Thursday, 23 October 2008

India's airline industry- Nose diving in perfect formation!

An interesting topic addresses by Mr. BV Krishnamurthy on the state of the aviation industry.

The airline industry in India is losing money everyday and by some estimates expected to lose 1.5-1.7 billion USD this year (second only to the US airline industry).

The airline companies in India are upset and asking for the govt. to help them out. They blame fuel costs and the economic downturn.

I don’t believe them.

Take fuel costs. Even two years back when the airlines industry was taking off, the pricing of tickets was not allowing recovery of all costs. They were losing money at the beginning and they are losing money now. In fact, with falling oil prices they should feel happier than 4 months ago.

Take the economic downturn. What has everyone worried is that fill rates are declining. Economic slowdown seems to have everyone cutting costs. Non essential expenses are going out of the window. A downturn is indeed a good time to judge the fundamentals of a business model. Every airline company is suffering and this is unusual. Usually, in a downturn, there is “down-trading” within a category. People go for cheaper alternatives of the same product. Then, if the downturn is longer, they shift to different substitution categories.

Eg: to fight higher fuel costs- you buy a smaller car. (But if you’re already stuck with a big car, you switch categories and use public transport.)

In a downturn, you avoid a Gillette and go for a Wilkinson. Or avoid a Heinz and take a WalMart ketchup. If the downturn is too steep, you avoid ketchups!

In the airline example, you would, in a downturn, move from business class to economy class or from full service to budget airlines. But for travelers to shift from air travel to road transport en-mass means that for them the value proposition of the entire industry has been found wanting. (See- traffic declined by a whopping 19% in September 2008-

In today’s environment then, in India, low cost airlines should be gaining market share. But in India, they are closing down.

What happened?

When budget airlines took off, their ticket prices were indeed low (one fifth regular prices in some cases). But they were never making money. Always below break-even point. As the fuel prices increased, all companies were forced to reflect this into the ticket price as a ”surcharge”. These surcharges are now 80% of the price of the ticket such that the price of a low cost ticket is not much different from a full fare ticket.

These low cost airlines (Deccan airlines being the pack leader) drove first time user growth in the industry. But, fundamentally the “low cost” carriers were a myth. With a cost structure so heavily skewed to fuel prices, managing all other costs is not sufficient to create a truly low cost business model.

Sure, when less than 5% of the Indian population flies with any regularity, setting artificially low prices is a good way to drive growth. But for long term sustainability, the usage of air travel must become regular. What’s the use of market penetrating pricing if the consumer does fundamentally have the income to get hooked onto the category at some stage?

But the low cost airlines were not alone in their enthusiasm. The 30% passenger traffic growths were extrapolated by all airline companies that went on to add more aircrafts and routes....and hence more costs.

In the case of air travel, the consumer is also aware that his purchase is an indulgence. Unlike a TV/ fridge or washing machine which is purchased once in 6 years, and only when seen to be a necessity for which the purchase is planned months in advance.

When a return ticket for a 600 km journey costs Rs 6000 or USD 133 per person, does not the income of a family need to cross a significant level before such purchases become regular? (We estimate this threshold to be Rs. 15L (USD 35K approximately), before they take to flying regularly.)

Then the key questions:
How many households/ consumers in India make this cut? How many planes and airline companies are then really needed to satisfy this demand?

In the last 2-3 years, how many consumers actually flew because the ticket price was artificially low and unsustainable for the airline company?

What kind of government watches and encourages this kind of industry growth?

And now the airline industry is asking the govt. to hand out sops…and keep it afloat!

Why should the tax payer pay for the shortcomings of an incompetent business idea?


PS: on 14th Nov, came across this in the papers:

It seems, the budget airlines are indeed cutting down price to create a differentiation and hence become more attractive to consumers.
On a side note: A good parallel is the car industry. While auto manufacturers have entered the Indian market, they have refused to sell at a loss. The industry had identified new products (low cost car) that makes it more affordable for families to buy and has hence increased penetration. Isn't that a more responsible business model?

Monday, 13 October 2008

Mr Smith and the Leader as a Principled Pragmatist

We are not political writers, more into marketing strategy. Yet an article by Richard Norton Smith ( drew us to it. Its an apt article for these times. The US election this year and India goes to the polls by April next year.

