Punch and Counterpunch in the Online Travel Industry

Orbitz Worldwide, the online travel booking agency, competes with the likes of Travelosity and Expedia. Of the three, Orbitz is the most dependent on airline booking fee revenue for its profits. Travelocity and Expedia both reduced fees for their booking of airline tickets before Orbitz. Orbitz held on to protect its margins. Orbitz began losing market share and reversed course. It announced that it would waive booking fees on most flights booked through May. This brings its pricing in line with its competition.

Then Orbitz did the industry one better. In an effort to grab market share and punish its discounting competition, the company announced a new promotion called “Dare to Compare.” This program brings with it a reduction in service fees on hotel rooms booked on its web site through July 15th. Orbitz is hoping to gain enough market share to offset the reduction in its fees.

Normally, an industry with only three major players is able to protect its pricing structure. Usually, the three players decide there is little to gain in price competition with one another. Apparently, this industry thinks differently. Orbitz most recent reporting found revenue off by 14%, as travelers cut back in the tough economy.

These industry discounts are a waste of margin. The entire industry is likely to copy any leading competitor’s price discounts. After all, the industry lives with the airline industry, where minute-by-minute price matching has become a non-clad rule. These discounts don’t mean much to consumers so they are unlikely to energize demand.

Orbitz also took another step recently that is far more promising. It launched a price-assurance program that automatically refunds customers when a hotel rate below the rate they paid appears on its web site and is purchased by another customer. This innovation improves the company’s Reliability in customer eyes (see the Perspective, “Discovering Hidden Pricing Power” on StrategyStreet.com).

For many ideas to improve market share and profits by a judicious use of pricing, see http://www.strategystreet.com/improve/pricing__1/brainstorming_ideas.

Variable Pricing to Shift Demand and Increase Revenues

One of our local snow ski areas has started offering a “no wait” pass for snow skiers on busy days. The pass costs $20. This $20 comes on top of the normal day pass the skier has purchased. This additional pass allows the skier to avoid lift lines by going through the “ski school” entry. Other ski areas have begun charging substantial fees for “close-in” valet parking, while letting most skiers park for free at a further distance from the lift lines.

This variable pricing both reduces demand pressures on some services and increases revenues. These variable price mechanisms have become much more common over the last few years. We see them in airlines, at hotels, sporting events, movies and plays and other venues.

Now the concept has come to art museums. Some years ago, some of the largest art museums in the country learned that it could charge substantial admission fees for special shows. Now some museums are bringing the variable pricing concept to day-to-day operations. Some museums are considering charging a premium for the first hour of every day and on weekends when demand is greater than at other times. Others have noted that special exhibitions become more crowded as the exhibition comes to its ends. So, these museums are considering increasing prices as the end of the special exhibition nears. Others are considering charging a fee for those museum-goers who purchase their tickets online in order to avoid lines.

Really, not bad ideas when you consider that many of these museums are under severe financial pressures these days due to the poor economy and falling attendance. And, across-the-board price increases are likely to drive even more patrons away. These, and many other pricing concepts, are available to help you develop your new pricing ideas. Please see the many brainstorming pricing ideas at www.strategystreet.com/improve/pricing.

Saving Jobs by Outsourcing

SmithCNC-USA is an Ohio firm that helps small midwestern manufacturers obtain components and raw materials from China and Mexico. The firm’s customers are U.S. manufacturers who are doing small and medium sized production runs. These companies are under severe pressure in the United States because of relatively high costs here compared to those in China and Mexico. This company has convinced its customers that they can save a good number of their jobs, and perhaps, even grow, by outsourcing only part of their production to cheaper foreign sources. The company convinces its customers to outsource just some components in order to save the rest of the jobs in the customer’s organization.

This cost reduction effort is an example of one of the ways companies are able to reduce the cost of Inputs used to produce product Output. A reduction in the rate of cost a company must pay for the Inputs used to produce product Output is equivalent to reducing the number of Inputs. A person earning $10 an hour, who can replace another earning $20 an hour, effectively cuts the labor input by 50%.

There are several ways that companies have found to reduce the rate of cost they pay for their Inputs. These include the following:

* Purchase in larger quantities
* Reduce the quality of the Input
* Change the components in the rate of cost
* Use subsidies offered by third parties
* Request the supplier to lower the price of the Input
* Change the source of supply to a less expensive supplier
* Expand in-house work

The SmithCNC-USA work is an example of a change in the source of supply, which reduces the effective Inputs required to produce the product Output.

For many more examples of ways to reduce the rate of cost you must pay for your Inputs, please see www/strategystreet/improve/costs/reduce the rate of cost.

