Rohit Kaul
Background
Sampad is the co-founder and CEO of Instamojo, an Indian company building eCommerce infrastructure for micro-merchants. We spoke to Sampad about product-led growth, monetizing via micro-merchants, competitive dynamics with Shopify, and what the future of D2C looks like in India.
Questions
- If you look at a typical fintech company, the name usually has some connection with fintech; Paytm, Stripe, Chargebee. So how did you come up with the name Instamojo?
- What was the thesis you built Instamojo around?
- When did you feel that you were onto something? What were the early signs of Product-market fit?
- And who were the early customers? Give us a sense of what were the early customer segments?
- You mentioned when people can trust you with their money, that's when things start moving. So how did Instamojo build that trust? How did you handle that trust issue early on?
- Can you help us understand a few things that you have built extra for the micro merchants, compared to say what you would have built for the enterprise?
- I read somewhere that there are more than 1.2 million merchants who are registered on Instamojo. Can you give us some sense in terms of what's the overlap between customers who use payments and who use the storefront?
- The SMB segment is characterized with high churn and low ACV which becomes a challenge for service providers. Are you also facing these challenges, and how are you overcoming these challenges?
- Can you talk a little bit more about your monetization strategy? Also, it will be good to know what is driving your ARR? Is it the subscription fee or the transaction fee?
- In just 15 months, you have on-boarded thousands of micro merchants in the storefront product. Can you share a few challenges that came with this rapid onboarding?
- In many ways, we are seeing a D2C version 1.0, especially for the micro merchants in India which includes a basic storefront, payments, shipping, etc. How do you foresee this evolving? What would version 2.0 of this?
- Do you see Instamojo becoming like the way Shopify is evolving, a two-sided marketplace, which aggregates demand from merchants for additional services and matches with suppliers such as designers, ad agencies, analytics, etc.
- You have products like sachet loans, and you are providing instant working capital loans. Can also help us understand these products?
- Anything that we have not touched upon so far and will help us understand Instamojo better?
Interview
If you look at a typical fintech company, the name usually has some connection with fintech; Paytm, Stripe, Chargebee. So how did you come up with the name Instamojo?
It was not entirely thought through as it may look like. I had a side project around 2010, after my first startup, and the project was about allowing people to accept payments for their business by sharing a link. I thought it was not a great idea, so I shelved it. I had a domain that I had booked at that point of time called instartup.com. So it had an instart word. And I don't know from where the mojo came in the picture. Later on, when we started Instamojo, obviously we loved the name because, you cannot forget the name, it's got a good recall value to it. And you don't have to spell it out for anybody. Instamojo is a very easy name to pronounce. So we stuck to it.
What was the thesis you built Instamojo around?
The primary thesis that we had and still have is that small businesses would have to come online to do trade and commerce. Obviously, it wasn't a popular concept a decade back, and a lot of it has changed, and rightfully so. We wanted to solve small business problems. And we thought when you look at all the problems that we could solve for them, payment stood out for us because it's an extremely opaque industry. To date, a lot of small businesses don't really know what happens once you pay me. I really don't know where the money flows, and suddenly, magically, the money appears in the bank account. So we realized that we wanted to solve payments, to begin with, because it's a black box, it's completely opaque, and they don't have a clear understanding about it.
The second thing we realized is that a lot of trust can be built if you're able to handle money on someone’s behalf. Small businesses coming online, solving trust via payments was very, very important to us. And it has paid us in spades, if I may say so, over the years. The last thing is that we did not want to build a payment gateway per se. Because we knew that small businesses overnight would not be technically savvy to build a website or an app to integrate an API, which Stripe or Razorpay of the world are fantastic at, but it cannot be used by everybody. Small businesses are not going to be technically savvy, learning JavaScript, HTML, website building, maintenance, and all of that.
So we wanted to build a quick, easy way to move money for value. And that is how we pioneered that idea of payment link. Obviously it helped us a lot in terms of not only getting a foothold, getting traction, but also to bring virality. When you send a link to a number of people, those people could either be potential buyers for you or they could turn into future merchants as well, because they say, "Hey, this is easy for me. I can use it." And that is exactly how it got played out.
When did you feel that you were onto something? What were the early signs of Product-market fit?
I think it was the virality of the link itself. Obviously, it's easy for me to say after so many years that, "Hey, the payment link was conceptualized as a viral mode." It wasn't the case at the beginning. We were solving for an easy mode to accept payments for value. What it turned out, we never anticipated, is that one merchant can actually share a link to ‘n’ number of consumers. We never anticipated that. And that in the first couple of weeks, you realize that, "Hey, this is a link you can copy, paste to any medium, like email, WhatsApp, SMS, it doesn't matter. Right? And you can send it to any number of people. And when those people started visiting our site, those people are getting registered as merchants as well.
