Europe's Service Sector May Be the Next to Adopt a Low-Cost Business Model

A widespread shift in consumer behavior towards purchasing low-cost goods and services has heightened the competition for customers and fueled price wars. Booz Allen Hamilton predicts that service providers will follow the lead of the consumer goods industry and in doing so could grab up to 40% of the market share in Western Europe by shifting to a low-cost business model.

Industry Role Models

The consumer goods industry successfully adopted a low-cost model to accommodate this shift in consumer behavior. In the 1970s, only 20% of demand in the consumer good industry was met with bargain-priced products; that figured increased to one third by the mid 1980s. "Today, more than half of consumers, regardless of income, are searching for a bargain," explained Friedrich. "Now it's 'cool' to be price conscious." He predicts that in the near-term 40% of all consumer goods purchases will be bargain-priced items.

The airline industry was the first service provider to pioneer the low-cost carrier model. "Providers like Ryanair and Easyjet caused a commotion in the European markets by providing limited service at a price that was attractive to the cost-conscious consumer," said Booz Allen Vice President Dr. Roman Friedrich. "Ryanair recorded an operational margin of 25% in the past year compared to the more traditional carriers that had to settle for margins below 10%."

The Future Success Stories

Service sector providers, including mobile network operators and Internet Service Providers, could be the next to adopt a low-cost model and such a shift could herald significant market growth. "The consumer has a wider selection and is encouraged to save through consumption," Friedrich said. "This causes the overall market to grow."

In addition to new customers, a low-cost strategy can bring increased complexity. "Low-cost business models could completely rewrite the rules of the effected industries," Friedrich said. "These optimized offerings create transparency in terms of the actual costs for the individual service components. This leads to strong price pressure and to a higher degree of product differentiation."

Smart Customization

Established players need to revisit their business models and assess. A rethinking is needed on the part of established players. "Booz Allen envisions low cost as a part of a service company's growth strategy," he said. "A higher complexity ensues from this. Several parallel business systems and internal processes must be established. Furthermore, it is important to pursue differentiate marketing strategies and successfully manage the resulting variety of brands. Smart Customization is the name of the game."

study posted July 19, 2004