Price Simplification in Practice

The Threat Posed by Simplifiers

There are many cases of companies that appeared to dominate the market, that were extremely profitable and highly valued by the stock market, which collapsed rather suddenly in the face of simplifying insurgents. To take just a few examples:

  • In the 1960s, IBM lost much of its market when DEC introduced minicomputers.

  •  Two decades later, the computer market had become largely a PC market. Despite being the PC market leader from 1981 to 1985, IBM lost its lead to price simplifiers Compaq, Hewlett- Packard, and Dell. IBM stopped making computers in 2005.

  • DEC and Wang lost their business to the PC price simplifiers in the 1980s, after being dominant in their minicomputers and word processors, respectively.

  • Xerox succumbed to Canon and Ricoh after the insurgents introduced smaller, simpler copiers that could sit on a manager’s desk.

  • Kodak lost out to Sony in digital cameras.

  • Lotus, once the leading software company, fell to price simplifier Microsoft.

  • Encyclopaedia Britannica, which had been the market leader for two hundred and twenty two years, was wiped out by price simplifiers Encarta and Wikipedia.

  • The video rental market leader, Blockbuster, was outgunned by Netflix.

  • AltaVista lost its lead in online search to Google.

  • Barnes & Noble was knocked out of the race in books by Amazon.

Air Travel

Commercial airlines provided an elaborate ‘hub and spoke’ route network traversing the globe, so that passengers could fly anywhere on the same ticket, with bags checked through to their final destination; a host of different aircraft to match demand and locations; gradations of class so that the more you paid, the richer the experience; luxurious lounges; and copious meals and drinks on board. The number of routes and standards of service rose continually, but the business system behind the service grew ever more complicated and expensive to operate. Greater complexity required higher fares, yet the airlines were never very profitable and many operated at heavy losses. A mass market for air travel remained elusive.

This pattern was interrupted in 1971, when Herb Kelleher started the first budget airline, Southwest, flying between Dallas, Houston, and San Antonio. Southwest Airlines now flies more passengers within the US than any other airline. What was Kelleher’s secret?

He price-simplified by totally redesigning the product:

  • Point-to-point routes only
  • One cabin class
  • No free refreshments or lounges
  • Use only Boeing 737 aircraft, simplifying maintenance, scheduling and training
  • Ten-minute turnaround at the gate
  • Use secondary airports, which are cheaper and faster
  • Direct sales to customers.

The system worked because low prices meant the planes were full and costs were pared to the bone. But behind Southwest Airlines’ business system redesign lay something even more fundamental. They streamlined flying, making it more affordable and convenient, in the same way that Henry Ford automated making a car, Ingvar Kamprad automated the furniture industry, and the McDonald brothers automated making hamburgers.