Business model innovation – Southwest

In: Companies, Entrepreneurship / 12 comments

29 Nov 2009

I really like to study business models, models for building a product and a market, especially in industries that have nothing to do with the IT industry, for various reasons: from time to time, I get out of the box I’m in, I learn that the world is bigger than IT, I find good ideas, analogies that can be applied or not. After I went to the States last month (and in preparation for my next trip this month 🙁 ) I would like to tell you about Southwest, a low-cost airline company.

Understanding the problems. People realized a few years ago (probably during the airline crisis in 2003/2004) that all airline companies do things the same way and that they are going down. They probably analyzed (many consultants, a lot of money spent?) what the elements that discourage people from flying more are (increase sales) and how they can do things in order to have lower expenses (of course, cutting costs), so as to obtain a higher profit through simple arithmetic. And let’s see what they found:

Long flights are less profitable than short ones. It’s true; if you look at our country also, flying to London costs as much as flying to Budapest. What’s more, in the States, many people fly from one place to the other, travelling distances between 300-700 miles. So, Southwest redefined itself as a short flight airline. They focused a lot on it from the point of view of marketing and from the point of view of operations. All in all, now if you want to fly with Southwest from San Francisco to New York, you do it with 3 or 4 stops. In fact, you don’t do it with this airline; you go to a different one. They accepted this loss, balancing it with all the (more profitable!) earnings from short flights, a market they completely conquered.

The classical check-in (with seat reservation) is expensive, inefficient and creates frustration among clients. So they invented (I don’t know if someone did this before them…) the following system: you go inside the plane in the order of the number written on your ticket and you can sit anywhere you like, on the seats available at that time. They have two classes – business and economy, different in that, if you take business class, you are among the first 15 entering the plane; economy is all the rest. And only to enter the plane earlier, they charge you 20$ more.

Load factor management. One of the biggest problems, both for planes, and for hotels, is the fact that there are days/hours when the load (demand) is 100%, and days/hours when the load is very small. How can you actually manage more effectively this situation for your company, so that on high load areas you can sell at a higher cost, and in the small load areas you can still sell something, at a cheaper price, without endangering the price of busy days? These guys solved the issue this way:
Business tickets can move from one flight to the other guaranteed. Meaning that if you finished the job sooner, you can take an earlier flight (yes, they have flights every half an hour…).
Economy tickets are cheaper but are fixed. You go on the plane in the order of arrival, after the first 15.
– And they have another type of tickets, a very interesting one: “wanna get away“. They are very cheap (40$), but you allow the airline to move your flight to the next available one, or to the next, or to the next… until there is a flight that has a seat for you. So they win because they basically auctioned the busy flights at a higher price and they filled the empty flights at a cheaper fare, but then those who want security and good seats (more expensive) also win, and so do the ones that want to fly cheaper and afford to postpone the flight for a few hours.

As I was saying in the beginning: it is interesting to see how well they understood their clients’ problems and how well and simple they solved them. And that’s how they got so big – see here some interesting figures about them.

As a friend of mine once said – “any Romanian is smarter than any American, but any 5 Americans are smarter than any 5 Romanians”. The math is probably wrong but, statistically, it gives us an idea…

(English version by Teodora Popescu)

Original Romanian version

Inovatia in modele de business – Southwest

Studiez cu mare placere modele de business, de constructie a unui produs si a unei piete. Mai ales din industrii care nu au legatura cu industria IT, din mai multe motive: mai ies din cutia in care ma aflu, invat mereu ca lumea este mai mare decat ITul, gasesc idei bune, analogii care se pot aplica sau nu. Dupa drumul in state de luna trecuta (si in pregatirea celui de luna asta 🙁 ) v-as povesti despre Southwest, companie aeriana lowcost.

