This is a story about Southwest Airlines, an 18th century French economist, and a simple way to build a better and more profitable business.
It starts with an observation–one I won’t be the first person to make. It’s that there are really only two business models in the world:
- The first is bundling.
- The second is unbundling.
Simple, right? Imagine you’re an entrepreneur. You try to create things for customers. You gather and improve, over and over, in order to increase your value proposition. You bundle it all together.
But then, somebody realizes that some customers want some of the things you offer more than they want the other things.
Maybe you realize that you’re under-valuing what you already offer, so you come up with add-ons that people can pay more for if they want.
Or else, maybe you decide to target another market you’ve discovered that turns out to be more price-conscious. So you strip everything down and try to entice those low-cost consumers with an unbundled product.
It gets a bit trickier when the whole process becomes cyclical, and self-reinforcing. People’s reactions to one new bundled or unbundled package begin to influence how they react to all the others.
It’s a challenge, and it’s been around forever. The earliest cogent explanation I’ve found of the dilemma comes from the French economist Jules Dupuit back in 1849, examining how early railroads decided what perks to give, and not give, with each class of railway tickets.
Granted, a 173-year-old French language economics text might not be the most accessible guide to solving this problem today. Maybe you’d like something a bit more practical.
If so, allow me to introduce you to (of all things): the newly announced, long-awaited, “Wanna Get Away Plus” fare product from Southwest Airlines.
I know, I know. That’s a lot fanfare for a new fare.
But this is why I think business owners in any industry should study the airlines: They’re a highly scrutinized commodity industry, dealing with many of the same challenges you face.
Every tiny decision they make is picked apart by a legion of analysts, investors, and journalists, and this announcement from Southwest Airlines might be the most intriguing example yet.
The point will become more clear in the details. We start with the fact that Southwest Airlines is a low-cost carrier with generally high customer satisfaction ratings and a $27 billion-plus market capitalization.
It’s also unique, largely because of how it bundles and unbundles its products.
For example, Southwest flies one type of plane (variations of the Boeing 737), and it offers only one type of seat. There are no business class or first class accommodations.
In fact there are no assigned seats at all; Southwest uses a modified form of first-come, first-served seating.
And while other airlines have unbundled a lot of air travel add-ons that used to be bundled (for example, the right to check luggage or even bring a carry-on bag aboard), Southwest bundles most of it into the price of a ticket.
Additionally, Southwest has remained remarkably consistent in terms of the specific fare classes it offers. For 15 years dating back to 2007, the airline has offered only three types of fares:
- Wanna Get Away, which is the lowest-cost, non-refundable fare. It also accounts for a majority of bookings.
- Anytime, which is the middle offering.
- Business Select, which is the most expensive fare and offers perks like priority boarding.
The new “Wanna Get Away Plus” fare will fit between the “Wanna Get Away” and “Anytime” fares. Among other things, it gives passengers a bit more credit with Southwest’s frequent flyer program (Rapid Rewards), and it lets passengers who don’t wind up using their tickets transfer future credits to someone else.
You can find the whole list of features here; if you had to compare it to other airlines’ offerings, it might be closest to “economy plus.” For our purposes, the main point is that these are truly incremental products.
In the air travel industry, once an airline establishes that it can deliver passengers safely and on time from one place to another, most of the room for differentiation lies along the edges. In fact, so much competition happens along the edges that passengers can start thinking as much about the edges as the core product.
- What kinds of snacks and meals are available?
- How much room is there from my seat to seat in front of me?
- Can I carry my bag aboard the flight, or do I have to check it and wait for it at the airport? And does it cost me extra if I do that?
In other words: What’s in the bundle? What’s not? How badly do I want the extras?
It’s also interesting how Southwest came up with this new fare category. The airline was at pains in its official announcement to point out that it didn’t take anything away from its core low-cost fare in order to make this slightly more expensive one more enticing.
Instead, Southwest managed to dream up new perks that they hadn’t offered before, and that don’t cost the airline much in terms of time, personnel, or money. Then, they bundled them into a new product, as opposed to offering them a la carte.
Will it work? Obviously that remains to be seen; in fact the new fare product won’t actually be offered for a few more months.
But, as I write in my free e-book, Flying Business Class: 10 Rules for Leaders From the U.S. Airlines, the big airlines offer a nonstop parade of business-school-style case studies.
This one will be fun to watch, and instructive, too. No French language translation app required.