Direct Cross Subsidies
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The document discusses the direct cross subsidy business model, where companies give away products or services to increase revenue from other offerings. It provides examples such as Ryan Air and Comcast, illustrating how businesses can use this strategy to enhance customer attraction and retention. Key concepts include pricing strategies, ancillary fees, and various instances across different industries that employ this model.
Direct Cross Subsidies
- 1. (Stanford BUS-21) Martin Westhead Mastering Marketing Model: Direct Cross Subsidies How to make money by giving things away
- 2. Overview Direct cross subsidy model (Tied) Examples - Ryan Air - Comcast - Controlinveste Business Models
- 3. Direct cross subsidy Price/Quantity Size rectangle = revenue Model assumption: Price ($/Q) Quantity PA + PB P(A+B) QA + QB Q (A+B) Revenue products combined > Revenue products separately P(A+B) Q(A+B) > (PA+ PB) (QA+ QB) Red Area > Blue Area Cost model is directly tied to sale
- 4. Free Cell Phone Free Cell Phone: postpaid mode Paid Cell Phone: prepay model Subscribers get free phone Subscribers pay for their phone up front Generally more expensive phones Generally cheaper phones (cost sensitive customer base) Multi-year contract with termination fee No contract: usage only
- 5. Ryan Air London -> Barcelona - $20 (£10) Ryan Air CEO wants - All flights all seats free Cut costs Ramp up ancillary fees Higher fares on popular days ($100) Ticket Price ($20) Checking 2 bags ($30) Ad revenue per hour ($1) Subsidy for more expensive flight ($5.50) Credit card handling ($6) Priority boarding ($4) Bottle of water ($3.50)
- 6. FREE DVR 9 million free DVRs Hidden fees - $20 installation Monthly subscription - $14 p.m. - Break even in under 18 months Up-sell other services - Internet $43 p.m. - Pay-per-view $5 each
- 7. Free silverware Leading media company in Portugal Jornal de Noticias - 120th Anniversary - 60-piece silverware set - Regular pieces during the week - Serving pieces on Sat 36% increase in circulation in 3 months
- 8. More give-aways Free toolbox with tools - 177 pieces - 20% 3m Free DVD every Sat - Coupon in Friday paper - 47% increase 2m Free Dinner plate set - 19 plates - 70% increase 4m Free language course - 11 languages - 48 disks - 22 books - 2 boxes - 63% increase 4m
- 9. DIRECT CROSS SUBSIDY BUSINESS MODELS
- 10. Direct Cross Subsidy Business Models Give away services, sell products Apple Store Genius Bar tech support Give away products, sell services Free gifts when you open a bank account https://www.bncbank.com/files/BNC_Gift_List_2014.pdf Example gifts
- 11. Direct Cross Subsidy Business ModelsGive away software, sell hardware IBM &HP’s Linux offerings Give away hardware, sell software Game consoles (e.g. XBox) Not technically free but below cost
- 12. Direct Cross Subsidy Business ModelsGive away cell phones, sell talk time Cell phone carriers Give away talk time, sell cell phones Free night and weekend plans from same carriers
- 13. Give away the show, sell the drinks Music, comedy clubs, strip clubs Give away the drinks, sell the show Casinos Direct Cross Subsidy Business Models
- 14. Buy one get one free Grocers / Supermarkets Free gift inside Cereal Direct Cross Subsidy Business Models
- 15. Free shipping orders over $25 Amazon Free samples Supermarkets, Perfume counters Direct Cross Subsidy Business Models
- 16. Free trial Magazine subscription SaaS products Free Parking Malls, Movie theatres Direct Cross Subsidy Business Models
- 17. Summary Direct cross subsidy model (Tied) Examples - Ryan Air - Comcast - Controlinveste Business Models