When we figured that out, we then started focusing on, "Hey, how simple can we make this link?" In fact, the first couple of years, we just focused on one product called Payment Link, and how do we make it more and more viral in nature. Can we make it easier to share so that we invite a certain amount of distribution to the links? And then we realized that "Hey, this link can not only bring in the early set of customers, but they can bring the next set of customers. And those customers will create more links, and it has a cascading effect with it."
And who were the early customers? Give us a sense of what were the early customer segments?
We divide customers as a pyramid. At the base are the micro merchants, then small merchants, followed by medium, large, and super large. The micro merchants, the guys who are on social platforms, like WhatsApp, or Instagram, or Facebook. They are people like me and you. They're freelancers, teachers, arts and crafts makers, homemakers, and so on and so forth. For them, the payment link was a God send. I don't know how to build a website. I don't know how to integrate a payment gateway. I don't have to talk with a payment gateway or a bank for all of this. I can just register the bank account and a phone number, and I can get started in a few minutes.
That itself was quite viral in nature. Now in today's day and world, micro merchants are not classified even as businesses. Even if you go by MSME parlance, they're not considered businesses. I'm talking about businesses that are doing up to $10,000 of sales a year -- Very small, tiny micro merchants. And upon focusing on them, we realized that there are a lot of them, but the value is small. We realized that we were going to play a volume game. Had I been a payment gateway, I'll be going to the large enterprises doing millions of dollars in transactions. But these guys would not be doing that. So the benefit is our margin structures were very different. Like today, our margins are at least eight to 10X more than a payment gateway, but the volume would be eight to 10X smaller than a gateway. So we did a trade off of let's go for mass because we have to work on retention. If 10% of merchants tomorrow switch, it doesn't matter to us because we don't have a concentration problem.
We focused on the micro merchant base -- a lot of them using the product, bringing more virality -- and focus on making it more simple and more sticky. And they're still focusing on it. By the way, we have not gravitated from a micro merchant base to enterprise.
Because of the product, the solutioning, the pricing was completely different.
You mentioned when people can trust you with their money, that's when things start moving. So how did Instamojo build that trust? How did you handle that trust issue early on?
Let me take a step back. We never wanted to put Instamojo in the forefront and wanted the customer who is paying or swiping his card to trust Instamojo. We relied on the merchant's trust. The merchant sends the link to unknown people. Over a period of time, as more merchants used it, their customers said, "I don't really care about Instamojo. I trust the merchant." And they pay the merchant.
The first 10 people who used it, shared it with a thousand people. And from there, we have relied only on the merchants and their network and captive base. So it was very easy. We never had to spend a single dollar from our pocket to advertise. We built the trust through the merchant's network and the inherent trust network they have built over the years.
Can you help us understand a few things that you have built extra for the micro merchants, compared to say what you would have built for the enterprise?
Instamojo started off as a payment link provider. We then gravitated towards the commerce side of it. We asked, "Hey, what can we build to drive commerce?" That led us to acquire a company called GetMeAShop, just before COVID, which is an online store builder platform. Over the years, we have relied on that one basic concept -- that small businesses have to come online to do trade and commerce. Payment was a great starting point. What other additional services can we build on top of the trust network we have built with the early set of micro merchants? We built the storefront and third-party logistics to be able to ship the products. Beyond that, we then created a lot of different modules, like customer engagement, digital marketing, SEO, analytics, loyalty service for them and their consumers.You can have your own domain on Instamojo. You can have emails and SMS. So basically, it's a one dashboard view of your entire business life cycle, where you get to know who is paying, who is not paying, I need to engage with them. Earlier it was more of an email and SMS, and now it is WhatsApp, very prevalent, especially in a market like India. So these are stuff we built.
Some of the services are built by us internally, and some services are built by third-party developers and startups because they are great at what they do. And we can then partner with them and integrate their service within our ecosystem. The merchant has each and every tool at the click of a button.
I read somewhere that there are more than 1.2 million merchants who are registered on Instamojo. Can you give us some sense in terms of what's the overlap between customers who use payments and who use the storefront?