He writes about the leader as a principled pragmatist!

Since we did not know, we would like to add that Richard Norton Smith is a 1975 Harvard graduate and author of eight books; his Thomas E. Dewey and His Times was a finalist for the 1983 Pulitzer Prize. Prior to accepting a 2006 appointment as Scholar in Residence at George Mason University, Smith served as director of the Hoover, Eisenhower, Reagan, Ford, and Lincoln presidential libraries. Presently working on a definitive biography of Nelson A. Rockefeller, Smith is also part of the team creating ambitious new exhibits for Ford's Theater.

Mr. Smith mentions that "Great presidents spend themselves in causes greater than themselves, for purposes nobler than re-election." Such a profound phrase. And no where is this tested as strongly as in India.

India is the land of the Mahatma Gandhi/ Sardar Patel/ Shartri...each a political leader that came to lead based on his moral authority. It is true that each prime minister in India has been built up by his political party over many years of struggling in the land, among the masses building his own political philosophy and succeeding in selling it to his constituency. (the only exception perhaps is Rajiv Gandhi, that experience ended sadly for all)

But as the political awareness and participation has increased, we find ourselves in a land of one billion, with so many special interest groups. Our last 4 governments have held together as coalitions. The Congress (a centre -left) ties up with the radical Left and some representation of "backward classes". There are over 200 registered parties that go to the polls. Compared to two in the US. Each government comes to rule on the basis of promises. Each voter looks only at the promises made by his special interest party. And yet, when you sum together all these promises made by various parties who have now come together to form a coalition, you ask the question how so manypromises can actually be fulfilled?

What does the leader of this coalition do? Who can deliver what the country needs, given that special interest groups have the power to topple the government? Who can argue then that small incremental steps, loaded with compromises, are better than nothing at all? Who can complain then that the rate of change in India remains so slow?

What use is the moral compass when it is in the hands of special interest groups. What is the benefit of winning an election when you know you could be toppled at any time? (the recent withdrawal of support from the Left parties over the nuclear issue is an example).

In a country where so much has to change fundamentally, the purpose of electing a government for 4 years sometimes is pointless. Change takes longer. The seeds sown by one (the hardest part) are seldom reaped by them. Yet anything longer and the political machinery loses accountability (as evident from the decades of rule by the Congress part in the 50s,60,70s and 80s).

Its such a difficult balance. The note forces us to look at this issue with the oncoming elections.

Getting the moral compass right and then having the opportunity over a 4-8 year period is a rare combination. the US at least assures (unless impeached) a 4 year term. In India, the prime minister is no longer sure how long his term wil last.

When a president in the US compromises with this principles in doing what he believes is best for the country, is it any different from when the prime minister in India compromises to ensure his coalition partners dont ditch him?

We cant say, but some day prime minister Manmohan Singh and President Bush will write their memoirs and we might know a bit more.

Do spend some time on the note by Mr. Smith.

Ritu and Venkat

Voice recognition and the promise of "connecting people"

Came across this note today on IBM's Speech Recognition technology initiatives (ambitions). The piece was written by Steve Hamm. Hamm is a senior writer for BusinessWeek in New York and author of the Globespotting blog.

It talks of research being done by IBM and some other companies in voice recognition technologies.

I have no comments on the article itself. Its factual.

I do believe that voice recognition and translation will become a key “killer” functionality of mobile phones as (and when) this technology develops. What I don’t undersatnd is why mobile phone companies like Nokia/ Samsung/ Motorola are not more involved in this- to make the “when” happen faster.

Instead, each company is looking to build the better mousetrap. Adding higher resolution cameras/ mp3 players or touch screens does not fundamentally enhance the benefit of a mobile phone- that of connecting people.

The integration of GPS is indeed enhancing connectivity. But GPS was not developed by the mobile phone companies. They were built independently. Till they caught on and the mobile phone companies (led by Nokia) have sought to integrate them into phones. Why this reactivity?

I have written, in our blog on “connectivity and empowerment”, the two key trends of our times. Products that are enhancing simultaneously our sense of empowerment (expression of choice) and connectivity to our environment, are ruling.

