Over the last few weeks I have become fascinated by low cost models in business. Be it airlines, hotels, or indeed banking, many of us are turning to these businesses to find value and in some cases more responsive service.
I have found myself, becoming quickly reliant on ‘apps’ to book low cost travel, buy quality produce from no frills supermarkets and even manage work life through low cost alternatives to traditional players (remember linux).
Okay, maybe I am just cheap…! however, I have also found there is plenty of value there too, with some interesting lessons to be learnt for us all.
The low cost model
After ‘extensive market research‘ it feels like they are three main variations of low cost model in place.
- The ‘all inclusive’. In this model everything is included in the price. It may be cheap, but you are promised the same as the traditional businesses, just for lower cost.
Pros: if everything works well, you get what you need at a much lower cost
Cons: if something goes wrong, there is little margin available for the company to resolve properly, it can be frustrating
- The ‘everything is extra’. In this model you are presented with a rock bottom price, it is unbelievably cheap for the basic service. However everything else is extra, including some things you may expect to be included.
Pros: can be really cheap if you know the tricks to get the deals
Cons: if you end up not being aware of some features, you can get stung with additional charges and end up paying more.
- The ‘half and half’. This is the blended model. Some things are included, some are extra, billed as you need them.
Pros: you get a low cost no frills deal, but with a little extra so there are no surprises
Cons: not as cheap or as great a sense of value as others. Sometimes add ons can be a expensive too.
Hopefully you can recognise these from your own experience (drop me a note if you need an example or two).
However, what does all this mean for us in the rest of the business world?
A focus on cost, a focus on value…
Across the more traditional business world there is continued focus on reducing costs. We are all looking for opportunity to do more with less it seems.
In this environment, the low cost business model seems very attractive and is being pursued by some as a clear strategy. They are transforming their businesses in order to be competitive; digital automation is a hot topic, as is reducing cost and eliminating waste.
However, there is much more to this than just automation and slashing expense.
A template for organisational culture change…
In many ways these low cost businesses also offer a template for cultural change, re-thinking and streamlining products. It is not just about being the cheapest, but also how to offer the most value. Key to this is how the business interacts with the customer; there are extra new rules is seems.
- Automate, but keep the customer informed at all times where they are in the new process. Transparency is key.
- Build in standardised flexibilty, but still stick to the process. Unplanned variation costs money, standardised processes generate economies of scale
- Find alternatives to traditional suppliers. There is a lot of flexibilty out there, spend only on what you need and similarly look for net value not just lowest cost
- Provide core services (include for most customers), however also have extra services available on an as needed basis. The customer saves as they only spend on what they need. If the price is reasonable they will still buy more.
We are all low cost now…
Undoubtedly these new businesses are shaking up the market. Customer expectations are changing and without legacy products these businesses are moving fast. They are unemcumbered by legacy systems, enabled with new technology and quickly gaining market share.
For the rest of us there is plenty to learn… and it is an opportunity to adopt some of the best practise out there.
Who will win in the end…?
I am not sure it is even a competition. Large established players will gradually transform, taking and incorporating the best ideas into their businesses. New businesses will grow rapidly, becoming large businesses and then become subject to some of same rules as the rest. All we can say is there will be change and standing still is not an option.
However, by watching, listening, and extracting the principles for your own business it is possible to stay abreast of these changes, providing extra value for your customers.
In the end this does sounds like a win to me…..
Last week, I was lucky enough to be able to speak at the latest Arum round table held at the rather grand National Museum of Scotland, overlooking Edinburgh Castle.