The storefront business is about 15 odd months old. We acquired a company, and we launched it around late 2020. Also launched a subscription plan around the same time last year. Right now, almost two-thirds of the merchants are using our storefront business. So if we look back, 100% of the users were Payment Link users. Now almost two-thirds of the users are also using the storefront framework, and of course, the storefront is on a freemium model.
The SMB segment is characterized with high churn and low ACV which becomes a challenge for service providers. Are you also facing these challenges, and how are you overcoming these challenges?
The bad news is that the mortality rate is very high in this sector, extremely high. Because they don't find business, they don't find sales, whatever, so it's very high. But the good news is the number of micro merchants is also very high, we're talking about at least 10 million. I'm talking about people doing up to about $10,000 of sales a year—selling on a social platform like Instagram and Facebook. So the key is to keep the CAC low and retention high. If you are not able to manage the CAC and high retention, you are dead. You can keep spending, throwing money at the problem, but you will just burn out.
Just to give you some context on the CAC side. Our CAC is about $1 to $2. And I think this is like a world-beating number. And that is because 80% of our merchants that we are acquiring every day, we are acquiring about 1,200 – 1,500 merchants on a daily basis, 80% of the merchants are coming through word of mouth, for the reasons I mentioned earlier -- because you create a link or a store, you share it, people are coming, and they say, "I can also build it for myself."
On the retention side -- I'm talking about last month -- retention month over month is about 96%. When we launched a subscription plan -- same time last year -- it was 80%.
We believe our retention rate will cross 100% as we upsell more services to the existing captive base. So CAC and retention, we have figured it out, if you may say so.
Now, the question is, how do we add more and more merchants? So far, it is an organic play. Now we are looking to promote and do a lot of branding, which we've never done in the past. To acquire more and more merchants on the platform. So that's the key to balancing the mortality rate that we have and the large audience base that’s the micro merchant base.
Can you talk a little bit more about your monetization strategy? Also, it will be good to know what is driving your ARR? Is it the subscription fee or the transaction fee?
Currently, the monetization models are transaction fees and subscription fees. The subscription fee is about 40% of total monetization. That means 60% is from the transaction fee. We believe over the period of time, the numbers might change a little bit here and there, but that's 60% from transactions, 40% from SaaS. As a differentiator, what we've done is, Instamojo gives a one-dashboard view of your entire ecommerce business, where we provide payments, customer engagement, sales view, logistics, loyalty, domain, email, and SEO. And we charge about $100 ARPU. You may say a $100 SaaS fee per year is very lucrative when it comes to monetization compared to global peers because they're more expensive.
At the same time, we keep the subscription fee in such a way that we are not saying that you pay me for the shop. We have a forever free plan as well, which is our lite plan. So that they can gradually agree to start a paid plan, our growth plan. We recently launched a plan called DIFM, Do It For Me plan, which is about 25,000 rupees, where the merchant says, "I don't know how to do this for myself. Can you help us?" So that's how we are monetizing. It’s like the JIO-fication of Shopify, if you would, as a buzzword. Give it for free, to begin with, acquire everybody, and then monetize from bottom to up.
That's what our strategy has been. Give them one dashboard view, a freemium model, acquire pretty much everybody in the micro merchant base that are selling on the social media currently or social media sellers. Give them all the tools that are readily available from the global peers, and they're charging for it, don't charge for it because you're not incurring any cost other than the software costs. And that's why our retention, which is 96%, our CAC, all of this is coming as a tailwind to help the base grow faster.
In just 15 months, you have on-boarded thousands of micro merchants in the storefront product. Can you share a few challenges that came with this rapid onboarding?
The storefront pricing that you're seeing today is the third revision of pricing in the last 12 months. We were never a SaaS business. First of all, we never thought merchants were going to pay by their own accord. Because nobody in India thinks that small businesses, let alone micro merchants, are going to pay for software. They're actually wrong. The vast majority of the merchants are paying by themselves after gravitating from the free tier to the paid tier. That I would attest maybe to COVID because it's a significant tailwind that happened recently.
But nobody in this country, other than us, has figured out the micro merchant base, who, as I said, are the largest in number but have a significantly high mortality rate. And the ability to pay is also limited because, as I said, they are doing $10,000 sales, and you cannot charge them $1000. So that took us a lot of time. But with a certain degree of confidence, I can tell you after 12 months, and three revisions, I think we have figured out the pricing strategy that works. Internally, we have something called a cost-to-value ratio. How much should I charge, and how much value should you derive? If they make $10,000 max and let's say the gross margin of the merchant is 40%. So that means at the end of the year, she makes about $4,000. How much can you charge out of $4,000, which she's happy to pay again and again, without thinking about switching? So today, we are charging about 4-5%. So we charge you five rupees, you are able to make 100 rupees. And our idea is that over a period of time, as we increase the base, our cost-to-value ratio should go down. Our internal estimate is we want to go to 1%. We should charge one rupee for you to make 100 rupees. And you can only do it on a much larger scale than we are currently.
