Thursday, May 01, 2014

Time to rethink your business model

I am a frequent airline traveler, going from client to client, in the US and frequently overseas on speaking engagements.  As such I am reliant on the airline industry, and aware of its increasingly poor service and constrained flights.  What's really appalling, however, is to see the airline industry eagerly import failed business concepts and models from other industries.  I refer here to the fact that the airlines increasingly are making the majority, if not all of their profits, from fees.  Baggage fees were the starter, but increasingly we are seeking new fees emerge.  Frontier Airlines has the latest - a fee for carry on baggage.  What were these folks doing over the last few years?  Did they entirely miss the issues associated with fees and the resulting impact on the financial services industry?

The CFPB exists today, in large part, because Congress felt that people were being taken advantage of in financial services and charged extortionate fees.  One can imagine in the near future that the FAA or FTC will decide to investigate airline fees, and will create a consumer protection agency to ensure appropriate notification of fees beyond the base ticket price of an airline.  Is this really where the airline industry wants to go?  Are they so bereft of new ideas that they are actually importing failed concepts from other industries?

When your profit model is reliant on charging your customer for things they think should be part of the base package, or for making money when your customer makes mistakes, you may want to start thinking about new business models.  There are a number of factors here, and not nearly enough ink to address them all.  Two in particular stand out:  is your profitability model and business model so constrained that you must charge for services that were once free?  and, do you possibly comprehend the idea of customer experience as a leading indicator for differentiation, growth and longevity?

Business Model Innovation

If your business model is so obsolete that the only way to make money is to extract fees when your customers make mistakes, or to charge for stuff that was once free, it's time to innovate your business model.  I know the airline industry has crappy conditions.  The airlines can't control the weather, they are highly regulated, their main inputs (like oil) are highly volatile and they sell a product with rapidly diminishing value ( you can't sell an airline seat once the flight has left the tarmac).  Yet these are simply factors of competition.  Yes, it's a tough market, but one you chose to participate in.  Perhaps instead of adopting and importing business practices that failed and led to more regulation, you'd spend time innovating and thinking about new business models, new partnerships and new customer experiences that drive more value and more margin, or which take out more cost.

For example, if Google can drive its profits through the roof with advertising, why can't the airline industry?  If I were the major carrier in Cincinnati, for instance, I might strike a deal with P&G to become the "P&G" airline.  Everything on planes entering or leaving Cincinnati would have P&G advertising, P&G products.  Ideally, P&G would pay for this additional advertising, cutting the costs of flights or increasing revenue on those flights.  There have got to be other, more compelling ways to make money, and to provide...

Customer Experience

In the long run, customer experience is what matters.  In a commoditized market (I'm again looking at you, airline industry) the race to the bottom continues.  But what will sustain and even drive differentiation and share gains is customer experience. Everyone tries the cheapest option once, but once they've encountered the fees and tradeoffs, they will seek out firms that offer low price but excellent customer experience.  Right now, Southwest is the only one who gets this, and frankly I think they've strayed from their path a bit.  Think about your favorite restaurant.  You may go there for the food, or atmosphere, or location, but I bet a lot has to do with the customer experience.  Other places may have better food, or better locations, but lack the experience.  The trouble is that many executives in larger organizations simply don't understand the value of customer experience, and certainly don't understand how to deliver it through vast networks of customer facing employees.

Importing Failure

When you find yourself relying on business practices and importing ideas that angered customers in other industries, you shouldn't be surprised at the backlash.  This importation signals to many that the innovation cupboard is bare - there aren't any good ideas.  It's probably time to bring in fresh perspectives and to radically rethink your core business model.  Innovation can help here.  I'm looking at you, airline industry.  What have you got that will change your business models, keep you profitable, and increase customer experience rather than simply race to the bottom?  Importing failed ideas from other industries will only accelerate anger and frustration from your customers.  We passengers are willing to experiment with new models, new channels, new business models.  Will anyone lead a new round of innovation in the airline industry?

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posted by Jeffrey Phillips at 9:03 AM


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