Product Innovation Using Twitter and Tweetups - Part 2

Kraft Foods plans to introduce its DiGiorno flatbed pizza by offering to host Tweetups for influential users of Twitter (see Part 1 of this blog). In Part 1 of this blog, we described three major types of customer segmentation by need: Physical, Emotional and Intellectual. We also described patterns that companies use to innovate products to meet those needs including: providing information, reducing resources the customer requires for the use of the product and improving the experience the customer has with the product.

In this Part 2 of the blog, we will illustrate the segments of customer needs and the product innovations that Kraft has used with this DiGiorno introduction.

Here are some segments of customer needs that Kraft is addressing with its innovations. Each of the indented concepts is a further refinement of the concept above it:

A. Segments with Intellectual needs

-----1. Knowledge of company and company's product

----------a. Segment with limited or no familiarity with the product

---------------1) Segment using a similar product

B. Segments with Emotional needs

-----1. Segment with needs for status in the community

----------a. Segment with needs for affiliation

---------------1) With a group on the cutting edge

The company addresses these segments with the following patterns of product innovation. Each of the indented concepts is a further refinement of the concept above it:

A. Provide information to the segment

-----1. Attract attention of customers to brand

----------a. Use non-traditional advertising in space available to many people

---------------1) Use an on-line event to provide sampling opportunity

B. Provide a good experience for the initial customer:

-----1. Associate the product with an image to increase customer pleasure in using the product

----------a. Suggest personal characteristics of the user of the product

---------------1) Suggest that users of the product are trend leaders

C. Provide good experience for follower customers
-----1. Increase the customer’s sense of security with the product

----------a. Assure customer that the product tastes good

---------------1) Obtain third party endorsements of the product

To gain a greater insight into the many patterns of segmentation and product innovation, please see www.strategystreet.com/improve/segments and www.strategystreet/com/improve/productsandservices. There you will find over 400 concepts of segmentation of customers by need and nearly 600 concepts of product innovation initiatives. We support these concepts with over 4500 examples. These concepts and examples are brainstorming thought-starters to help you meet the challenge of innovation in your own marketplace.

Product Innovation Using Twitter and Tweetups - Part 1

Over the years we have gathered several thousand examples of product innovations. We have found patterns in the needs of customers and in the approaches that companies follow to develop product innovations to meet those needs. At the highest level, a customer has three basic needs, which create three major customer segments. First, there are physical needs related to the physical situation of the customer or of the location where the product is purchased or used. Second, there are emotional needs, which reflect the customer’s personal needs for comfort, status and the avoidance of anxiety. Finally, there are intellectual needs which segment customers based on their current knowledge and understanding of the company, its products and how the products are used.

To meet the needs of these customer segments, companies follow three primary approaches to product innovation. First, they may provide the customer with information, which helps the customer to recognize and recall the name of the company and its products, to explain the product’s relative benefits or to obtain directions on how the product should operate within a broader customer cost system. Second, the company may reduce the resources the customer requires for the use of the product. These resources include money, time, effort and health. Third, a company may improve the experience the customer has with the product. These experienced-based innovations add new appeal to the senses, associate the company or the product with an image to increase the customer’s pleasure in using the product, increase the customer’s sense of security with the product or entertain the customer while he waits for or uses the product.

Kraft has demonstrated some of these patterns in its recent DiGiorno flatbed pizza introduction. In one of its most innovative approaches to this introduction, the company is seeking out influential users of Twitter. Twitter is the social online media company that allows users to communicate quickly using very short, 140 character messages. For influential users of Twitter, Kraft is offering to host Tweetups. Tweetups are in-person get-togethers prearranged on Twitter. The company is recruiting these Twitter users, called Tweeters, in Chicago, New York and Los Angeles. The company is offering to provide DiGiorno flatbed pizzas to these Tweetup events in the hope that attendees will like the product and spread the word.

In the second part of this blog, we will tie these product innovations back to the customer need segments and types of product innovations we have outlined above.

Big Cost Differences in an Industry - Part 2

McKinsey and Company has undertaken a detailed examination of Productivity in the pharmaceutical industry. This extensive study offers us an opportunity to see common patterns in cost management and productivity improvement. We described these patterns in Part 1 of this blog. These common patterns of Productivity improvement include four major concepts.

