Two Great Followups on Business Models Post

Not everyone reads comments, so I thought I’d highlight two of the comments on my recent post, Insight into Future Business Models.

Srini pointed to a Business Week article entitled WalMart with Wings, describing how Ryanair gives free or heavily discounted tickets, but then charges passengers for services, sells them goods while they are in the air, sells advertising, and is even eyeing the lucrative possibility of in-flight gambling:

O’Leary’s secret? He thinks like a retailer and charges for absolutely every little thing, except the seat itself. Imagine the seat as akin to a cell phone: It comes free, or nearly free, but its owner winds up spending on all sorts of services. Last year, Ryanair gave away 25% of its seats, a figure O’Leary thinks he can double within five years. In the not-too-distant future, he wants all seats to go for free….


Outrageous? You bet, but the strategy is working. Although its average fare is $53, compared with $92 for Southwest, Ryanair’s net margins are, at 18%, more than double the 7% achieved by Southwest. “Ryanair is Wal-Mart (WMT ) with wings,” says Nick van den Brul, an aviation analyst at Exane BNP Paribas in London.

Michael Schrage pointed to a Financial Times article entitled Why Giveaways are Changing the Rules of Business:

To the extent that business models can be defined as the artful mix of “what companies profitably charge for” versus “what they give away free”, successful innovators are branding and bundling ever-cleverer subsidies into their market offerings. The right “free” fuels growth and profit. Technology has successfully upgraded King Gillette’s classic “razor & blades” business model.

The article gives numerous examples of “cross-subsidization” allowing for “free” products, from Google giving away free applications subsidized by search advertising revenue, to financial services firms offering various free services to attract customers who “pay” by putting their money under management, to the Ryanair example cited above, but also points out that as with any case of cross-subsidization, from Microsoft to Airbus and Boeing, there are both anti-trust and trade issues to consider.

The long and the short of it: though some readers were skeptical, Srini and Michael turned up some strong evidence that the ideas I wrote about are well on their way to becoming mainstream, with some business mavericks pushing them further and faster than anyone might have expected. Stay tuned for a future that is very different from the past. The big question for entrepreneurs: what is the razor, and what is the blade?