For those of us who are in the business of observing the Indian consumer, Blume’s Indus Valley Report is the perfect starting point. The report splits the Indian consumer into three distinct sets - India 1, 2, and 3.

The India 1 consumer set is the top ~120M consumers in India. They have the majority of disposable income, behave like Western audiences, and are almost English native. I like to say this is the consumer that has rewatched the TV series ‘Friends’ a couple of times.

India 2 is an emerging consumer cohort with significantly lower per capita income. Beyond income, they are ‘regional language first,' thinking in a local language, creating cultural differentiation that shows up in their consumption.

Beyond these are India 3, where there are free consumption rules.

India is a large country, and segmenting 300M people into one homogenous bucket despite differences in language, location, culture, and ability to pay leaves out nuance. The image below shows the heterogeneous nature of this consumer.

Looking closely at India 2, we realize there's a young audience whose behavior is driven by aspiration above all else. They're influenced by social media, have disposable income (and a path to increasing it), and are unafraid to spend.

I call this audience India 2.1, a viable target market for tech companies looking to expand beyond the top ~120M consumers.

In this write-up, I uncover the key emerging themes around monetizing India 2 and companies charting that path. But first, some context.

The key narrative around monetizing India 2 has always been their low per capita income and inability to pay for services. Statements like ‘Indians won’t pay for software’ or ‘The consumer wants only free stuff’ support this narrative. Some data points also reinforce this. For instance, Facebook’s ~400M MAU in India drives USD 2B in revenue, but ~200M MAU in the US drives USD 40B.

However, if we look at things a little differently, we can see a different narrative.

Historically, companies have been able to monetize India 2 efficiently. FMCG is the pioneer, with their Rs 1/- shampoo sachets setting off a wave that persists to this day. In the tech ecosystem, the Paytm Soundbox is another product that has made USD 150M in gross subscriptions revenue in the third quarter of FY ‘23.

There's enough evidence that large companies can be built by focusing on India 2, and existing players serving India 1 will need to look at India 2 consumers for expansion.

It’s easier to build trust with small ticket sizes.

The Indian consumer has no reason to trust your product by default. Small ticket sizes allow them to build trust through trials.

This is not new information. FMCG companies have perfected the sachet strategy. New digital product and service revenue models are emerging, buoyed by UPI for digital payments and microtransactions.

From the latest edition of the Indus Valley Report.

Indian startups are also creating a distinct monetization playbook, by enabling microtransactions, or subscriptions built on top of UPI Autopay, when very few believed that Indian customers would pay or that the only way to monetize was via ads.”

For example, Astrotalk, a platform connecting users with astrologers, smartly uses free trials to push users through its funnels. Most of its products have a free version.

1) Free chats that run out after a few messages but still give you a taste of the product.

2) Live consultations where you can join as a listen-only participant. The person talking to the astrologer remains anonymous (a great way for the user to immerse themselves in the product for free).

Once users try the product, paying for consultation becomes easier. Astrotalk offers prices starting from Rs 300 for 30 minutes, making a 30 to 60-minute consultation viable for the average user.

Sri Mandir is another good example. It allows users to conduct online pujas (I’m being simplistic here) across their temple network. The price starts at Rs 25, and first-time users get chadhava for just Rs 1.

Pocket FM is a breakout company, having raised ~100 mn USD in its latest round, and boasts an annualised revenue of 160mn USD. It's an audio stories app that perfected the episodic content + micropayments model in India before transitioning to the US. The insight for them was two-fold:

1) Episodic content taps into the mental model of TV series where episodes end on a cliffhanger, creating anticipation for the next episode.

2) People are willing to pay small amounts for access to anticipated content, and the coins users buy come in small packages that deliver enough episodes to be valuable.

Consumers will pay if you pack enough perceived value in your offering

It’s probably time to retire the trope of “Indians don’t pay.”

Package your product/service at the right price point and pack a lot of value. Indian consumers will pay for a high value/price ratio.

From Arindam Paul’s (CBO at Atomberg) Substack

The Indian consumer (or any consumer with some disposable income) is not price conscious, but value-conscious. Show them the value, and they will shell out a premium. But creating, communicating, and delivering value consistently is what makes people pay a premium for brands.

