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How ASPs Work


Defining an ASP

ASPs tend to be made fairly complex and confusing in the media, but people have been using forms of the ASP for centuries. By looking at one of these existing models and seeing how simple they are, you can gain a great deal of knowledge about Internet ASPs. An airline is a classic example of a non-Internet ASP, and is extremely simple to understand. It therefore makes a great starting point into your understanding of ASPs.

Almost all Fortune 1,000 businesses, as well as many small businesses, use airlines extensively. Many individuals also fly frequently for business and pleasure. Yet the number of businesses and individuals that own their own airplanes is extremely small. Instead, we rely on airlines to provide travel services to us on a per-use basis.

The main reason for the lack of plane ownership is the extremely high cost of entry. Let's say that you would like to own and operate your own jet. Here are some of the costs involved:

  • You have to purchase the jet. Jets cost millions of dollars.
  • You have to maintain the jet.
  • You have to hire people to staff the jet -- a pilot, for instance, is someone you will need, and pilots are extremely expensive.
  • You have to hope that the jet is in the right place at the right time for the people who need it. If not, you need to move the jet around at a high cost in terms of fuel, maintenance, etc.

In almost all cases, these costs are so high that, compared to the cost of individual airline tickets, they make no economic sense. Even the most intrepid traveler who flies 52 weeks out of the year would spend at most $2,000 per week ($104,000 per year) on airline travel. That amount of money would not even cover the cost of the pilot, not to mention the cost of the plane, fuel, maintenance, support, etc. involved in owning and operating a private jet. A private jet only makes economic sense in two possible cases:

  • You are moving a group of people around frequently and in unison.
  • The value of the people flying is so great that it washes out the cost of operating the jet. For example, if you have a group of executives whose value to the company is $2,000 per hour (for example, a CEO making $4 million per year), then obviously you want to waste as little of this group's time as possible. You also want these people to be as relaxed as possible so they can work optimally. In cases like that, a private jet may be well worth the money.

These two cases are extremely rare, hence the rarity of private jets. Note also that people who own private jets frequently travel between the United States and Europe on the Concorde. The Concorde is an ASP for high-speed European travel. No company could justify the cost of owning and operating a supersonic jet.

Airlines are classic ASPs because they give you and/or your company a choice. You can own and operate your own jet, or you can charter a jet from an airline when you need one (see, for example, How NFL Equipment Works to find out how an NFL team uses chartered jet service), or you can pay a very low incremental cost to fly each time you need to travel (and share the cost of owning and operating the jet with hundreds of other passengers on the plane). The "pay a low price each time you use it" versus the "buy the service outright" option is a common feature of Internet ASPs, too.

There are many other ASP-like models that most of us use every day. For example:

  • Shipping companies - Instead of maintaining your own distribution network for packages, you pay a low incremental fee to ship a package with the post office, Fedex or UPS. BMW and McDonalds are examples of companies that do so much shipping that they actually own and operate their own truck fleets -- but this are a rarity.
  • Telephone companies - It would be extremely difficult for a company to justify the cost of owning and operating its own nationwide fiber optic network, so we all pay an extremely low incremental cost for each minute of long distance time we use.
  • Power companies - It would be possible for each homeowner and business to generate power, but not for 10 cents per kilowatt-hour. Therefore, it makes sense to purchase power from a power company that distributes the high capital cost of a power plant across all of its customers. Some companies -- especially companies that deal in forestry products -- can actually generate their own power affordably because they have a source of free fuel or waste heat from some other process within the company.

There are cases where we do not go the ASP route. For example, a huge number of Americans own and operate their own automobiles instead of using the ASP called "public transportation." Most large businesses can justify the costs of large copying machines, while smaller companies rely on the ASP called Kinkos.

The point of all this is simple -- ASPs are all around us in many different forms. We choose whether or not to use ASPs based on economic factors that are driven largely by our frequency of use and the cost of entry and maintenance.