added a commerce feature - they would have become larger than Amazon by now.
When advertisers use Google / YT or any social network for advertisements, it’s massively expensive to get a sales/lead to happen because the audiences are super diverse, and to find a target group in a diverse consumer base is extremely hard.
The harder your target group is to find, the more your CAC becomes.
Imagine, specific ad platforms for a specific category - you can easily find your customers at lesser CAC - that’s something all tech companies solved for.
Another added benefit is, that most % of the customers have an “Intent to buy”
Before ads business was all about passing information, now it is all about enabling people/companies to make more money without human intervention - Extremely bullish on this industry.
If you have any thoughts or tips share them in the comments :)
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