Just after the shutdown of operations in Tier II cities by Grofers and Zomato, it’s PepperTap who is joining the list of unplanned expansion experiments of startups. Recently, the hyper local delivery startup Peppertap shut down operations in six cities including Mumbai, Kolkata and Chennai and would be laying off about 400 delivery guys.

Though the founders of Grofers and Zomato shutdown the show in Tier II cities stating these spots were not ready to accept the hyper local delivery,  Peppertap founders decided to deepen their roots in the limited cities like Delhi, Noida, Pune, Hyderabad, Ghaziabad, Gurgaon, Bengaluru rather than expansion in different geographical locations.

Navneet Singh, CEO of PepperTap stated “The startup has decided to focus on depth rather than breadth, given the short to mid-term investment climate outlook. We are digging our heels in for the long term. We will focus on building a stellar customer experience by providing additional categories and services that differentiate us from our competition in cities where we continue to operate.”

Peppertap Shut down Operations in Major Cities – Why startups should focus on Depth rather than Width

Apart from resource wastage, such kind of unplanned expansions are developing the lessons for other startups as well. FS analyzed the entire scenario of Peppertap shut down operations in major cities, and comprehended the right direction for entrepreneurs –

Customer Acquisition Cost and Profit – In Established Vs New Location

Let’s assume you are hyper local delivery startup just like Peppertap and with huge funds available you want to hit the entire market volume by enhancing your geographical presence. Let’s assume the following before jumping to cost estimation –

  1. You are able to manage to run the show in some cities at least at break-even volume. So you are running the entire business model at no loss on running cost.
  2. Since the demand of the new location is based on the experiences and expectations so the manpower planning is pre-defined.
  3. Fixed cost of assets and detailed breakup of cost components is not considered in the calculation for simplification of the concept.
  4. Only method that is involved in revenue generation is the commission per order.

So you can precise the calculations based on the verticals involved in your business model.

Cost Calculation

With reference to the above calculations if the number of orders per month is less than the calculated break-even point 23,644 , business model is running at loss.

Let’s consider two locations – Delhi where the show is already running at least at break-even volume and Pune which you have selected as a potential market for hyper local delivery.

The first priority of any of the business is to earn the profit. In case of the considered starteup, you have two choices to enhance your revenue – 1. Deepen your presence in the existing locations 2. Expand your business to other locations. Let’s do a small comparison of cost involved in the both of the choices –

Delhi Vs Pune Comparison

In Delhi, the cost that is coming into picture is the additional marketing cost that is required while in Pune the entire setup cost is going to come into picture. So in Pune, first struggle is to convince the consumers to use your business model, reach the break-even volume and then start earning the profit while in Delhi, consumer trust is already built so the probability of getting more market volume is more.

The next question is if there is any additional market volume available in Delhi. So here is the market analysis of Delhi-

Delhi Market Volume Estimation

From above analysis, it is clear that Delhi is better choice from business profit point of view. Since the funds flow fluctuations are unpredictable – very first day of your operations you might be able to get huge amount of funds while for next couple of years no investors might show interest in your startup concept, the better choice for startup survival in long run is to ensure the sustainability of business model first.

FS Outlook 

FS advice to entrepreneurs is to first focus on the sustainability of the business model and then start thinking for expansion in other dimensions. The depth and well as width of startup brand name is important to gain consumer trust and loyalty but the survival of startup is above all.

Read here the learning from other startups shutting down their operations in Tier II and III cities. (Grofers and Zomato)

Wish you luck for your startup. Stay tuned to know more.