Intelegerea problemelor. Oamenii au realizat acum ceva ani (probabil ca in timpul crizei liniilor aeriene din 2003/2004?) ca toate firmele de transpurt aerian fac lucrurile la fel si ca se duc in jos. Au analizat probabil (multi consultanti, multi bani cheltuiti?) care sunt elementele care retin oamenii sa zboare mai mult (cresterea vanzarilor) si cum oare sa faca ei sa aibe cheltuieli mai mic (bine’nteles, scaderea costurilor). Ca prin aritmetica sa ramana cu un profit mai mare. Si sa vedem ce au gasit:

Zborurile lungi sunt mai putin profitabile decat cele scurte. Adevarat, daca te uiti si pe la noi, costa cam la fel sa zbori pana la Londra si pana la Budapesta. Mai mult, in state zboara multa lume de ici colo, pe distante de 300-700 de mile. Asa ca s-au redefinit ca companie de zboruri scurte. Focus mare pe asta atat ca marketing, cat si ca operatiuni. Una peste alta, acum daca vrei sa zbori Southwest din San Francisco pana in New York, o faci din 3 sau 4 bucati. De fapt nu o faci de loc cu ei, te duci la altcineva. Si-au asumat aceasta pierdere, balansand-o cu toate castigurile (mai profitabile!) din zborurile scurte, piata pe care au cucerit-o complet.

Check-in-ul clasic (cu rezervare de loc) este costisitor, ineficient si creaza frustrari clientilor. Asa ca au inventat (nu stiu daca nu cumva a mai facut cineva asta inaintea lor…) urmatorul sistem: se intra in avion in ordinea numarului de pe bilet si poti sta unde vrei, pe locurile ramase libere la momentul acela. Au doua clase – business si economic, diferite prin faptul ca daca iei business esti in primii 15 care intra in avion, economic – restul. Si doar ca sa intri mai devreme in avion te taxeaza 20$ mai scump.

Gestiunea coeficientului de incarcare. Una din marile probleme atat la avioane cate si la hoteluri este data de faptul ca exista zile/ore cu incarcare (cerere) peste 100% si zile/ore cu incarcare mica. Cum faci sa licitezi cat mai eficient pentru companie situatia, astfel incat pe zonele de incarcare mare sa vinzi scump, iar pe cele de incarcare mica totusi sa vinzi ceva, ieftin, fara sa periclitezi pretul zilelor incarcate? Oamenii astia au rezolvat-o asa:
– Biletele business se pot muta de la ocursa la alta garantat. Adica daca ai terminat treaba mai devreme poti sa te duci cu un avion mai devreme (da, oamenii au curse din jumatate in jumatate de ora…).
– Biletele economy costa mai ieftin si sunt fixe. Intri in avion in ordinea venirii, dupa primii 15.
– Si mai au un tip de bilete, foarte interesant: “wanna get away“. Costa foarte putin (40$) si le dai voie sa te mute din zborul tau in urmatorul, sau in urmatorul… pana cand e un zbor care are un loc pentru tine. Asa castiga si ei ca practic au licitat zborurile aglomerate mai scump si au umplut zborurile goale mai ieftin, castiga si cei care vor siguranta si locuri bune (mai scump), si cei care vor sa zboare ieftin si isi permit sa amane zborul cateva ore.

Cum ziceam si la inceput: interesant cat de bine au inteles problemele clientilor si cat de bine si simplu le-au rezolvat. Si asa au ajuns mari, vezi aici cateva cifre interesante despre ei.

Cum zicea un prieten: orice roman e mai destept decat orice american, oricare 5 americani sunt mai destepti decat oricare 5 romani. Matematic gresit probabil, dar statistic ne da o idee….

Comments

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Radu Panciuc

November 29th, 2009 at 10:03 pm

Southwest erau renumiti si pentru timpul scurt dintre zboruri dar si pentru personalul foarte bine instruit (i.e. stewardesele si pilotii faceau mai mult decat jobul lor obisnuit pentru a taia din costuri si a scoate un timp record la redecolare). Sunt destul de renumiti in State pentru aceste lucruri, Southwest fiind studiat intens prin universitatile de peste ocean.

