TPG makes a bundle on product and price

TPG’s half-year profit statement suggests where a company is headquartered may be less important than the value for money of its offering.

TPG Telecom is not everyone’s favourite provider of internet and telephone services in Western Australia after its acquisition of local darling iiNet, but there is one aspect to TPG that is worth noting – cheap is what most customers want.

Service is also good, and if you can deliver low prices and a reasonable level of service, success in any business is virtually guaranteed.

There are several reasons for taking a closer look at TPG and using it as a case study in how to build a profitable business in the face of stiff competition and criticism, sometimes from your own customers.

The first reason is that TPG has grown from a single shop selling electronic hardware in Sydney little more than 30 years ago into a business knocking on the door of the ASX’s top 30 with a market value of $9.6 billion, which means it is $1 billion bigger than WA’s star, Fortescue Metals Group.

A second reason is that TPG appears to have perfected a business model heavily focused on price; and while some people claim they ignore the cost of a product to seek out a local supplier, or one offering smoother service, the truth is that price wins with most customers.

A third reason is that TPG released its half-year profit statement late last month, the first that integrated iiNet. And no matter what criticism might be tossed at TPG, the result was impressive, with a series of graphs showing eight years of rising earnings, cash flow and dividends – a genuine stairway to business heaven.

Can it continue? That’s always the $64,000 dollar question with some older observers of business, including Bystander, who remain suspicious of growth graphs that seem to be on a permanent upward path – if only because every business hits a hurdle sometime.

The rumblings heard in Perth after the iiNet takeover centred on niggling annoyances such as slow response time to internet outages, and problems with accounts, issues the old iiNet had been quick to resolve.

TPG, which operates a much leaner business than iiNet ever did, has ridden out the initial flurry of protests and threats to switch internet service provider.

Some people have moved, but in a business where customer numbers are measured in the millions, that’s to be expected; and when TPG released its half-year results, there was little evidence to support claims of a mass exodus.

The only possible measure of discontent is that TPG did not grow its newly acquired iiNet division in the December half year, starting and ending with 989,000 customers, which it might be argued was a step backward in a business where growth remains strong.

So what’s caused most iiNet customers to stay?

The answer seems to be a combination of the effort required to make a switch and the realisation that while TPG might not be as good at service as the old iiNet, it does offer low prices and bundles its services to catch and keep customers.

There are a number of business lessons in the TPG-iiNet situation, with the first being that low prices are hard to beat. And while people might grumble about control of a local business passing to an interstate rival, they soon forget who owns a service provider if the price is right.

In a way, TPG’s business model is a reminder of a famous WA television advertising campaign run by the largely forgotten WA Salvage featuring a cartoon-like character called Luigi Savadamoni – a name that today would surely have racial vilification overtones.

Back in the 1970s when Luigi (a part played by Italian migrant and opera singer Claudio Versaico) first used the WA Salvage slogan ‘we’re not fancy but we’re cheap’, the response was immediate success for the business, which sold heavily discounted hardware.

Cheap in the case of WA Salvage obviously resonated with the market, and the slogan became a household comment, which lives on among the state’s older inhabitants.

TPG is the modern version of WA Salvage, not fancy but cheap, an observation that can be made about a number of other consumer-based success stories, including Bunnings in the hardware world, Aldi in retailing, and even the internet itself, which has empowered consumers to shop around for low prices.

Complaints about poor service might cost a business a few customers, but cheap prices win more back.