Value Migration and Business Design

A business design could be in one of three phases. Value could be flowing in, staying stable or flowing out. A business design can be altered to attract and retain value by focusing on the end customer. Sounds simple, right? It is meant to be.

I like the airlines industry so I am going to focus on that to expand on this concept. The airline industry encountered an external event in 1978 that changed it. It was deregulation. Long story short, the legacy airlines focused on profits, forgot about the customer and almost three decades later, here we are. Meanwhile, several Low Cast Carriers (LCCs) emerged. A few of them survived, the most beloved example being that of Southwest.

Recently, we have Virgin Air plying on the coveted LAX – JFK route. This is the cherry on the cake amongst the airline routes. The customer base is movie moguls, I am told. Virgin Air is going to try it’s very best to please these folks. JetBlue and Southwest will do their part to woo these folks as well because this would be the profitable tranche of the customer base.

So, getting back to that elusive thing, ‘value’ in terms of business design. LCC provide value at low prices. The customer base on this route is not looking for value at the best price. These folks might travel via Virgin for the ‘novelty factor’ and the VS PJ party but they would just as well take a United flight for $2,500.

How do these airlines intend to retain value? And, more importantly how do they define value for the different tranches of the customer base? Is there one formula that would satisfy all? Because it is one airline and more importantly, the plane is a whole, although they might be able to divide the service components between the areas of the airplane.

For the humor factor, let’s imagine, we have a passenger who paid $139 to fly from LAX to JFK and we have another passenger who paid $439. Let’s say they are sitting in the Economy section of the plane. How will the service differ for these passengers? Will the $139 passenger not get the soda drink he requested? Similarly, the add-on services are no longer at this point (air borne) a factor of their ticket prices. It is a factor of how good they feel as customers receiving the default service and their financial comfort level.

So, again, what is value and how do you retain it? You look at the business model and align it with where you can capture the most of it.