Beyond the Low-Cost Business

Widespread low-price supply and demand across all ranges of products and services has become, in Europe and in America, the dominant trend in the first decade of the 21st century. This is no passing phenomenon; its effects are going to be felt for many years to come. Yet, despite the mass implementation of the low-cost concept, a change that has occurred recently highlights the need for an in-depth analysis of its good and bad points. The good points include, for example, démocratisation of consumption, insofar as all kinds of products and product categories have been brought closer to the customer. Brands that were beyond the reach of the ordinary consumer through traditional channels can now be found at reduced prices in physical or online outlets, or reinvented as basic, low-price products, producing similar level of consumer satisfaction, or some altogether new kind of satisfaction. Businesses have innovated in this way to cut costs and to offer a price to suit any time and any pocket. Consumption, has actually been growing during the low-cost phenomenon, so during the financial crisis consumers are buying practically the same quantity of goods, but for less money. However, on the negative side we cannot ignore the confusion surrounding product and service quality; consumers have some serious questions about how much they should be paying for what they are offered: “Am I paying the right price, or am I spending too much in this transaction for the value obtained?” they wonder. There is too much confusion about how the value of the goods is shown, and that reflects negatively on companies that are unwilling to be clear about it.

As had already happened with US air-traffic deregulation in 1978, the European low-cost phenomenon first appeared in the wake of the price war between certain airlines attempting to break into the market following European air-traffic deregulation in 1997. Another cause was the widespread demand for low prices on the part of consumers as a result of heightened price sensitivity. The confluence of supply and demand, which came about over the last decade, caused the position of price as a deciding factor in the valuation of a product to change definitively. Where it had once been towards the end of the pre-purchase process, it now had a new, pre-eminent position as the absolute initial purchase discriminator, at the moment that the purchase is first conceived.

The old marketing paradigm has undergone a radical change — rather than setting up assets and supplies to create a specific offer aimed at the customer via a selected channel, the formula has been turned around (Kotier, Jain and Maesincee, 2002), and it is now the customers who clearly state what they want, the format, the price they are willing to pay at any given time and the choice of purchase channel. Companies who can take on all this, have to identify the supplies and assets necessary for production. So the investment and production model is reversed, with the offer now being based on what the customer demands. Price has gone from being just one of the important attributes of the product to being a key driver in the decision-making process. From now on it is produced separately, insofar as the business is able to base a price on consumer value. Strategic pricing will mean coordinating marketing interrelations and financial decisions to arrive at profitable prices. To achieve this, there has to be a new focus, a strategic stimulus that creates interdepartmental coherence in marketing and finance and across the rest of the organisation, based on:

understanding segments according to variables and reference factors; identifying the company’s competitive advantages in order to focus on the target segment;

understanding the cost structure behind the new strategy;

taking into account the competitors and their competitive capacity;

setting different prices for each offer, according to price sensitivity;

price management based on integration of strategic objectives, bearing in mind the product life cycle and seeking maximum returns at each stage (Valls and Alfaro, 2008);

trying to anticipate change, technological and otherwise, which can alter previous models substantially by influencing the value chain.

The airline companies took a radical “no-frills” attitude right from the start. Moreover, the extras they had included before (newspapers and magazines, in-flight meals, complimentary drinks, seat reservation, loading excess baggage, etc.) all became new sources of income. As time passed, practically all these cost-cutting policies were adopted by the classic companies. British Airways and Iberia even took the risky step of asking their clientele about charging for excess baggage. It is clear that travellers will never give up the most basic benefits offered by all airlines (transport and safety), but millions of travellers are willing, if the price is low enough, to travel to airports at some distance from the destination, or to pay for their own food and drink or excess baggage as long as these two key factors of carriage to a specific destination and air safety are retained (even agreeing to walk a short distance if necessary).

When Marino Maganto, Director of the Badalona IKEA store and head of the planned opening of the centre at Gran Vía 2, looked at the ad agency’s storyboard, he nodded. He liked aggressive advertising and this proposal was just that. In spades. He was just about to open the second IKEA centre in Barcelona’s Metropolitan Area, and the advertising campaign was going to be intense.

Companies’ response to the new price sensitivity was to reinvent the business model, in order to create more satisfaction; to create more wealth. As well as the four case studies in Chapter 4, we now add eight more companies that are openly using innovations connected to the low-cost phenomenon to draw certain general conclusions. We shall mark each of the innovations on a scale of one to five, where one is the lowest and five the highest.