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easyWhat?
EasyInternetCafe (or eIC, formerly easyEverything) is a chain of Internet cafes with 21 stores in the UK, the USA, Holland, Belgium, France, Germany, Spain and Italy. eIC is part of the Easy Group, headed by the Greek entrepreneur Stelios Haji-Ioannou.
The stores are built and operated on the principle of ‘economics of scale’: most stores are open 24 hours a day, 7 days a week, and each has an average of 350 PC’s.
eIC’s first store opened in June 1999 opposite London’s Victoria Station. Soon afterwards, it was quickly recognised that eIC’s product offering had certain characteristics by which they could revenue or yield manage:
- It was offering a highly perishable product (e.g. an hour of Internet access time, which cannot be put in inventory. Once that hour had gone, there was no way of reselling that hour of internet access time);
- Although its stores are large, capacity is limited;
- Internet access demand varies, not only by time of day, day of week, but also across other time and seasonal horizons;
- Incremental costs are next to nothing: it doesn’t matter whether there is one person or 500 in a store, the bandwidth is already there.
By the time it opened its second and third stores (on Tottenham Court Road and near Trafalgar Square respectively), eIC had built yield management into its store management system. In fact, it has been groundbreaking in offering a dynamically priced product on the High Street. The principle is quite simple: as the occupancy (the number of customers) in the store increases, so does the rate per hour they pay. Viewed conversely, as the occupancy increases, the number of minutes that customers get on-line for their £, $ or Euro decreases.
easyWins
Aside from the above, there are other benefits in adopting a dynamic pricing/yield management regime. It is easily adaptable to the product life cycle and other marketing strategies. When eIC opened the world largest Internet Café (as certified by the Guinness Book of Records) in New York’s Times Square, its introductory offer of $1 for 5 hours featured in many press headlines. This is an example of how dynamic pricing is easily adaptable to a penetration pricing strategy to build location and product awareness. Likewise, the system easily adapted to the mature phase of the product life cycle, where the objective is to optimise revenue. Prices can easily be increased to complement a market exit strategy, as well as responding to competitive pressures. When a rival’s system functionality only allows them to charge a fixed rate per hour, it is far easier for eIC to match that price, than for the rival to take the battle to eIC.
How have customers accepted this pricing regime? Well, it was reported that a very high percentage of customers thought eIC represents good or excellent value for money. For an industry where many customers give price as the first reason for visiting an internet cafe, ahead of convenience, speed of access and other service/value factors, this is an excellent endorsement for eIC's business model.
Like the buying and selling of stocks and shares, eIC has the ability to offer a unique price to every customer, the often touted but elusive nirvana of “a market segment of one”. To date, it has not done this. It has however, gone so micro as to offer a unique price to a market segment of just four or five.
easyLosses
Aggressive use of yield management, combined with low overhead operations, is a recognised and admired business model of Stelios Haji-Ioannou. EasyJet is profitable after just 6 years of operation. However, with EasyInternetCafe profits seem a long way off, with many commentators suggesting that it will never be profitable. To-date, the Group has injected £80m into the company. Of that, £15m is reported to have been a personal investment of Mr. Haji-Ioannou. Losses of £30m-40m are expected for the year to 30 September 2001. What has gone wrong? According to the FT:
- the company leased expensive freehold property.
- the stores were too large - economies of scale don't materialise if they are half empty.
- it purchased sophisticated and expensive information technology.
- it was able to borrow too easily. For example, HP loaned over £20m.
- staff overheads were excessive.
By mid 2001, with cash running out and the original partners like HP being not prepared to advance further funds, drastic action was necessary:
- eIC issued 1.5bn £1 shares at a 1p (£0.01) each. This immediately devalued the holdings of the original shareholders to almost nothing. Many employee shareholders were badly affected.
- head office staff were cut from 60 to 20 and store staff by 75%.
- excess space at front of stores was sub-let.
- unprofitable stores were closed.
- a franchising plan is being developed.
It is early days, but the next 6 months will prove whether the above actions are sufficient. What has not changed is the business model. Maybe this should be re-assessed:
- are there sufficient customers who want to use an internet cafe? To-day, 50% of UK homes have internet access, and many others have (free) access at their place of work or at colleges or university.
- are the stores located in the right place to attract customers throughout the day and the whole week? City business centre cafes might attract business people needing to keep in touch, but many city business centres are quiet in the evenings and at weekends.
- could smaller cafes, co-located alongside the EasyJet airport lounges and EasyCar rental check-in points, provide a good, steady income stream with very low overheads?
- do customers accept dynamic pricing or do they find it irritable? Do they understand that eIC is using dynamic pricing or are they confused at paying a different price on each visit?
- are there real competitors charging a significant price premium such that eIC customers actually feel they are getting a bargain, in the same way as they do with EasyJet or EasyCar?
- how does it's pricing compare to the numerous flat rate schemes of £15 per month for unlimited access. For a typical surfer using the internet for 2 hours per day, then £15 per month equals 25p per hour.
- how does the product's performance compare? Is the performance as good, worse or far better? Is performance an issue? - probably not for accessing a few emails, but yes for on-line chat and web surfing.
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