In Munich we meet Jochen Engert, co-founder of the long distance bus marketing company Flixbus.

Jochen talks about how he started the company while studying for his PhD, describes the business model and what makes it unique, and shares some insights in the problems and learnings of growing the company to now more than 120 employees.

 

Interviewer: Hi. Today we are in Munich at Flixbus office with Jochen. Jochen, who are you and what do you do?

Jochen: Hi. Welcome here. I am Jochen, one of the founders of Flixbus. I’m responsible for everything we do on marketing, sales and the finance part. I’ve been doing something completely different to the bus industry before, classical management consulting, started a PhD thesis which I had to beak up to start the bus business. Since the market was deregulated last year, this was just the opportunity for us to start the business.

Interviewer: When did you have this idea of starting such a business?

Jochen: We initially thought about it quite some time ago. It started in 2009 when the last government had written down their coalition contract where they said we are going to deregulate the market. And we were like that sounds interesting, how often does that happens that markets still get deregulated. We thought about it in the first place saying there is probably going to be Deutsche Bahn coming in and they’re just going to fill up the market and there is no chance to actually develop a new business. And then maybe a year or a year and half later, Deutsche Bahn said the market is not going to be attractive, it’s not profitable, we’re not going to do it. And we were like, oh, maybe it’s still there and we got back to the idea and started discussing business models again. In the end turns out to be a combination of classical online marketing e-commerce business of selling tickets online, and something that is very real – the bus is pretty real, as real as it can get. And the bus industry and company owners that we work with are very weird in a way but cool to work with. And that combination is unique for us, and that again in a market that recently got deregulated. So it was that once in a lifetime opportunity which we had to take.

Interviewer: You started this company while you were studying for PhD, what was the final trigger that made you switch from being a student to becoming an entrepreneur?

Jochen: Actually that phase took quite some time to go from having a well-paid job, the PhD part, finalizing the thesis, to saying, okay I have to leave all this behind and be an entrepreneur. But in the end we were like this is a once in a lifetime chance, we’re probably going to be pretty sad if we don’t do it, and we are always going to think that we missed out on something, so we just had to do it at some point.

Interviewer: Let’s talk about the business model of Flixbus. Can you tell us briefly how it works?

Jochen: Basically it’s pretty comparable to what franchises do, like the McDonald’s out there. We do everything that goes with the product, we do the scheduling, the network planning, we do the bus branding, we do all the marketing, communications, we do everything that goes with sales, IT, ticketing, etc., and we do all the service towards the customer. Once the customer calls in, he’s going to reach our colleagues, once he writes an e-mail he reaches us. We do the operations and the bus driving part pretty much together with the local partners. It’s medium sized private companies throughout Germany, we work with over 50 companies across the country, and they do the operations for us. They will bring in the assets, they bring in the drivers, they drive the buses for us, and they deliver the product the way we want them to deliver.

On top of that, we have a revenue sharing model, so once a line goes very well they’re going to be very profitable, once it’s not going so well we’re going to share the risk of utilization with them. And that leaves us with a great incentive to do good marketing, to do good sales, to have our efforts focused on that part, and it leaves them with an incentive to deliver good quality, clean buses, friendly drivers, good quality service, and that is our business model.

Interviewer: When you started with this business model, did you focus on specific roots, like Munich to Berlin or something like that?

Jochen: Our approach was that we have to provide a nationwide network. So in whatever bigger city you’re looking for a connection to another city you have to find some offer on our website. That was the initial idea. And at the beginning we thought we can start with the whole network all at once, but obviously that usually doesn’t work. So we had to be a little pragmatic at the beginning. We focused on the bigger roots so we can connect bigger cities, such as Munich, Hamburg, Berlin, Frankfurt, Cologne, etc., and then develop the network over time. We started with only ten buses and now we are running over 150 buses throughout Germany every day, also connecting cities in other countries across the borders. As I said, you’ve got to be pragmatic at some point. So we just had to start and get going, and in the end it turns out there is no chance we can start with the whole network at once, but you have to develop the processes over time and get into what the business model in all detail looks like.

Interviewer: How did you acquire the first bus operator?

Jochen: It’s pretty much like investors for us. It’s been a long time for us to visit them, we have been traveling throughout Germany to visit bus companies, talk to them, and say look this is the market, it’s going to develop, it’s going to be fast, it’s going to be really big, and it’s going to be attractive for all of us. We are going to concentrate on what we do best, which is marketing and sales, and you’re going to do the operations, don’t you want to work with us? And it’s usually been like an investor, you can imagine it’s usually family-owned businesses, the father built up the company 50 or 60 years ago, the son took it over, and now he’s in the position to say I want to do something with the company. There is no growth in their core businesses, they’re doing travel, they’re doing local public transportation, and there is no growth in that, so they also have the chance to have their business developing. And then it’s really an investor pitch, you’ve got to persuade them to invest hundreds of thousands of Euros in parts, millions of Euros in the buses and the drivers and the operational costs. That takes a lot of discussion, a lot of arguments, a lot of persuasion to bring them to that point.