1. Reduce the rate of cost for the Input

2. Reduce the Inputs not producing Output

3. Reduce unique Intermediate Cost Drivers(ICDs) in products and processes

4. Spread fixed cost ICDs over new Output

McKinsey undertook a detailed analysis of 1900 pharmaceutical production lines at 150 plants located all around the world. The Firm measured the Productivity levels among the plants and companies in their study and found dramatic differences in Productivity among these 150 plants. (See the Perspective, “What Makes Returns High?” on StrategyStreet.com.) The top quartile of the companies involved in this study had manufacturing utilization rates that were more than twice those of the bottom quartile companies. McKinsey estimated that, if the average drug-maker would match the total labor productivity of the top players in the industry, it would realize an improvement of 5 to 6 percentage points in operating earnings, quite an improvement

Here are some of the cost management reasons for the superior performance of the best performing companies and how these cost management efforts fall into the four categories of cost reduction above:

* Measure of I/ICD and Concept #2: McKinsey found that the top performers used non-production labor extraordinarily efficiently. For example, the quality control employees for the top performers reviewed an average of 110 batches a year, while those in the bottom quartile did less than 5. This finding is a good example of both an Input, the quality control employee, and an Intermediate Cost Driver, a quality control batch. A company using this measure would reduce Inputs not producing Output through reporting to the employees of this measure of their efficiency. (Concept 2)

* Concepts #2 and #3: The high performers use standardized ways of measuring and controlling equipment, reducing line stoppages and waste. This is an example of two of the patterns. (Concept 2) This approach reduces Inputs not producing Output by eliminating unplanned downtime. It also reduces the unique ICDs in processes by standardizing processes. (Concept 3)

* Concepts #2 and #3: The top performers were more likely to use lean management tools to plan and schedule activities, so they released a higher percentage of their products to market without reworking. This approach reduced Inputs not producing Output by improving the accuracy of production forecasts. (Concept 2) It also reduced unique ICDs in the process by reducing the rework activities through a reduction in errors. (Concept 3)

* Concept #2: The top quartile players reached final delivery in half as much time as the average manufacturer, and more than five times faster than those in the bottom quartile. The top performers reduced Inputs not producing Output by speeding the process.

* Concept #3: The best performers eliminated unnecessary complexity from their production planning activities by using fixed, repeatable, short duration production schedules in order to avoid forced changes in production plans. These companies reduced unique ICDs in their processes by reducing the movements of Inputs.

* Concept #4: McKinsey found that small plants were substantially less productive than larger plants. However, the very largest plants were not the most productive. This illustrates the spreading of fixed cost ICDs over additional product Output. It also warns us of the limit of that concept when there are multiple products emerging from the plant.

Every drug maker that McKinsey studied had launched a lean, or Six Sigma, project in the recent past. Yet relatively few of these companies were effective in reducing their comparative costs.

For further explanation of these cost reduction patterns, and for over 600 cost reduction concepts, illustrated by 2400 examples of these concepts in action, please visit www.strategystreet.com/improve/costs. These concepts will help you improve your company’s productivity.

Big Cost Differences in an Industry - Part 1

The objective of every cost management system is to improve the Productivity of the Input (I) resources used to produce the final Output (O) product. These resources include the Inputs of People, Purchases and Capital. The Output is the unit of product sold. A simple measure of Productivity is Inputs divided by Outputs (P=I/O).

There are several stages in producing a unit of Output, so relatively few employees (one of the key Inputs) actually produce a unit of Output. Instead, most employees produce something else as an intermediate end product on the way to the final product. We call these intermediate end products Intermediate Cost Drivers. So, to increase Productivity, you would like to improve the ratio of Inputs needed to produce Intermediate Cost Drivers (I/ICD).

You would also like to reduce the activities, or Intermediate Cost Drivers, you require to produce a unit of final product Output. In ratio form, this means you want to reduce the ratio of Intermediate Cost Drivers in the Output (ICDs/O).

The measure of Productivity then expands into two factors:

Productivity = Inputs/Output = Inputs/Intermediate Cost Drivers x Intermediate Cost Driver

Or

P = I/ICD x ICD/O = I/O

We have studied several thousand cost reduction efforts from the last 25 years. We believe that you can categorize all cost reduction efforts into one of four major concepts:

1. Reduce the rate of cost for the Input

2. Reduce the Inputs not producing Output

3. Reduce unique Intermediate Cost Drivers(ICDs) in products and processes

4. Spread fixed cost ICDs over new Output

The current issue of The McKinsey Quarterly describes an interesting study that McKinsey has undertaken in the pharmaceutical industry. The study’s conclusions offer us the opportunity to categorize their findings into one of these four cost reduction concepts.

In Part 2, we will describe some of McKinsey’s findings and then tie the findings to the four major productivity improvement concepts above.