This is a post on Radio Taxi business in India. I am using Meru just as an example to understand the economics of business. There are simple back of an envelop calculations and hope someone gives me a better insight on this business. The numbers look too tempting to be real.
I was traveling with Meru yesterday (27th July 2008) and I happened to strike a conversation with the driver. During our conversation, he gave me following stats
- No of Meru taxis on Mumbai roads: 800
- No of taxis by EOY in Mumbai: 1300
- Average occupancy: 100% in peak-hours and 80%+ in non-peak hours
- Peak Hours: 7AM to 10AM and 6PM to 10PM. He said that its impossible to get a Meru Cab in peak hours. This vindicates the business model and demand in the market for these call cabs.
- Average Fare: Rs. 15 per KM. Compare this with regular taxis in Mumbai. A regular taxi is Rs. 13 per KM and a premium of Rs. 2 is not very steep considering the convenience and comfort of a call cab.
With these numbers the business sure makes a lot of sense. Only deterrents I can think of are:
- High fixed cost of acquiring taxis. Not a huge problem. They can take long term loans from banks or PE players. They can also acquire more cabs by using the part-ownership model (where each driver pools in some money to own the taxi and Meru is just a brand name).
- Setup of call center. Obviously each taxi needs to have a GPS device and a two-way radio. There has to be a way to connect the cab with the nearest available free taxi. And since this is a pure service offering, call center is very important.
- Capped Potential: The earnings is directly proportional to number of taxis on the road. The scope of innovating on income stream is really low. At max you can use your taxi as an advertising medium.
- Traffic rules and regulations: Registration with transport authorities in India is a very cumbersome and long process. Although this is a one-time stumbling block, companies would have to divert a lot of attention there initially.
- What else? Am I missing something here?
Business Sense
- I would want to what percentage of bookings is done for immediate travel and what percentage is booked at least 2 hours in advance. If the pre-planned travel is very high, then these companies can better utilize their capacities and go for some kind of planning.
- I would also want to know what percentage of bookings is for large corporates (say institutional). Because moment Meru gets institutional bookings, they can again manage the fleet better and can be assured of certain minimum number of bookings.
Future
- Is their a merit in getting into contracts with airlines, hotels,
coporate parks etc to manage their taxi services? Again its of those
things where you convert huge one time capex for companies into on-demand opex. - What innovations are possible so as to maximize the utilization of fleet and make more money from the same number of taxis? Would a thing like car-pooling work with radio taxis? Say junta going from Andheri to Town everyday can pool a Meru.
- What else? Please send in your suggestions.
From the Meru website, I could get following details
- After Mumbai, Meru is now available in Hyderabad, Bangalore and Delhi. As I said earlier also, the business potential is vindicated by simple calculations.
- India Value Fund has already invested in Meru. Although I am no fortune teller, but I can easily foresee a handsome return on the investment. And I can’t understand why the Penguin effect is absent in this industry. If I had money, I would have loved to get into this business. Obviously at the right time and right price.
Other Radio Taxi Players in India
If anyone can help me connect to someone with Meru or any other radio cab owners/managers, please drop a line. I will keep on updating this post on my wiki at s4ur4bh.pbwiki.com.
Image Credits: Andertho via Flickr
Disclaimer: I am assuming that the occupancy rates given by that driver are correct and the taxi service would have similar occupancy numbers in other cities.
Posted originally on my blog here.
- Thoughts on book publishing industry - July 2, 2012
- Business Idea: Market Intelligence Firm - September 12, 2008
- Call Taxi India - August 1, 2008
A few calculations:
The peak hrs as per this driver are – 7 hrs/day
The non-peak hrs are – 14 hrs with the assumption that at least 2/3 hrs will be spent refueling, servicing and cleaning the cars. It also assumes two drivers per vehicle. I am not sure if 21 hrs a day for a vehicle is possible / allowed but let us assume it is the case.
