Bangalore: By buying cabs, India’s largest cab hailing company Ola is embracing a business model that the company itself and its rival Uber have disavowed earlier.

Ola, owned by ANI Technologies Pvt. Ltd, said on Monday that it has started buying cabs and lending them to new drivers, as it moves to a part-inventory model to build exclusivity with drivers and stave off competition from Uber. Cab leasing represents a big shift in Ola’s business model, which never aimed to own cars. In the past, Ola only connected customers with drivers who owned the cars. Now, Ola will be putting up cash to buy cars.

But such reversals aren’t new in e-commerce. India’s largest Internet business Flipkart Ltd started out as an online retailer but has been shifting to a marketplace model over the past two years or so. India’s second-largest e-commerce firm Snapdeal, whose founders are among the earliest backers of Ola, is aggressively increasing its logistics network through GoJavas. Snapdeal, which picked up a significant minority stake in GoJavas in March, earlier worked only with third-party logistics providers rather than spending millions of dollars on building its own supply chain and delivery network.

But as is the case with Ola, access to large amounts of capital allows firms to tweak and make even larger changes to their business models. In Snapdeal’s case, by investing in GoJavas, the company obtained more control over the critical delivery experience for customers even though its top executives had earlier scorned at the concept of investing in logistics.

A counterpoint to the likes of Ola and Snapdeal is Meru, which started out in 2007 and pioneered the cab service sector in India. Meru bought cabs and hired drivers on its payrolls to cater to a basic need in urban India—to travel to the airport in a reliable, planned manner. Meru established itself as the go-to service for airport travel and it was briefly synonymous with cab services the way Google Inc. is synonymous with search.

But once it created the basic infrastructure to support the demand for personalised transport services it ignited, Meru failed to spot or capture the strong customer need for on-demand cab services within cities (of course, the ubiquity of smartphones made this possible). It was upstaged by bolder, more technologically adept start-ups such as Ola, TaxiForSure and Uber, all of which employed a pure marketplace model and bet on mobile to grow much faster than the older company.

Meru, too, shifted to a part-inventory, part-marketplace model in 2012. But the company just hasn’t managed to attract the hundreds of millions of dollars required to compete in any meaningful way with the likes of Ola, which started out four years after Meru.

Ola and Uber are now the dominant app-based cab services in India, with Ola claiming a share of more than 75% of app-based cab bookings in India.

That kind of dominance means Ola has emerged as the most attractive local cab services company for investors, and it has already raised more than $1 billion in funds over the past year. Now, Ola’s biggest problem isn’t growth or cash efficiency; it is to hold off US-based Uber, the world’s most valuable venture-backed start-up.

Currently, many drivers use both Ola and Uber to get clients; few are exclusive to one service. With stakes getting higher in the market-share battle between Ola and Uber, both are trying to sign on as many drivers as possible and make them their exclusive partners.

The move into cab ownership and leasing will allow Ola to ensure exclusivity with drivers by locking them into its system. Ola said on Monday it is also putting together a monitoring system to ensure the drivers on its platform using leased vehicles don’t switch to other apps.

The move will perhaps pay off if Ola achieves its driver growth target of 100,000 by the end of next year and if it can extract attractive margins. But the fact that the company was able to shift its business model highlights an important lesson for e-commerce businesses: identifying both supply gaps and changes in customer behaviour. Capturing revenues offered by such changes is more important than loyalty to any business model.

Close