Why iD’s PC Musthafa blindly trusts his customers?

Hello, fellow Olio enthusiasts! 👋

Happy Hump Day and welcome to the 28th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

A big shoutout to all of you for the fantastic support and feedback. Let's keep the momentum going in the days and weeks ahead! 😊

Today’s Publisher’s Parmesan talks about the marketing genius executed by iD Fresh Foods, a food products company based in Bangalore, India. The company manufactures a range of fresh foods including idly/ dosa batter, parotas, chapatis, curd, and paneer.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

Oh, and before you continue, it's time for some sponsor spotlight, where we put the "fun" in funding! We promise this isn't an attempt to pull the wool over your eyes, but rather a chance to keep the lights on and the laughter meter off the charts. So go ahead, give that link a click, and let's make sure our pun-loving team doesn't end up in a world of dad-joke darkness. 😀

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The Quote󠀢 💭

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The Short Read 📝

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Publisher’s Parmesan 🧀

Why iD’s PC Musthafa blindly trusts his customers?

The world of marketing and sales is all about RETURNS. Every penny spent and earned counts. But when you are a new player in the game, you'll have to do anything to get your customers to like and "trust" you.

iD Fresh, the market leader in the idli-dosa batter industry that made INR 411 Cr (~$5 M) revenue in FY22, was in a similar situation during its early days.

Starting out with only INR 50K (~$600), iD was dreaming to become the dosa king of Bangalore and then the entire country of India!

The problem? No one knew about iD's products and more importantly, customers didn't trust them!

So, iD created a unique and groundbreaking marketing strategy that solved its biggest problem — Customer Trust!

Mustafa and iD Fresh's struggle with TRUST

To understand the significance of this marketing strategy, we must first learn about the conundrum iD was in, back when it started!

In early 2005, iD's founder, PC Musthafa and his 4 cousins set up a small shop selling idli-dosa batter. The shop ran in a

• 50 square feet kitchen

• where a 5-member team

• would sell idli-dosa batter in a plastic bag

• secured with nothing but an elastic band

Now, off the bat, you can see there are several problems with this venture. This way of unsophisticated operation works for a mom & pop shop owner, but it's inexcusable for an established venture.

1. Firstly, there was a blatant lack of hygiene

2. In a small kitchen bug infestations are all too common

3. The packaging was not secured properly which could cause spillage

4. The idli-dosa batter easily goes bad when kept in hot weather due to over-fermentation. So, the shelf life of the product was super low

On top of that, only a small demographic of college students and working young adults would buy ready-to-make homemade products at that time.

The majority of the idli-dosa batter consumers vehemently avoided using packaged products because

• These consumers are very used to eating home-cooked food

• They feared the packaged product might contain preservatives

Apart from these very strong barriers, iD still had the massive task of marketing their product lineup and generally spreading the word, so that more people buy their packaged food and they eventually break even!

iD's positioning to become the Idli KING!

Immediately Musthafa and iD's team started working on solving these problems.

1. They improved the hygiene of their kitchens, eventually building 6 very high-quality manufacturing plants

2. Musthafa and the team experimented to create their own packaging. The design of the package is patented now and it fixes all the previous issues like spillage & durability and protects the batter during transport.

3. They skipped out all preservatives and marketed their products as equal to any homemade batter and 100% preservative-free

4. Finally, to make sure every package that reaches a person is 100% fresh, they dramatically improved their supply chain. So, every morning the retail stores receive a fresh batch of packages. Their supply chain efforts were widely appreciated and got their own Harvard Business case study.

Now, you can gather from this that iD's entire marketing strategy was to position itself as a high-quality brand that sells "fresh", "preservative-free" food equivalent to any homemade version.

They weren't looking to compete with other ready-to-make brands. Instead, they were offering convenience to homemakers by cutting down the nightly effort of preparing the breakfast batter for the next morning.

Now, iD had worked enough to perfect its product, positioning and brand messaging. But, no matter how impressive your positioning is, if people don't know about it, they wouldn't buy your products.

Here's where their genius marketing comes in!

The Trust Shop - How trusting customers builds trust

Initially, while designing their marketing strategy, Musthafa and the team were adamant about not spending a truckload of money on huge ad campaigns. So, they did something much more simple.

Their goal was to reach customers directly and win their trust. And, ultimately they wanted to convince people that their products were actually at par with the homemade version.

Now, Musthafa understood that it was a tough ask to expect customers to believe their products were fresh at face value. But, all he needed was for them to try one of his batters once, so they can test the hypothesis first-hand.

