Marginal customers and growth

The Rogers diffusion of innovations paradigm — along with common sense — says that less enthusiastic customers adopt a technology later. But this can be applied more broadly to any type of customers: cell phone calls at $1/minute are for pretty serious stuff (or seriously rich phone owners) but at $0.00 a minute, you call home to ask whether to buy braeburn apples or fuji apples.

Despite the Rogers paradigm that emphasizes marginal customers (e.g. “late majority”) for finishing the adoption of a new technology, I'd never made the connection between such customers and growing a mature markets. Until today, when I was reading the WSJ at lunch.

Reporter Paulo Prada explained why Southwest and other discount airlines won’t be trying to expand share during this time of high fuel prices:

Until recently, the game for discounters was about increasing the size of the flying public, much of it by luring first-time and infrequent air travelers with cut-rate fares. Earlier this decade, when a barrel of oil cost more than $100 less than it does today, that strategy made sense and made money. Now, "expanding the overall demand doesn't solve anything," says David Cush, chief executive of Virgin America, which earlier this week said it would scale back its planned capacity by the end of the year by about 10%. "You have to contract supply, because that sheds the lowest-paying, marginal traffic. It's all about keeping the higher-paying traffic."

In one paragraph, that pretty much says it all.

Of course, despite Hal Varian’s advice about price discrimination, very few industries sell an identical product at such varying prices as the airlines. So the temptation to sell one last seat (no matter how cheap) is highest during the growth phase of the airline industry — much higher than, for example, the push to sell one more car.

Traditionally the airlines had three major costs — labor, capital equipment and fuel. Selling an additional seat did not raise the first two costs, only the third. It will be interesting to see if marginal pricing falls out of favor if fuel prices remain high.