issue
start-Ups
Strategy Development for a Satellite/Wireless Airline ISP
Client Problem
- Emerging technology business needed to develop an optimized pricing strategy for entering and succeeding in a new market
- Business had developed a protocol and hardware system to offer email and internet services on airplanes
- Their approach and components were demonstrably superior to alternatives
- From their standpoint, the only remaining question was setting specific pricing level to maximize return
Initial Project Focus
- In order to determine a revenue forecast, we pursued detailed research and developed elasticity curves as a basis for pricing decisions
- To understand the technology costs/economics, we constructed a granular business model based on cost-driver relationships, projected subscription rates, pricing alternatives, technology development, equipment requirements, and airline partner participation
- We quickly discovered that the economics 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)
Refocus and Relaunch
- As a result of our initial work, we realized that our client's technology faced the same discouraging economics of other form of in-flight communications: high capital intensity requiring unrealistic pricing or usage
- We therefore asked the client to consider a shift in strategic positioning by forming a joint venture with an airline consortium
- As we constructed the detailed economics, the advantages of a JV included leveraging the business traveler relationships, scale of customer care operations, and capital resources of airline incumbents
- The revised JV-based business plan was a good strategic path for airlines to share risk, deliver a viable technology immediately, and turn EBIT positive by year 3
- To support negotiations, we significantly increased the granularity of our model by defining operational requirements (headcount by department, etc) and key managerial metrics (calls per customer care agent, etc)
Key Learnings
- 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