Ola is taking its hyper discounting model beyond India. But will it work?

Riding on.
Riding on.
Image: Reuters/Shailesh Andrade
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Ola is replicating its tried and tested formula from its home country, India, in international markets: underwriting customers, incentivising drivers.

On Nov. 06, the Bengaluru-based company kicked off its ride-sharing service in New Zealand with a three-city launch in Auckland, Wellington, and Christchurch. In the first month, the company is offering a staggering 50% discount to passengers and is charging just 9% in commission from drivers.

“With this move, Ola is offering Kiwis a reliable ride-share service, which provides a safe and affordable alternative as well as a better deal for drivers with lower commission rates that enable them to earn more,” the company said in a press release today (Nov. 06).

The New Zealand launch comes around 10 months after Ola made its first overseas foray to Australia. Right after the launch, in February, Ola slashed the commission from drivers to 7.5%. Now, it says it operates in seven cities across Australia with over 50,000 drivers registered on the platform, having completed over 2 million rides to date.

“Ola had to resort to aggressive discounting in Australia in order to compete with Uber, which has been the market for five years. It means that company is burning cash, while its ticket-size will be low,” Satish Meena, senior forecast analyst at Forrester Research, said. “This will remain a challenge for Ola. At some point, they will have to take in consideration unit economics and increase prices. It could raise the same situation it is facing in India right now.”

In August, when Ola launched in the UK, it offered commissions at 10% for private vehicle drivers and went as low as 5% for taxis, the company had said in a release. Ola also offered discounted rates to its new users, the company had said.

While such low commissions and high discounts can go a long way in luring drivers and customers to join the platform, they’re unsustainable in the long run. For example, in India, Ola used to charge commissions of maximum 10% when it started operations in 2010, according to industry sources. But now, the company charges up to 20% on each ride from drivers.

Ola said these discounted rates are only introductory and will be withdrawn once it reaches scale.

Will it work?

Ola has spent the last seven years since its inception subsidising Indian drivers and riders from its own pockets. However, with global startup funding under pressure, the company now needs to start generating revenue to sustain its business.

But increasing the commission rates has not gone down too well for the company as drivers are used to higher earnings.

Just this month, drivers of both Ola and Uber went on a two-week-long strike in India’s financial capital Mumbai. The strike highlights the growing dissatisfaction among drivers regarding dipping income, higher commissions, and reduced incentives.

Several drivers told Quartz that their earnings have gone down drastically in the last two years to about Rs50,000-Rs60,000 per month ($700-$800 ), compared with a high of Rs80,000-Rs90,000 monthly income they once enjoyed.

“These mature markets look for quality; they are not as price-conscious as India is. Low ticket-size services like auto, share, and micro has worked for Ola here, but it will not be the same in international markets. It can attract new drivers and users through discounts initially, but once they withdraw those, the company will have to find a way to give a better user experience. That is something Ola struggles with, in India, too,” Meena added.