In many ways, we are seeing a D2C version 1.0, especially for the micro merchants in India which includes a basic storefront, payments, shipping, etc. How do you foresee this evolving? What would version 2.0 of this?
Version 1.0 is exactly what we provide. Basic storefront, payment, and shipping, that's it. And that's what pretty much everyone is providing. And we have been planning and thinking about what is version 2.0, 3.0, and so forth. So we believe the next version is beyond these three table stakes. These are rudimentary stuff we have to get right. The next version is marketing and promotional tools. "Boss. I have created my store, I have got my payment sorted, I've got my logistics set. Can you help me promote myself? My brand, my product. How does the world get to know about it?" So can you give them a one-click view of how to promote to an Instagram audience or Facebook?
Second is integration with Facebook and Google. They are integral to eCommerce 3.0. 1.0 was Flipkart, Amazon. 2.0 is social commerce and 3.0 is ‘I want to have my own audience; I own them. No marketplace owns them’. So integration. Google and Facebook are integral.
The third thing is marketplace integration. I'm not going to sell only to my audience. There are marketplaces where I'm ready to give more commission. Can I have Instamojo as a partner, which can help me promote and sell my products in third-party marketplaces.
Our strategy is a one-dashboard view of ecommerce business. What we give today is the need of the hour. You may think this is what you need right now. But this is what you needed two years back, India is a little late in the game honestly. What you need is the ability to one-click advertise, one-click integration with Facebook and Google, one-click advertise and sell products in third-party marketplaces. That's 2.0. Maybe 3.0 is Metaverse; let's not go there. But I'm saying 2.0 is selling your products and services in conjunction with already existing large platforms that we mentioned earlier.
Do you see Instamojo becoming like the way Shopify is evolving, a two-sided marketplace, which aggregates demand from merchants for additional services and matches with suppliers such as designers, ad agencies, analytics, etc.
We provide that already.It's just very hush, hush. We started about a quarter ago. What we realized is there are things we're really good at and there are things we won't be good at. But there are people who are really good at these other things. Our forte is not to help tens of thousands of merchants advertise, but there are agents and agencies and freelancers who are great at doing it. What if I created a two-sided marketplace where if a merchant wants to advertise, with let's say, 50,000 rupee, and there's someone, as a developer or as a freelancer, who's an advertising whiz kid. They can connect on our marketplace and add value to each other.
So we are building an ecosystem, so as I said, 2.0 is all about the ecosystem. To bring third-party players, not just large platforms like Google and Facebook, but also to have small micro guys to come and basically help the merchant, do all the other things that you just mentioned, is the key. And we have already started taking inroads, though these are still very early days for us.
You have products like sachet loans, and you are providing instant working capital loans. Can also help us understand these products?
Currently, sachet loan is part of the broader value-added services that we provide to our captive audience. In terms of revenue contribution, it contributes about 3%. So not large, but not insignificant. We plan to expand it but not immediately. As I said, the immediate plan is the version 2.0 applications from the basic store, payments, and logistics, to give them more ecosystem services. Probably once we're done with that, we'll focus more on the capital side of the business because we are trying to move up the value chain from the micro merchants to small and medium and so on and so forth. As you move up the value chain, the requirement of capital significantly increases for those merchants. Once we reach there, we will then start exploring much deeper capital products for our future.
Anything that we have not touched upon so far and will help us understand Instamojo better?
There are a couple of things I hinted across various answers, which is a little bit of innovation that we did. One is obviously the business model front, where we went for the freemium model, compared to the global peers who don’t offer free trial but not freemium, which I called the JIO-fication of Shopify, which is extremely critical to our business.
The second thing is the technology where we have localized significantly compared to global peers, like focus on mobile and WhatsApp. For instance a lot of promotions, marketing, and engagement happens from a merchant with the consumers or buyers on WhatsApp. We are extremely focused on that.
Other than that, none of the players today, including the global ones, focus on this TG, the micro merchant base, which is the social media sellers and we completely 100% focus on them.
And the next logical step is to create the ecosystem, version 2.0, while moving upstream. So those are the two vectors of growth. One is to move upstream from micro to small to medium. And the second one is to create more and more ecosystem services.
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