The absolute difference in cost and total cost of ownership is increasingly considered by consumers while making expensive purchases. While someone buying a Wagon R will not upgrade to a Mercedes( the absolute amount gap is way too high), people considering a 70k Petrol 2 wheeler will easily upgrade to an EV 2 wheeler keeping the total cost of ownership in mind. Same for consumers moving from 2000 Rs induction fans to 3500 Rs BLDC fans.

Atomberg is a great example. BLDC fans exploded onto the scene a few years ago, but Atomberg wasn’t the first to launch BLDC fans. Superfan.in launched BLDC fans in India in 2012 (Source). Atomberg did so in 2015 (Source). However, Atomberg fans have better aesthetic appeal (anecdotal).

In 2019, they were a fashion statement in Bangalore. The value proposition for my friends buying them was that they could be operated by a remote or an app, and they looked good in the home compared to the plain white/off-white fans that middle class Indians were used to. Today, the fact that BLDC is more energy efficient has seeped into the consumer sentiment, giving consumers more value for the higher price.

Now, having a good-looking, automated, energy-efficient fan at home is a fashion statement, driving Atomberg's growth. Atomberg has grown 10x in the last four years, from ₹69 crore topline in FY20 to nearly ₹650 crore in FY23." Source.

As Indian consumers become more aspirational, they will seek products that are more than just ‘functional.'

India 2.1 seeks an offline premium experience because they haven't experienced it yet

The dominant trend in consumer spend is premiumisation, evident across categories like apparel, food, beauty, and electronics.

"Over 70% of Hindustan Unilever's new products in the last two years were in the premium segment.Source: ET

There's an opportunity to serve the aspirational customer in India 2.

The Indian consumer is now aspirational across India 1 and India 2.1. India 1 has had access to the ‘experience’ of shopping, like going to malls and upscale retail outlets, for some time now. ‘Going to the mall’ is now a commodity. Consumers are now trading off this ‘experience’ for convenience, explaining the growth of e-commerce and D2C brands in India 1, providing search + convenience.

But this isn't how things are panning out for the India 2 consumer.

For this audience, shopping was not an ‘experience’ until now. Access to social media fuels aspiration, and an increasing disposable income means they're willing to spend on goods and services they wouldn't have before. For them, it’s not just about the convenience of product access; it's also about the whole shopping experience.

While India 1 goes the D2C route (trading-off experience for convenience), India 2.1 is going offline (trading into the shopping experience), especially in retail and F&B.

Air-conditioned retail spaces, large aisles, good lighting, and better product assortment, taken for granted by India 1, are novel for India 2, where shopping is like a family outing rather than a chore. This is seen in increasing mall investment in Tier 2 and 3 towns and, more generally, in modern retail.

We know about the D-mart success story. I recently wrote about ‘SuperK’, (Blume Fund IV portco) another innovative business which is transforming kirana stores into modern retail outlets. Another story which has taken the business world by storm is Zudio, the India 2 cousin of Zara, which offers a premium shopping experience at an affordable price point (I’ve referred to ‘faux-premiumisation’ in a previous post’.

Here’s a screengrab from the video of a Zudio store in Ranchi at 9 pm - stock is out! If you visit a ‘modern’ store in a Tier 2 town, you will likely find it packed to the brim.

Zudio has been the major reason for Trent’s (Tata Group's, Westside owner) success. Zudio’s store count has grown to ~350, contributing ~48% of Trent’s revenue in FY ‘23 (from ~2% in 2018).

A quick sidebar into why Zudio works - Affordable, trendy fashion, packaged in a premium shopping experience

  1. Aspirational customer: Thanks to social media, the India 2.1 consumer is much more aware of what is ‘trendy’ in fashion and apparel.
  2. Price: Trent’s other retail chain, Westside, failed because of its premium brand and price positioning.
  3. Shopping Experience - Zudio innovated on fashion trends and prices with a premium shopping experience, making shopping more than a transaction. Consumers could buy and feel like it was a family outing.

Source: Instagram

Build for the different online behavior of India 2

'Crafto’ by Kutumb is a popular app that lets users create custom quotes for WhatsApp.

Sharing ‘Good Morning’ messages on WhatsApp is not new. ShareChat tapped into this behavior to generate organic installs on WhatsApp. Users logged on to ShareChat to find messages to share with friends and family on WhatsApp, along with Sharechat’s download link.

