Your cheap cab rides the last X’mas and New Year week, reportedly, was one expensive lesson for Ola’s investors. While you were relentlessly waiting to dig your teeth into the sinful cake and wine, smart drivers of Ola Cabs were busy making quick and easy money. Ola cabs had launched an incentive scheme for its prompt drivers, a rejoicing bonus of Rs.5,000 per day for every 10 rides they completed, to enhance your (customer) experience of uninterrupted service. This helped customers to be happy, as the drivers did not cancel any rides and drivers be happy, as they got to earn more than they ever did. With the rides in that week going right up to 20 a day, it was a blessing for the drivers as their earnings skyrocketed to about Rs. 10,000 a day.

And then again, the trouble started there.

Apart from the brunt Ola Cabs bore of making your ride cheap, the whopping $2.4 million or Rs.14,70,00,000 “customer acquisition cost” had a large chunk of clever fraudulence. And Ola, we feel, got smartly cheated. How did it all happen?

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On his latest article on Medium, Sanjay Rao, a resident of Bangalore, India and a customer of Ola Cabs, quotes his discussion with an Ola cab driver on his earnings during the latest holiday season. The driver admitted that most of the Ola Cabs drivers earned anything between Rs. 50,000 and Rs. 60,000 within a short span of just 10 days during the X’mas and New Year period – something which most of the highly educated executives in Bangalore fail to earn despite sweating blood.

To give its potential customers, uninterrupted service during the holiday season, when demand for the service is destined to peak, the company came up with a strategy to poach drivers from its competitors by offerings high incentive for 10 completed rides in a day. And if a driver managed to finish 20 rides, it’s just doubled.

Reportedly, sensing a great opportunity to pocket extra earnings, Ola drivers came with a counter strategy to take advantage of Ola’s desperation to grow quickly. They formed a group of five drivers, bought new Sim cards and cheap smartphones, installed the Ola app and started booking the cab within themselves. While one of the five booked a ride from his alternate phone posing as a customer, another accepted the ride and the others switched off their Ola smartphones (which they are permitted to do on breaks and during network issues). The host cab and the other cabs then used to travel together for 3 to 4 kms (an approximately 15min ride) and end the ride causing it to seem like a genuine one. This would repeat every 15mins, with the drivers taking turns booking each other’s ride. They kept doing that till they finished their 10 rides before they could take any genuine rides for the day. For each bogus ride, the host driver had to pay the driver who was enacting a customer about Rs.150. Eventually, each posing driver shelled out about Rs. 1500/- for ten rides and earned Rs.5000 for completing 10 rides. That sums up to all the five drivers, getting a minimum of Rs. 3,500/- per day per driver.

If we believe the driver who narrated this story, each one of those drivers earned nearly Rs. 70,000/- in ten days, as they managed to finish 20 such short-distance rides in a day. He also claimed that atleast 50% of Ola Cabs drivers adopted this strategy to make their X’mas and New Year memorable.

Let’s consider the scenario where the driver in conversation was exaggerating. Keep in mind that Ola has a fleet of 60,000 cars and If we had to think conservatively, even if 10% of Ola drivers took undue advantage of Ola’s this “customer acquisition strategy” and managed to finished only 10 rides in a day for 7 days, still, it totals to Rs. 24,500 by each of 6,000 drivers. That adds up to the figure we had mentioned to start with.

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Since the figure looks exaggerated, we decided to validate the story and reached out to few Ola cab drivers on 20th and 21th of January 2015 and the responses left us shocked and stunned. While some of the drivers did not spill the beans, but they didn’t deny the possibilities of such arrangements. In fact, among these, there were few who told us that such schemes are more benefiting to the Ola cabs drivers than their customers.

While considering that the four-year-old Ola Cabs, who recently received US$210 million funding from SoftBank and again in talks with investors to raise another$500 million at a valuation of $2 billion, can afford to burn $2-3 million on marketing efforts, its plans to spend a big chunk on expansion and acquiring greater market share, is certainly not coming cheap. In 2014 Taxi and ride sharing apps, likes of Ola and Uber, raised almost $5 billion in disclosed funding. Apart from China and India, these included startups in Brazil, Mexico, the Philippines, Singapore, South Korea, Estonia and several other developed countries in West, according to the HIS report. Ola Cabs is currently operating in 52 cities across India and has a fleet of 60,000 cabs handling 200,000 rides each day, as announced last week.

Accepting that Ola’s mode of retention is incentivising their drivers heavily, the bigger questions are:

What is in it for Ola? Could such expenses be justified in the name of customer acquisition alone? As all the money that was squandered on driver retention was investor money, why would investors, let such a huge expenditure pass by unquestioned?

To understand this, we went through a recent interview of Tarun Yadav, Director, Matrix Partners, India, and an early investor in Ola Cabs.

He quotes, “The world over, these tend to be winner-takes-all or winner-takes-most of the market type of businesses. You aren’t going to have more than two taxi apps on your phone. There are very well-funded players in the country today who understand that this is network-effect business, and they are spending very aggressively to scale their businesses. Competitive intensity in the short term is a very large challenge.”

The statement portrays a scenario where investors are firm believers of growth in the Taxi and Ride sharing app industry. The growing anxiety towards traffic, rising fuel cost, parallel to rising spending capabilities and affordability of such services are probably keeping the investors confident about the promising market scenario. But, the bigger question still looms large “What about profits and who will actually enjoy it?” Small-scale investors are making a healthy exit by selling yet-to-be-profitable startups to bigger companies or bringing in bigger investors. And, the incoming investors are holding their nerve patiently till the day people will get habitual of such rides and ongoing discount strategy could be flushed out. And, then companies would reap profits that will result in double-digit folds returns to investors.

All this could happen, only if brand loyalty remains strong among customers; something that can’t be bet on in Indian scenario. Whatever be the case, if would be interesting to see how, how much and when investors can gain desirable return on investment from the industry. But till then they will have to have deep pockets to stay in the game, which is just started.

Although at first, we see it as a naivety of Ola to have lost the kind of money it did, the strategy seems smart in retrospect. While its competitors were still thinking hard, Ola’s irresistible offer got drivers from other services shift their loyalties to Ola and thus caused the egression of talent inflow. This ensured that the customers always got their booked cabs, no matter which nook of the city they stayed in.

Leaving that kind of money on the table, not just boosted Ola’s brand image through sustained reliability and increased loyalty, even the loss incurred by Ola through this strategy seems less significant against the positive impact it generated.

Are the majority of leading start-ups adopting the “Winner takes it all” strategy to raise more funds and is it a trend? Or, are the investors sold to the fact that such expenses are required to keep the interest of drivers and customers intact? The truth is yet to emerge.

We have contacted Ola Cabs to know their stand on this developing story, we are waiting for their response.