This Flight Has A Two Drink Minimum

from the business-model-decisions dept

Following our post this morning about the concept of software providers paying people to use their software (or, at the least, giving away software supported by advertising), The Stalwart has an interesting post on related lines about Irish discount airline Ryanair claiming that they may give away flights for free supported by revenue from online drinks and (mainly) gambling. Yes, they basically want to turn airplanes into flying casinos. Admission (and travel) is free, but they expect you to give up your hard earned dollars to the house... er... plane. The Stalwart does a nice job explaining why most of these efforts are a bastardization of King Gillette's "give away the razor, sell the blade" business model, which has more recently morphed into the "give away the *fill in the blank*, sell ads" in pretty much every hyped up business plan you see these days.

The real issue in these business models is always which part should be given away for free. Free stuff, contrary to the prevailing opinion in the entertainment industry these days, is a valuable business idea if it's recognized that the free stuff has promotional value that helps to sell the other stuff. The razor helps to sell blades. iTunes helps to sell more iPods. But why isn't it the other way around? Why are iTunes the loss leader instead of the iPods? It should come down to marginal costs. You want whatever you're giving away or deeply discounting to have low marginal costs, so even if people abuse the offer (and they will), your cost remains low. You also want something that really does drive demand to the paid part, rather than hopefully sorta gets people interested in the paid part. Applying both those standards it's pretty easy to see why things like free PCs (supported by ads!) fail, and why free flights supported by suckers gamblers will almost definitely run into trouble as well. The "free" part has a high marginal cost to the provider, and does almost nothing to actually drive people to the part that gives the company revenue. Since the free part has value by itself, you run into something of an adverse selection problem, where those free seats get taken up by people with absolutely no intention of spending a dime on any extra offerings. The Ryanair situation is a bit more complicated, as they've already been successfully giving away plenty of seats for a while, filling up otherwise empty seats (taking the marginal cost issue in the other direction), but you have to worry how sustainable such moves are. They're creating the expectation of free flights, which are expensive to the airline, and hoping that enough people will take up these extra offerings to make it worthwhile. It may cut down on some administrative costs, but it's also going to cause a lot of problems.



Reader Comments (rss)

(Flattened / Threaded)

  1.  
    identicon
    Anonymous of Course, Nov 9th, 2005 @ 11:05am

    Giving People what they want

    In the early 90's I was on of many engineers involved with the Matsushita Avionics in-flight entertainment system which was used on the Boeing 747-400, 767 and Airbus A3xx (I'm not sure of the Airbus model number.) Companies like Lufthansa, Singapore Airlines and Cathay Air adopted the system which provides video/audio on demand, gaming, duty free shopping, video games... A few years later I was told that they were making four million US dollars a month by providing content for these systems. This was a very new thing at the time and I was quite surprised. The hardware is nothing, the content is everything, of course

     

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