Since Musthafa wanted his customers to trust him, he decided to trust them first! Hence came the idea of iD trust shops.

The team set up iD Trust Shops in local societies, apartment complexes and tech parks. Here’s how these Trust Shops worked.

1. iD would set up a cooler with exclusive iD products in societies.

2. The coolers were left unlocked and customers could simply grab a packet and pay as & when they wished.

3. There was no one to collect money, or even a camera to watch over the transactions. There were no follow-ups about the due amount. Customers could simply drop the amount in the money box.

The idea was simple. Without a watchful eye or a persistent salesman, when things are left alone, people would eventually be intrigued by the coolers and surely would want to test out the products as they were right at their doorsteps.

If iD can continue to deliver quality results for a certain amount of time through these Trust Shops, customers would become familiar with the product, hence solving the trust issue.

But, it also comes with a risk of iD losing a lot of money on an experiment that could prove to be a huge failure!

You see, customers don't have to pay up for a product. So, there is a high chance that they actually won't pay. For a young startup like iD, even if their product sale numbers turn out to be high, it was key that these Trust shops are profitable for this marketing experiment to be a success.

Because if people pay up for iD products when they don't necessarily have to, it would imply that people really like iD products and would rave about it in their circle.

On the contrary, if people don't pay up and end up taking these products directly from the trust shops, it would imply that people are taking iD products only because they are offered for free. And, once they are not free, no one would care to buy them.

So, is Trust profitable?

It's essential we calculate the ramifications of trusting your customers by comparing the margins for Trust Shops and retail stores.

One packet of iD batter costs INR 110. Let’s say, both retail stores and Trust Shops sell 1000 packets in a month. Let’s calculate the respective cost of retail stores and Trust Shops.

Retail Stores

On average retail stores have a profit margin of 8-40% on FMCG products [1]. If we consider a case where the retailer keeps 40% of the MRP then we get => 40% of INR 110 = INR 44

Additionally, there will be some costs of materials, logistics and other charges for the company. Let’s assume it to be 40%. That’s 40% of INR 110 = INR 44

So, in selling to retail stores, iD loses INR 44 + INR 44 = INR 88. This implies that iD makes INR 110 - INR 88 = INR 22

iD makes 1000 x INR 22 = INR 22000 in a month

That’s a profit margin of INR 22 / INR 110 x 100 = 20%

Although iD is guaranteed to recover its entire MRP amount on each package sold, its profit margin is still only 20% with retail stores. This works out well, as most FMCG products in fact do have a profit margin between 2-25%.

Trust Shop

Now, let’s assume that iD can recover x% of MRP via Trust Shops. For example, if it recovers 20% of MRP, it’ll only make 20% x INR 110 = INR 22 on one packet.

In this case, they don’t have to worry about the retailer's margins. But, there are other significant costs like the cooler’s electricity bill, store space, etc.

Let's calculate the electricity bill first. An average full-size fridge consumes ~1500kWh of energy annually.

That is ~125KWh of energy consumed per month.

Let's consider an energy cost of INR 5.55 per kWh. So we get the total monthly electricity bill to be => INR 5.55 x 125 = ~INR 700.

Next, we take the storage space rental to be INR 10,000 per month. Now depending on the locality, this number can change.

On top of that, the usual manufacturing and logistics costs remain the same at 40%. So, that deducts an additional INR 44,000.

So, let’s calculate the x% iD will have to recover to earn the same INR 22000 as a retail store:

INR 22000 = (x% x INR 110 X 1000) - INR 700 (electricity) - INR 44000 (logistics) - INR 10,000 (cooler space rent)

x/100 x INR 110,000 - INR 54,700 = INR 22,000

x/100 x INR 110,000 = INR 76,700

x = INR 76,700 / INR 110,000 x 100 => 69.7%

So, x is ~70%. This means if iD is able to recover at least 70% of the MRP from Trust Shop customers they’ll get the same margins as the retail stores.

Now, what’s surprising is that actually, iD very easily recovers >90% of their MRP through this Trust Shop experiment!

This will make their profit margins => (INR 110,000 * 90% - INR 54,700) / INR 110,000 = 40%

That’s a 20% better profit margin with Trust Shops than with retail stores!

Now, operating these Trust Shops and hoping to recover steady margins over a long-term period can obviously be challenging. But, iD used these Trust Shops as an ice-breaker between them and their consumers.

They knew that they had to work on increasing their consumer base and repeated orders. So, as more people got familiar with iDs trust shops the growth eventually compounded, earning them the name of the Breakfast-KING of India and INR 411Cr revenue in 2021.

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