Learning from Failure — Negative Unit Economics

Peppertap was a pioneer in the hyper-local grocery delivery space in India. By October 2015, they were one of the top 3 grocery delivery companies in India, doing slightly more than 20,000 orders per day. It just announced a few days back that it is closing down.

One of the biggest reasons for its closure was the negative unit economics the business model faced. In India, discounting has been the most commonly used tool by startups to attract customers. Peppertap was also using the lure of cheaper prices to attract customers. Also the committed delivery time (of less than 2 hours) meant that company was having to spend money to create spare capacity in its logistics and supply chain. This too had a significant cost.

The startup was effectively bearing a big loss on every sale owing to discounts and the logistics costs. Since this loss was not visibly looking to come down drastically even in the longer term, the founders decided to close the startup.

Advice — A startup can bear negative unit economics in the short term. However in the longer term, positive unit economics are a must for the business to sustain.