So Many Cranberries
Patagonia is a company that I really admire for its commitment to earning a profit in a socially responsible way. Your post and the previous comment made me think about an article I read over the summer regarding Patagonia’s human trafficking reduction effort: http://www.theatlantic.com/business/archive/2015/06/patagonia-labor-clothing-factory-exploitation/394658/. Patagonia uses internal audits to ensure that their supply chain is consistent with their social values, and the 2011 audits found multiple instances of forced labor/human trafficking in their supply chain. Since then, Patagonia has taken several measures to try to reduce human trafficking/forced labor in their supply chain and even invited competitors to a forum to discuss these issues. I am interested to see what actions Patagonia continues to take in this direction and how those actions may alter the operations model. Becoming fully accountable for the supply chain while remaining profitable is a big task, but I think Patagonia has the drive/power to come close to a solution and set an even higher bar for its industry.
Well done! This post cleanly lays out how IndiGo’s operating model choices–one plane type, lease-back agreements, no meals–were all designed with profit margins and on-time arrivals in mind. This company’s growth in market share over the past 8 years is incredibly impressive, especially given the fact that it is one of the few domestic airlines to consistently turn a profit. I think this company’s story is a great example of what can happen when someone dares to challenge the status quo–and at the right time.
Just a few small points to add on the operating model. Choosing to go with one style of plane probably played a role in IndiGo’s ability to secure attractive lease-back agreements. Since they ordered planes in bulk instead of in small orders, they probably had some power over Airbus to negotiate such an arrangement. I’m guessing that this arrangement plays a huge part in the company’s profitability. The only concern that I have about this model is that it is probably limited to only serving major airline routes due to the plane size. That said, they’ve done an excellent job at playing to their strengths along those routes, winning market share, and focusing on profit margins. I’d be interested to see if this model could extend to another market with a growing airline industry.
I love that you chose to look into this business–I have a friend who is part of the Heady Topper cult and never fully understood it myself :).
It’s really interesting to see a business exercise so much control over growth when there is such a high demand for its product. You hit the nail on the head by identifying that this controlled growth allows for operations that tightly link to the customer value proposition. Given the growing appeal of IPAs to beer aficionados, the valued provided by this unwavering commitment to quality is probably magnified quite a bit.
One thought on expansion: I know it would be difficult to maintain consistent quality if they grew out of their VT brewery and used distributors, but do you think they might be able to expand geographically by replicating the brewery model in other cities (say, Denver or Portland)? It would be interesting to see if there would be other communities that would pair well with this operating model while still not detracting from the cult-like following in New England.
Thank you for taking the time to share your feedback. IMHO, the way vans play into their business model really depends on whether they buy or rent the vans. From what I’ve read, it appears that they are currently renting the vans so that they can scale (or scale back) quickly. I too would be curious to see what they would do during off-peak hours if they purchased vehicles. This would pose a problem for the distinctive look of Bridj’s vans, but it would be interesting to see if they could share vehicles with a local university since universities seem to need shuttles during common class times (10AM-2PM) and for “safe-ride” times (7PM-3AM).
Thanks for the feedback. I definitely agree that the profitability of this business model remains to be proven. Here were some rough calculations that I ran but was not able to include in the original post because of the 750 word limit:
-Average Revenue / Trip = 14 Seats * (7 Seats Sold / 10 Seats) * ($4 / Seat Sold) = $39.20 / trip.
-Gas Cost / Trip = 7 miles roundtrip / (19 miles / gallon for Mercedes Sprinter) * ($2.49 / gallon diesel in Boston as of December 6) = $0.92 / trip
-Average Driver Cost / Trip = $18.95 / hour * 1 hour / trip = $18.95 / trip. Labor rate came from the Bureau of Labor Statistics.
That only leaves $19.33 / trip to cover cost of vehicles, employee salaries, overhead costs, etc. So, as you mention, scalability is key. Finding a way to keep vehicle costs down is also key (I think they are renting vehicles right now, but at what price?).
I am optimistic that they could increase revenues. Using Uber Boston’s pricing model and Google Map’s driving distance/time between Coolidge Corner and Kendall Square, it would cost roughly $10.92 to take an Uber between these locations–without surge pricing, which would likely occur during rush hour. Given this cost, WiFi on the busses, and the fact that Bridj qualifies for the IRS’s pre-tax mass transit deduction, I think they might be able to raise prices past the current $3-$5 price point and still attract customers. In Boston, though, I really think that the area for growth is along the 128 corridor. There are a lot of technology companies in this area that are not easily connected to public transit. In DC, they may have an easier time justifying higher prices since peak fares on the Metro can reach $5.90.
I’m really interested to see how this company plays out. I think that the operations model delivers the customer value proposition pretty well but, as you pointed out, may not support a profitable business model unless they have a very creative way to control costs and achieve critical mass.