GPS systems enhance the connectivity with our environment, which is provided by a mobile phone. The reason mobile phones have caught on in the first place, is their ability to keep us connected (till we choose to switch it off and become disconnected – the concept of empowerment) all the time.

As technologies advance, the phone will definitely become the credit-card/ mp3 player/ camera/ writing pad/ canvass all in one and at reasonable price points. But i believe we will still be making better mousetraps.

A voice recognition function goes further. The technology in-itself leads to a real time translation system.

Imagine being able to converse with cultures that are “alien” today because we don’t understand the language. How much more connected will we be?

Why then don’t mobile companies invest in this? Why is development left to the IBMs of the world?

What’s Nokia doing to continue its promise of connecting people?


Tuesday, 7 October 2008

Gillette Fusion and Pricing

Premium brands and products dont have the choice of ever lowering their prices.

Gillette Sharpens Its Pitch for Expensive RazorWe picked up this article in the Wall Street Journal on Gillette and its battle to maintain the premium price of its Fusion shaving system in these troubled economic times.
For a few months now we have been struggling to write on pricing and this article is an appropriate place to start. Here’s a brand that’s keeping its pricing and not trying to blame raw materials for an increase or the poor economy for a decrease.

As marketers, we love very deeply the Pricing “P” of the four Ps. It’s the most elegant and decisive proof of a successful marketing plan. Pricing is the most potent signal of how much a marketing team values its own offer to the consumer. It’s a key differentiator in any market.

Most companies leave pricing to the finance team. No way. Marketing does not exist if the pricing is not under the control of the Marketing Manager.

Well, here’s our take on pricing:

1. In our view, you never drop price on a product unless you accept that your value proposition for consumers has dissolved. (Note: this is not always a bad thing in itself. Most outdated technology based products cut price because new technology offers a better value proposition.)

2. Reducing prices to gain volumes and market share is a no-no. Reducing prices to protect against emerging competition is a bigger no-no.

3. On the other hand, price increases is an equally contentious subjects to us. Most companies in the past few months have raised prices on account of “raw material price increases.” Crap!

Crap, because raw material prices are now decreasing, but no one is reducing prices. So it appears that raw material based price increases are only crutches for a marketing team lame on good ideas and a company lame on good products.

Increase prices if you believe you have increased value. If you are following raw material prices in your pricing strategy, make sure you REALLY follow it. In both directions.

4. Essentially, you launch a product at a price point. You maintain it. If you’re creating strong demand, you will have the opportunity to raise prices. However, if entry barriers are low, high margins will attract other competitors. Then either you look for more differentiation to justify high prices (this is good and the basis of all marketing) or you drop prices (which takes us to point 2).

Coming back to Gillette. By not reducing prices of its Fusion shaving system blades, what is Gillette signalling to Venkat?

1. You Venkat, who bought the product for over a year at price X, need not feel that you were overcharged.
2. Because the economy is bad, does not mean our product is any worse.
3. Because the economy is bad, does not mean you, our customer shouldn’t have the best shave money can buy. You might as well stop buying toothpaste and chew on the bark of a “neem” tree.
4. You may choose not to buy the fusion. And we have a number of other products you could choose from. But when you’re feeling better, and think you’re ready to go back to the best, we’ll be waiting.

As a side note: another interesting “premium” brand Louis Vuitton has never had a price promotion (or any sales promotion) in its history. Never.

A price premium position takes years of R&D, marketing, sales efforts to develop.
Once you discount a brand, the expectation of future discounts will always remain. You will never again be completely trusted. There is no way to calculate the current value of these future discounts when taking a price reduction decision.

So Gillette, we salute you. Venkat may not buy a fusion blade for a while, but he will again, one day.

However, Gillette we pick fault with your advertising approach at this time. Your communication now is “In the world of high-performance, what machine can you run for as little as a dollar a week?” Why try to play down your price?

Premium products should never walk that path. Premium products charge a premium for an outstanding product experience. Period.

We would have focused the Gillette ad on the best shave a man can get.
“Sure the world’s looking pretty bleak now… even more reason you pamper yourself in the small ways that you can.”

Ritu and Venkat

Monday, 6 October 2008

Customer Service- a flight of fancy?