Crafto has tapped into the nuance of users wanting their names and photos with these images - a touch of personalization (remember 123greetings.com?). Crafto allows you to add your name and photo for a fee.

This is a great combination of identifying sharp user behavior, creating an app that does one thing, and monetizing it via microtransactions. Even the app title on Play Store is optimized for organic traffic: ‘Crafto - Daily Morning Quotes’.

Unlike India 1, India 2 is not digitally native. Their first interaction with the internet was through mobile devices, with the dominant apps being WhatsApp, YouTube, and Facebook. As a result, there are differences in how the audience thinks about online behavior.

For example, one dominant behavior is ‘browse’, not ‘search’. Information is accessed by browsing feeds on WhatsApp groups, YouTube, Facebook, and other content apps. This is different from how You and I started with the internet, using Google Search as the primary entry point.

Apps are crucial for this user. Many searches start directly on the app store for specific needs, with the mental model being ‘what app can I use to do that?’.

These behavior differences present opportunities for building businesses in India 2.

However, there are cautionary tales. Live commerce experiments, which translate browse behavior directly to purchase, have been unsuccessful so far, unlike TikTok in China, where it's a large industry. Translating behaviors from China, a market considered to be similar to India, might not apply to all verticals.

Start with monetizing the younger audience

I use the concept of the ‘pioneer user’ to devise GTM strategies for an India 2 audience. Source

I saw the panwadi (pan shop owner) next to our office using ShareChat and started chatting with him.

At a young age, he left his village in Bihar and started his shop in Bangalore, where he now owns a few pan stalls. He is now the bridge between his village and the city, helping young people settle (providing initial accommodation, connecting them with business owners, and moral support). He was familiar with city trends (tech or otherwise) and adept at using apps like UPI. Because of this, he is a pioneer in his community in digital payments, e-commerce, and social media.

For example, he acted as the trust bridge for bringing UPI payments into his village ('paisa bhejne ke lie yeh nila button dabao' 'kuch gadbad hogi to mujhe batana'). For us, a failed transaction might be relatively trivial (we reach out to customer support, use twitter, maybe even ping the PM of the app). But the risk of even a small amount of money not reaching its intended recipient is an existential crisis for many Indians. A user won't touch a button in a 'paise bhejne waala app' unless she's sure what it does - and this is where personal support helps.

Pioneer users are early adopters, and a marketing strategy reaching them gives products an early advantage. Meesho targeted women at home for their reseller model, tapping into existing behavioral and cultural nuances (women struggled to work full-time jobs). These early users drove sales and word of mouth to grow demand for Meesho products.

More generally, younger people are an archetype of pioneer users. They are savvy with the internet and digital payments, know how to find and research products, are open to trying new things, and use social media to spread the word. Digital products like ShareChat’s audio rooms, Eloelo (live video rooms), and even Astrotalk have started out by monetizing a younger audience.

Monetize earlier than later 

Even if you're not raising venture capital, testing monetization as early as possible makes sense. With prevailing macro conditions and the (sometimes dreary) narrative about the customer's paying capacity, building conviction on monetization early is the best approach. The best case is making money on Day 1.

A good example is the real money gaming world, where the business model is geared to monetizing acquired users quickly. Astrotalk has built a successful model by deeply optimizing their acquisition and product funnels to be unit economics positive on each user. Both models use revenue as a lever for retention rather than the other way around.

Companies that delay monetization or unit economics have struggled to prove the scale of monetization for their valuations to hold true.

Conclusion: Monetizing is hard but not impossible, and there are tailwinds of customer aspirations

There is enough evidence of profit pools to be created by selling to India 2. However, expecting the growth mechanics that worked for India 1 to work in India 2 in terms of go-to-market strategies, products, and business models is unfair. Building for India 2 is like building for ten different countries, each with its own language and cultural nuances. This unique challenge requires new models to be tried, discarded, and tried again; new behaviors will have to be built, and big bets will have to be taken. The ecosystem should prepare for this.

This is a guest post by Mithun Madhusudan, an astute observer of the Indian internet consumer market and a Product Leader at Sharechat and Apna in his earlier avatars. He writes passionately about the Indian consumer and building products for India in his newsletter, The Indian Pivot.

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  • Mithun

    Mithun Madhusudan

    Mithun is deeply steeped in Indian consumer tech ecosystem and has been building consumer technology products for the Indian internet user for 10+ years.
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