Illustrating business model change

On the dawn flight to London this morning, I was busy enjoying my complimentary sausage, egg and bacon breakfast and pondering how British Airways manages to eke out a profit from my £36.50 fare. Airlines and telecom can often serve as examples for each other. Both involve capturing as much value as possible from sunk network capital whose momentary value is lost forever if not filled with people or packets.

I'm a regular traveller between Scotland and London. Each time I book I check the relative merits of the train as well as BA, bmi, and EasyJet. I'm quite good at avoiding handing over much money. After all, I am a bit Scottish. Yet by bundling and selling its product differently, BA could make more out of me.

Instead of sustaining the cost of me booking over and over, BA could offer me a booklet of pre-paid travel vouchers. These would be discounted slightly, and redeemable against any flight. Peak time flights would involve a surcharge between the voucher value and full fare. The vouchers would also allow some additional change and refund flexibility not available on standard public fares. BA gets to keep me as a customer for longer, my loyalty increases as I'm less prone to gain frequent flyer status on a rival, and their free cashflow gets a boost.

This is a way of differentiating itself through following a different business model archetype or template. Every business attempts to differentiate itself from potential rivals. There are maybe 8 or 10 different buckets into which you can classify each attempt at business model differentiation. One such generic business model is product differentiation, which is often seen as being synonymous with "differentiation" but is only one form. In this case, it was the offer of an inclusive breakfast, not offered by rival bmi, and pre-selected seating when I checked in online the night before, not offered by any rival. In this case, it's an expensive proposition for BA, as they have only weak competitive advantage in keeping me fed compared to airport vendors.

There are other means of differentiation of business models. For example, it could be the production method. In the case of airlines, they all fly similar planes. However, for a company like Toyota, it made relatively ordinary cars using a uniquely productive lean manufacturing system.

In the case of the coupon book of flight vouchers, BA would be differentiating itself through how the product is sold. The flight can be ordinary even if the way it is transacted is not. Another example of this might be Avon Cosmetics: ordinary lipstick sold in an extraordinary manner.

So, how could we apply these ideas to telecom? Telcos are desperate to differentiate themselves. A consistently successful differentiation strategy has been "distribution" -- i.e. network coverage that makes your service available where rivals cannot reach. This continues to be the case with developments in fixed-mobile convergence in markets where in-building mobile coverage remains weak.

But can a telco differentiate itself on sales method rather than product or distribution? How could a telco make use of the BA coupon-book or Avon cosmetics pattern? Well, you might take a highly standard product like a generic family mobile voice+messaging plan, and bundle it with some other product that helps to reduce churn. Since mobile phone costs are one of the larger items in the family budget, ideally we'd chose a product with even larger cost (in which we can hide out price) and with even lower churn. How about one of these...?

"Hurry while stocks last! Re-mortgage with us and qualify for unlimited UK calls for you and your family*!"

Naturally, you won't expect the most competitive possible interest rate -- something has to give. The operator would be expected to give a hefty discount to the reseller, and one that reflects the exceptionally low anticipated churn. Plus there's that pesky asterisk -- when a telco says they are "deploying an asterisk solution" they aren't referring to the usual meaning.

Given the struggles telcos face in devising compelling applications and services for IMS, perhaps some back-to-basics business model re-think is in order? Funnily enough, our own survey said the same thing.