Should I Offer a Budget Version of Our Service to Fight Low-Cost Competitors, or Will That Devalue Our Premium Brand?

Your premium service works well. Clients value it, it earns its price, and the business is built around it. But you keep meeting people who would clearly benefit from something like it and can't justify what it costs - smaller businesses, tighter budgets, simpler needs.

A cheaper budget version looks like the obvious answer: keep the premium service exactly as it is, add a lighter, cheaper option alongside it, and reach a whole group of customers you're currently turning away. Done well, it can grow the business. Done badly, it can quietly shrink it.

In 2004, Qantas launched a low-cost airline of its own, Jetstar. More than twenty years later it is still flying, and by one assessment it is the only low-cost offshoot of a full-service airline to have delivered real returns to shareholders. Plenty of airlines have tried the same move, but very few made it work.

What made the difference was whether the cheaper offer reached a genuinely new market, or simply gave the existing one a cheaper way to buy.

What a second market actually needs

Three things tend to separate a budget tier that grows the business from one that eats into it.

A different customer, or a different buying occasion. The budget tier has to serve people with a genuinely different need - not your current clients having a tight month, but customers who would never have bought the premium version at all.

A different way of serving. A lower price only works if the service genuinely costs less to deliver. Take the premium service, remove a few meetings and some reporting, and much of the cost often stays - the onboarding, the admin, the support, the expertise behind it. You end up delivering most of the work for less of the money.

A clear boundary. Customers have to be able to see, easily, which offer is meant for them. If the difference is vague, the cheaper option becomes the sensible choice for everyone, including the people already paying full price.

⚡ A new market needs its own way of being served, not just a lower price.

How Jetstar did it

Jetstar met all three of these conditions.

It went after a different customer. Qantas served the full-service market, business travellers included. Jetstar was aimed mainly at leisure passengers - people flying for holidays and visits, for whom the fare decides the booking.

It was built to cost less from the start, not as Qantas with the extras removed. It deliberately avoided the costs that tend to come across from a parent airline, and it began with its own identity and culture.

And the boundary was managed. A committee within the group decided route by route whether a route belonged to Qantas or Jetstar, or should move from one to the other. That discipline is widely credited for the fact that Jetstar took far less traffic from Qantas than other airline-owned budget carriers took from their parents.

For a smaller business, the same three questions apply on a much smaller scale. Who exactly is the budget version for, and would they ever have bought the premium one? Does it genuinely cost less to deliver, or is it the same work with a smaller invoice? And can a customer tell, at a glance, which offer is meant for them?

When the conditions aren't there

Continental Airlines tried something similar a decade earlier. Continental Lite launched in 1993 and, at its peak, accounted for about a third of the airline's capacity. By 1995 it was gone, with losses reported at anywhere between $140 million and $300 million.

It missed all three conditions. The customers weren't there - the airline's own executives later described it as too many flights in too many small markets. It wasn't a different way of serving - it flew aircraft from the main fleet, repainted and stripped of first class. And there was no real boundary. Lite flew under the Continental name, in the same aircraft types, out of Continental's own hub, so passengers had no clear way to tell the cheap product from the full one. The no-frills experience started to become what people associated with Continental itself. Once Lite was shut down, the airline even stopped handing out peanuts for a while, to distance itself from the "Peanuts Fares" it had used to sell the cheaper service.

In a smaller business, the same failure is probably less noticeable. The budget package sells, and the numbers look healthy. But look at who bought it, and many turn out to be customers you already had, now paying less for much the same work. One question separates the helpful cases from the costly ones: would this customer have stayed at the premium price? If they were about to leave, the budget tier kept them. If they would have stayed, it simply discounted them.

Before you add a second price

A budget version can genuinely grow a business. Jetstar shows that. But a second price on its own doesn't create a second market.

⚡ Two price levels do not necessarily mean two different markets.

So before adding a cheaper offer, the question to ask is whether there is a second market there, and whether you can serve it differently enough that the first one stays where it is.

🚀 What to do next

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