Maximizing capacity utilization as a startup premise

In stark contrast to other major airlines, Southwest has been profitable for 40 years. If Southwest had one core “startup premise” it was this: for every second the planes sat on the ground, their airplanes and people were costing them money but not generating revenue. So Southwest designed an airline from the ground up that maximized capacity utilization. They avoided the hub-and-spoke system that led to cascading delays. They removed meals to reduce ground crew times, along with assigned seating so passengers would hurry onto the plane to get good seats. They used only one aircraft type to reduce maintenance times.

Some of the most interesting startups today are founded on the same premise of maximizing capacity utilization. Being information technology startups, their method for doing so is generally by matching demand for capacity with supply of un-utilized capacity. AirBnB lets people rent out unused space, increasing the utilization of their homes. Uber lets drivers rent out their unused time, increasing the utilization of their cars and labor. Services like TaskRabbit are trying let people fully utilize their “labor capacity”. Over time, services that increase capacity utilization tend to drive prices down (even if, at first, they sometimes have higher prices).

Whenever Southwest would begin servicing a new city, it drove prices down so dramatically that economists began referring to it as the “Southwest Effect“. One particularly remarkable aspect of the Southwest Effect: when Southwest began servicing a city, it would stimulate new business activity – and thus air travel – to such an extent that even Southwest’s less efficient competitors ended up benefiting.

http://doriandargan.com Dorian Dargan

Wow… this is really cool. I like the parallel, thanks Chris.
http://www.ivpcapital.com Michael Elling

The world is realtime, 7*24. Every biz model. As an analyst I wrote about pricing for the new digital networks in the mid90s by asking “what’s the most expensive wireless minute?” Naturally the unsold one. That’s called marginal analysis.
http://arnoldwaldstein.com awaldstein

I heard somewhere that the definition of disruption was taking what traditionally costs $10 and selling it for $2, and making money at scale.

Prashant Gandhi

Vinod Khosla refers this as “Chindia” price

Anonymous

This is a great analogy.

I think even the ‘unsexy’ are due their credit here. For example, Craigslist has been busy connecting individuals to maximize the value from their unemployed/underemployed resources forever. eBay and Etsy have been busy creating a flat world by finding buyers who would pay top dollar for sellers in remote areas since Web 1.0.

The ability of the individual to maximize personal potential seems to be getting easier as time & technology progresses, no doubt.

FAKE GRIMLOCK

CRAIGSLIST, EBAY, GOOD SOURCE FOR IDEAS. LOOK AT WHAT PEOPLE TWIST THEM TO DO, BUILD PRODUCT THAT JUST DO THAT.

http://twitter.com/matthuang Matt Huang

I think it’s worth noting that shared utilization is not new (skis, cars, airplanes, hotels), but there was always an associated coordination cost.

Web/mobile networks are bringing those costs way down. So we’re seeing p2p becoming feasible over central providers. And we’re seeing more marginal goods being shared.

http://www.cdixon.org chris dixon

Yes, agreed.
http://twitter.com/ay_o ayo o

Not only are web/mobile networks bringing the cost down, social networks are filling in for “trust”.

http://www.kickofflabs.com Scott Watermasysk

I love the thought overall…but it feels like too many startups are focused “success at scale” and miss the opportunity to wow real customers, make a profit, and stay in business for the long haul.

http://www.cdixon.org chris dixon

I’d argue that the startups of this type are far more likely to be profitable and sustainable that many other classes of tech startups.

Eric Page

Chris, which type of startup are you referring to? Those focused on “success at scale” or the ones that focus on nearer term customers etc?

Anonymous

Priceline flashbacks.

Who were the reverse B2B auction guys for equipment and supplies?

-XC
http://twitter.com/ay_o ayo o

Agreed on all fronts. In addition I think that the lower the utilization on average, the greater the market/business opportunity.
http://twitter.com/ChrisA9 Christian Arca

Southwest also had a great fuel hedging strategy that gave them a great competitive edge. In 2009 though it started to backfire.

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Cool post!

JamesHRH

Terrific insight.
http://www.alearningaday.com Rohan

Terrific insight indeed. I feel the need for a caveat though.. often times, people caught in the lean wave go lean for the sake of going lean.

What’s noteworthy about Southwest is that they had a very very specific strategy and every ‘lean’ initiative was designed around that objective i.e. reduce flight time on the ground.

Essentially, every decision was evaluated with the question – ‘Is this going to increase the wasted time on the ground?’.

Focused effort – makes a massive difference to outcome.
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Great post really nice!
https://plus.google.com/112879998616209951634/posts David Barnes

In publishing you could look at “capacity” as your catalogue of media — records, books, application code, or whatever. The catalogue is your key asset. The premise of Spotify is that if you enable maximum utilisation of that asset, you profit. More or less the opposite of traditional media publishing.

Freemium games are based on maximizing the use of your big asset — your code base — rather than restricting access as the “boxed software” model has always been.

Useful way to think about the future of publishing, so relevant for me. Thanks Chris!
http://twitter.com/natmakar Nat Makarevitch

Read “Mavericks at work”.

Note: some virtualization (modern virtual machines) benefits also come from this very “interstices” concept.
Anonymous

Awesome analogy — you’re really in the blogging groove now, Chris. The story of Southwest’s original “startup premise” is one of my favorites. Dan Roam writes about it from a different perspective in his book (and blog), The Back of the Napkin.
http://digitalroam.typepad.com/digital_roam/2008/04/southwest-airli.html

http://www.victusspiritus.com/ Mark Essel

Thanks for the backstory link on Southwest

http://www.kickofflabs.com/ Josh Ledgard

One of the best parts of this trend for entrepreneurs is the rise of freelancer availability. We’ve offloaded a lot of side work around http://www.kickofflabs.com to that “extra labor”. Stuff that’s not core or we’re not best at. So even if you are building one of those services you can take advantage of this trend.
Alexander Close

Interesting example to parallel some of Clayton Christensen’s thoughts. Disruptive technologies entering the market at the bottom through a cheaper product and pushing the established companies out through the top end. Seen from his classic examples of mini-mill steel production and car companies.

But the real kicker, some of the most valuable (value creating) startups today are the ones that don’t just make an existing product/market cheaper, they create value from where it didn’t previously exist. Airbnb being the perfect example of that.
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http://www.youtube.com/watch?v=vOAnzYk379M samedayessay.com

Made me smile…
http://cynthiaschames.tumblr.com/ Cynthia Schames

Sounds so simple in retrospect, doesn’t it?
It always amazes me how overly complicated people can make business–even startups–when a bit of common sense (use only one type of plane for your whole airline) can help you scale, grow, be more profitable and efficient. Apparently “common” sense is a misnomer.
http://www.gabrielweinberg.com/ Gabriel Weinberg

testt
http://pulse.yahoo.com/_PUBT4HNB7CJVAYWPUXIJB2VZTE Jason

Chris – don’t forget that Southwest has always had some of the best fuel hedgers in the industry. Fuel is at the top of the expense list.
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Chris Dixon