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Bogdan

November 30th, 2009 at 11:03 am

Buna Radu,

Poti sa-mi dai titlul cartii din care citesti despre modelele de business?

Mersi anticipat,

Bogdan

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    Radu

    November 30th, 2009 at 11:18 am

    Bogdan,

    nu am o carte anume – ma uit si eu in jur si vad lucruri. Apoi ma dau pe net si aflu, trec prin putul gandirii si ma intreb ce as putea sa invat eu din asta.

    Cum vezi, sunt foarte multe lucruri pe care le aflu chiar aici din raspunsuri – ce spune Radu Panciuc nu stiam…

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    Radu Panciuc

    November 30th, 2009 at 11:24 am

    Cred ca gasesti in librarii manuale de Marketing, Business Ethics, Organizational Theory and Behaviour care sa prezinte aceste cazuri. Eu nu mai tin minte exact la ce disciplina am studiat acest caz dar daca ai putin timp liber sa rasfoiesti niste carti in librarie atunci cu siguranta ai sa gasesti ce vrei 🙂

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Alex

November 30th, 2009 at 11:18 am

Asta cu renuntarea la rezervarea locului si alegerea locului in ordinea intrarii in avion nu stiu daca ar merge in balcani.. cel mai probabil s-ar forma imbulzeala la boarding… 🙂
Ref. la cine e mai destept dintre un roman si un american.. in primul rand depinde daca prin destept intelegi mai degraba smecher, si un roman (vorbind in general) sigur asta intelege si in al doilea rand depinde de unde iei americanu’.. ca daca-l iei din mecdonaldz….
Acu’ serios vorbind, daca e sa cautam modele de business sanatos, din care nu neaparat o parte pierde, facem bine daca ne uitam spre americani.

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A.Faith

December 1st, 2009 at 4:06 am

foarte interesante rezolvările pe care le-au găsit.

referitor la ceea ce ai zis la final, aş vrea să ştiu dacă am tras concluzia corectă: munca în echipă face totul. degeaba e unul deştept (şi leneş aş mai adăuga eu), dacă 5 proşti pot face munca lui.

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Dorel Bajaliu

December 1st, 2009 at 1:25 pm

Hi all,
Modelul de la Southwest se remarca prin simplitate, fara proceduri complicate si la indemina clientilor din varii segmente.
Intr-adevar modelele simple, apropiate de modelele din natura castiga tot mai mult teren si sunt de succes.

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Daniel

December 1st, 2009 at 8:12 pm

Re: “Intri in avion in ordinea venirii” – este putin incorect. Sistemul formeaza intr-adevar o coada de imbarcare dar se pleaca de la ordinea checkin-ului – Southwest iti asociaza apoi un numar de ordine pentru imbarcare care consta in litere (A,B,C, etc) – clasa business are A implicit iar restul biletelor primesc la check-in.

@Alex – imbulzeala se poate crea doar in sistemele ce o permit – in US sistemele sint mult evoluate (e.g. sistemele de formare a cozilor la ghisee) – e un subiect de studiat insa, sint de acord.

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online

December 18th, 2009 at 4:32 pm

invatat o multime

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Tweets that mention Inovatia in modele de business – Southwest | Radu Georgescu -- Topsy.com

November 29th, 2009 at 8:59 pm

[…] This post was mentioned on Twitter by Filip Chereches-Tosa, Radu Georgescu. Radu Georgescu said: Blog post: Despre inovatie in modelul de business: http://www.radugeorgescu.ro/2009/11/29/inovatia-in-modele-de-business-southwest/ […]

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November 29th, 2009 at 11:31 pm

Social comments and analytics for this post…

This post was mentioned on Twitter by GeorgescuRadu: Blog post: Despre inovatie in modelul de business: http://www.radugeorgescu.ro/2009/11/29/inovatia-in-modele-de-business-southwest/

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