Client Problem:
Our client was a technology firm that had recently developed a protocol and hardware system to offer email and wireless internet service on airplanes. Their service and approach were demonstrably superior to alternatives. From their viewpoint, they needed help in setting a specific price level that would maximize returns.
However, the company also had a fundamental issue with regards to the economics of the business. We quickly discovered that to be profitable, the airplane wireless service required extremely high usage per customer because of extensive fixed costs. In addition, as a result of detailed surveys of customer segments, we noted that customer price points were much lower than expected (and potentially below breakeven).
Project Objectives:
Our objective was to develop a revenue forecast based on the client’s projected business model. Secondly our objective was to figure out a way to address the fundamental economic issues of the product.
Approach:
We first conducted extensive primary and secondary research to help develop elasticity curves based on customer pricing decisions. We used these along with numerous other drivers (e.g. pricing alternatives, projects subscription rates, airline partner participation, etc.) to develop a business model.
Secondly we analyzed the positive and negative aspects of forming a joint venture with an airline consortium. We viewed this as a potential means of working around the poor overall economics of the business.
We developed a granular business model that laid out the advantages of the JV both for our client and the airline consortium. The model showed the JV allowed for leveraging of business traveler relationships, significant customer service scale, and capital resources that would allow our client to diffuse some of the high upfront costs. We refined our model so that it could be used in negotiations with airlines.
Results:
For our client, the primary value added was gaining an end-to-end business perspective on the applications, segments, and strategy that were critical to the launch of a viable business. Their expertise was in the technology itself – not in defining customer elasticities, developing an alternative capital structure, or defining critical elements of a potential JV. Our ability to focus on these critical elements of the future business enabled the creation of a strong business platform and allowed the company to focus more directly on its core competencies of technology development.
We found that through the JV our client could turn EBIT positive by Year 3 and we assisted them in negotiations and implementation of the strategy to ensure that this happened.