Low cost business models - overview

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Low Cost Business ModelHow to create no-frills low cost business model and kill the competition

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Successful companies after achieving the product-market fit manage to start growing almost exponentially

Well executed business hacks, tricks and tactics

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One of such business hack was the low cost business model that required total change of approach to specific industry

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Low cost model has been quite successful in many industries

Airlines

Furniture

Buses

Retail

Hotels

Fitness Clubs

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In this presentation you will learn how low cost business model works and how to

apply it to your business

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Low Cost Model-introduction

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In low cost model you have important pillars that fuel the model

Simplified product and services

1 type of assets

Better asset utilization

Efficient process

You target only 80/20

Scale matters

Simplified operations

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Low Cost Business Model -examples

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IKEA

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IKEA has been very successful in implementing low cost model in furniture

Model „big box” built outside the city center

Design

Consistent message

Diversified revenue streams

Operational excellence

Business scale

Retail

Acquisition

Activation

Retention

Revenue

Referral

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Raynair

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Raynair is an example of a great execution of the low cost model in airlines

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

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They have used 1 type of aircrafts and increased their capacity

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

1 type of aircraft

No classes

No reserved places

More places in the plane

Better Loading factor

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They do only point-to-point and use cheap airports

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

Point-to-point

Regional airports

No waiting for passenger

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Raynair is also master of operational excellence

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

Shortest taxi time and turn around time

More courses per day

Shortest time of preparing

Better usage of people

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Raynair has been also very creative on the revenue side

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

Dynamic pricing and not so low prices

Unbundling

Charge for everything

Alternative revenue stream

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Biedronka

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Biedronka keeps it simple on the operational side

Retail

Acquisition

Activation

Retention

Revenue

Referral

Narrow range – they used to have just 1000 SKUs

1 retail format

Optimize supply chain and in-store process

Scale

Expansion model similar to Walmart and Starbucks

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They went deep into product management

Retail

Acquisition

Activation

Retention

Revenue

Referral

Gradual move from discounter to supermarket

Quality and origin obsessed

Own brands & selected premium brands (often powered by)

No e-commerce

For long time excepting only cash

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Fitness clubs

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There are plenty of examples of successful low cost fitness clubs

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

Get rid off things that do not generate sales: reception, sauna, solarium, café, relax room

Unbundling (shower, fitness classes require additional fee)

Low on staff; much more self service

Higher density of machines and usually bigger format

Usually more technologically advanced

Available 24 /7

UK Germany USA

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40

60

80

100

Price Join Online OpeningHours

Club Design Technology Hospitality # of staff

Low cost gym Mid-market gym

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Hotels

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There are plenty of examples of successful low cost hotels

B2C Services

Acquisition

Activation

Retention

Revenue

Referral

Targeted at people who just want to sleep well (sales reps) – extremely comfortable beds

Limited non-core space: reception, kitchen

Very small, densely located rooms with big king-size beds.

Very limited breakfast; no proper restaurants; vending machines available

Very clean and with great smell

Unbundling of services

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Eating Design Room size 24-hourreception

Furniture Bedquality

Hygiene Silence Price

Ibis Budget 1-star 2-star

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Math behind the Low Cost Business Model

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What drives the profitability of low cost model?

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Just let’s have a quick look at the pillars of low cost model

Simplified product and services

1 type of assets

Better asset utilization

Efficient process

You target only 80/20

Scale matters

Simplified operations

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Low Cost Models are great at optimizing the Profit to Assets Ratio

Better and longer usage of assets

1 type of assets

Optimized processes

Quicker change of assets

Using purchasing power to get assets

Fewer processes

Reduce the complexity and limit the choice

Profit

Assets

Unbundling

Dynamic pricing

Creating big purchasing power

Innovative revenue streams

Reduce the dependence on people

Reducing non-core assets

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Compound effect

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There are 2 types of compounding effect. The first one is related to time

Time related

Even if the growth is small applied over long period of time gives big end-results

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Even if the start is modest with time you have the snowball effect. If you grow 10% every period after 10 periods you have 2.6x what you had in the beginning

Time related

Even if the growth is small applied over long period of time gives big end-results

= 2.6 x StartStart x (1+10%)^10

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Second type of compounding is related to operations. By having small improvements in many areas you are generating big difference

Time related Operations related

Even if the growth is small applied over long period of time gives big end-results

A lot of small changes in many areas may produce a big end-results

= 2,6 x StartStart x (1+10%)^10

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Have a look for example on the effect you would have in retail if you improved number of customers by 15% and the average revenue per customer by 20%

Time related Operations related

Even if the growth is small applied over long period of time gives big end-results

A lot of small changes in many areas may produce a big end-results

# of customers Average revenue per customer

Revenues

x

+15%+20%

+38%

= 2,6 x StartStart x (1+10%)^10

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In low cost model you use both effects extensively

Time related Operations related

Even if the growth is small applied over long period of time gives big end-results

A lot of small changes in many areas may produce a big end-results

# of customers Average revenue per customer

Revenues

x

+15%+20%

+38%

= 2,6 x StartStart x (1+10%)^10

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For more business hacks check my on-line course. Below specially for you a big discount. You will find there a lot of additional resources

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Business hacks, tactics and tricks -practical guide

$90$15

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