In Delhi, for instance, the average speed of a private vehicle (4 wheeler) is no more than 13-14 kmph in peak hrs and maybe up to 18 kmph in non-peak hrs. Assume that for a cab it will be 80% of this. Reason being cabs have to wait for passengers and they need to drive carefully so as to ensure that vehicle and passenger are comfortable.
At this rate the each cab will cover:
7 hrs X 11.2 kmph = 78.4 km per day for peak hrs
14 hrs X 14.4 kmph X .8 (utilization) = 161.3 km per day for non-peak hrs
Total distance covered = 239.7 km per day
Assume there will be 10% non billable driving – from last drop point to next pick up point. This leaves us with a total billable distance of 215.7 km per day.
At a constant billing rate of Rs 15 per km (it will be more at night) we get a total revenue of Rs 3236 per cab per day.
There can be a lot of complications to this calculation:
a) Total time on road may be much less
b) Utilization factor may be less or may reduce over time
c) Night time charges may be more
d) There may be seasonal variations
e) Weekend use pattern may be different, ditto for holidays, etc.
f) There will be some revenue from advertising
This revenue then has to cover the following costs:
a) 2 drivers per vehicle – variable
b) fuel – variable
c) management cost – fixed
d) call center – fixed
e) cost of funds – fixed
f) servicing and maintenance – fixed/variable
g) greasing palms – fixed(?)
h) insurance – fixed
i) employee benefits, insurance (life + accident), etc. – variable
i) any other
I have divided these costs into fixed and variable on the basis of time spent on road. For instance if the vehicle is owned by the driver and not the cab company, then number of hours will reduce, fuel and driver salary will reduce but most other costs will still be there. Only servicing cost may go down with less utilization. A lot of cost heads are under the fixed category.
Does the revenue cover for all costs and still deliver a great profit, I am not sure (for I do not know all costs and cost heads).
May be some of you could help.
Saurabh,
I may not be understanding this right ? But here are some questions and thoughts
1> Who owns the taxis ? Is it Meru ?
2> Why have increasing fuel costs not been considered ? (Are these cng?)
3> Is there an estimate to how much margins there are in this business?
wrt Capped Potential: “The earnings is directly proportional to number of taxis on the road. The scope of innovating on income stream is really low. At max you can use your taxi as an advertising medium.”
I feel that advertising is an untapped avenue in taxis. A majority of the business models for internet companies these days relies on advertising. Here you have customers who are stuck in your cab, in traffic with no outlet. How about advertising to people inside ? (Instead of putting a sign on the outside).
It shouldn’t be too hard to profile the type of people using these cabs during different hours of the day. Messages could be tailored for each type of profile.
I read an article sometime back that highlights some of troubles, Meru has to deal with: “Politics and the Free Market”
http://indiauncut.com/iublog/article/politics-and-the-free-market/
Glad that tech startups are pretty much insulated from problems like this.
-Mahesh
Celebrating Life…
Couple of other costs:
1. Cost of acquiring a license in BOM. New licenses have been frozen in the city for a long time, so all new players have to buy cab licenses off the black-and-yellow owners … and the cost of those in grey market can be absurdly high.
2. Manpower cost. From the outside, it seems to be cheap but given the quality of drivers required (english speaking, some minimum threshold of experiance, and with good knowledge of all city roads) makes the supply situation a bit stretched. Also the volumes required may be higher than similar B&Y cabs – 3 in 8 hour shifts with 1 on leave any day and say 0.5 for standby / backup.
3. Finally, as Chica pointed out above, the cost of maintenance of these cars can sky rocket if not taken care of by the driver.
4. Also, though the fuel prices have risen almost 25% at the pump, fares haven’t undergone a change for any of the cabs for a long time.
I agree the business would still be well in the black but not sure how handsome the returns would be…
I think you’ve summed it up well. IMHO I can think of one more deterrent and that is maintenance of the cabs. Given the beating that cars take on Bombay roads, its very important for the cabs to be well maintained, which costs money. One of the reasons I prefer Meru to the the black-N-yellows is that I am sure of a smooth ride. But I always wonder how many years before they become ragged.