Show me the money. Show me the love, people.
Outstanding customer service is often a spontaneous occurrence. Which happens only with truly empowered staff empathizing with their customers.

This piece was inspired by a recent experience with the ticketing department of India’s Kingfisher airlines. While I focus on the airline business, my grudge applies to every consumer centric business.

I enjoy flying Kingfisher airlines. Very polite, well trained staff, clean planes, always a good experience. I am a frequent flyer. In fact when I book for any member of my family, I book Kingfisher.

But even they slip up. Here’s what happened and why I think I am being shortchanged all the time by these marketing folks.

I booked two tickets for my parents. But instead of flying them in first from Mumbai to Bangalore, I booked them Bangalore to Mumbai as first sector. Realized the error five minutes after booking and called the booking centre to make the change.

“Cant be done”, they said.

So I asked them to advance the return sector and push back the first sector.

“Cant be done”, they said. So I asked them to look in their rules and there was nothing to prevent me from doing this.

They still refused and I promptly wrote to Dr. Mallya, the chairman.

Within a few days, I was contacted by a guest relations executive and this was sorted out. Me being given a refund in the form of a travel voucher (that lapsed last week). All this works well. No problem. And I appreciated their promptness.

But here’s my point. The re-imbursement I was asking for was Rs 1500.
I estimate that I have spent over Rs. 100,000 in flight tickets this year with KF. So I am now asking for someone to look at my expenditure on the company’s information systems and waive off a Rs 1500 without my having to bring the chairman into play. (At least the email id I wrote to says “chairman@”)

That would be true customer service.
Outstanding customer service is a spontaneous occurrence. Which happens only with truly empowered staff empathizing with their customers.

KF is not there yet. But then there are so many companies that fail on this account.

My experience in marketing suggests most consumer goods companies spend about 6-8% of their revenues in marketing related activities.

Which means Rs 8000 of my expenditure of Rs 100,000 was spent on marketing. To whom? Not me. KF does not run any print advertisements/ nor TV commercials. So where is my 8000 rupees?

Let’s say that of the 8% spent on marketing, 50% (4%) is spent on acquiring new customers. OK, so maybe that’s why I don’t see that part of the money.

But I still want to see the other Rs 4000 being spent on me. In applying the same rules to me as to someone flying once in three months, what’s my gain?

This is not toothpaste and shampoos I am buying. And I am very serious. This is big money that should be invested in me.

Show me the money! Show me the love, people.

I’m making these cats fat. And I don’t see gratitude. I see free pens and toffees. But I don’t see that they trust me, care for me and respect the business that I contribute.

Is it because they know that I don’t have a choice? Any other airline in India would do exactly this, and some do it with a bigger smile and more free pens.

This note is for companies that want to move to a new level in customer service.

Business analytics is with every company now. Last week, I had a letter from Jet airways asking why I had stopped using their services. ( I was impressed. But then turned cynical. Do I think they would have accepted that I erroneously reversed the order of a journey and wanted that changed- at no cost? Naaah!

So each company has a lot of data on its customers. What we buy, don’t buy etc. So they can surely identify and segment their customers as A,B,C or any which way they choose. Would they not then have some rules for treating these segments differently? I don’t see that.

Remember, when my family flies, I pay but I don’t get the freq flier points. Why cannot an information system track the credit card details to identify the big spenders? If airlines companies really wanted to reward loyalty, they would link the points to the “buyer” of tickets.

Sure a first class customer is treated differently. Frequent flier points give you some free-bees. But where is the differentiation in customer service for a customer that I neither carrying his freq flier card on his face, nor seating himself in first class- but still contributing heavily to business?

Everyone is looking to get new customers. Why is customer retention such a “non issue”? Is it the high switching costs?

It’s a pity. Because “customer service” is a clear opportunity to differentiate in a relevant way. Proper technology married to proper judgment is a powerful tool in producing genuine “wows” for customers.

Technology is bringing powerful information to corporations and their customer facing staff. Even the most “subjective” decisions can be quantified and modeled in order to produce objective guidelines.

We seem to have the technology.
We seem to have well trained people.

So what stops companies from treating us as the unique individuals we really are?