Interviewer: So basically your pitch was like this, “Hey guys, you have your local business with your local buses, we can make you national. But in order for you to become national we need to invest in some buses with our brand name.”

Jochen: Exactly. We said, look, you’re very good at operations, we’re good at marketing and sales, let’s bring that together and let’s build that big brand throughout Germany. We’re going to bring you together with different partners across the country, and we’re going to build what we do now, and Flixbus is providing over 1000 connections throughout Germany. In the end it appealed to enough partners to actually start the business.

Interviewer: How much traction did you need in order to, let us say, fill up the buses sufficiently?

Jochen: At the beginning there was a lot of PR and media around it, so that obviously helped us and helped the market to come to the awareness of the people. At the beginning – again, this is pretty common – there’s been early adopters like younger people, students, who tried it out and then they spread the word. And usually people are very satisfied with our services. It’s really low price, you can go Munich-Berlin for like 15 Euros if you book early, and there is no cheaper way to get there. And then people are usually surprised how comfortable the buses are today. When you think about buses you usually have in mind there was my granny going somewhere over the weakened, like it’s old-fashioned, but we also changed the image of going by bus. There’s free Wi-Fi on board, it’s really comfortable, usually the driver is quite friendly, and it’s quite nice service, and that changed the whole picture and image on buses. That still helps us to get traction on the whole thing.

Interviewer: This is also related to that local operators bought new buses which have an economical advantage over the old buses?

Jochen: Absolutely. Our bus feed I think on average is one and half years old at the most. They usually have brand new buses bought for us in our specifications, we define the life space you need to have there, obviously there’s toilets, there’s Wi-Fi, etc. And that also gives you an operation cost advantage, because they are much more efficient in long-distance operations than older buses.

Interviewer: What are the key performance indicators that you’re trying to manage?

Jochen: Obviously from a marketing and sales perspective, it’s the classical one, it’s CPO, it’s customer acquisition cost, it’s the overall marketing budget we spend there, it’s the service cost per ticket, these kinds of KPIs, and we measure traffic conversion, etc. Operationally, we look into how do we get line operations as cost-effective as possible, and that has a lot to do with the geography, where is the bus partner sitting, because you have certain limitations on bus driver availability, how long are they actually allowed to drive a bus, and when do they have to change.

And that goes along with a really complex network planning. We have pretty, let’s call them, nerdy mathematics guys do the network planning, and that’s pretty complex, and we really focus on cost-efficiency there. So you look into how much does it cost to operate the bus between Munich and Berlin, how do we optimize that, and there’s a lot of KPIs in there, we usually measure that in Euros per kilometers, that’s what we optimize on. And then, again, prices are very important for us. We look into what do we earn per kilometer per ticket, and that’s the core KPIs that we look for.

Interviewer: Let’s talk about the corporate strategy. One thing I would be very interested in is how you would try to generate a competitive advantage, and whether it is possible to make this business profitable on a low-scale, or whether you don’t really need a high scale?

Jochen: It’s quite interesting, because in the market at the moment we’re playing against large corporations, we’re playing against Deutsche Bahn, again ADAC and Post and some other corporates as well. From a startup perspective, our advantage is to do good marketing and to be very efficient in what we do on online and performance marketing. That’s like the competitive advantage that we have as a startup. Also we are very flexible with our partners, so we change routes every day, every week, we’re flexible to adjust in our offer. And on the other part you need a certain scale to be able to do that profitably, especially the part that we do with marketing and the sales has a lot of synergy as to the size you doing the business. So that leaves us with certain growth demand that we have, and we’re going to grow the business quite aggressively. We’re going to extend our offer till the end of the year and we’re going to still double it again.

This also brings us to the point where we say is Germany going to be enough. Germany is the biggest mobility market in Europe, but we still think that also in other markets there is no business model that actually compares to what we do and the way we do it, coming from that online ecommerce part and bringing that to transportation coming, which are two very far away parts. So we are also going to do that in other countries, we are going to bring Flixbus at the beginning to other cities that are closer to Germany, so we’re going to connect Prague, we’re going to connect, Vienna, Amsterdam, Paris, etc. And then we’re going to bring the whole model also to other countries.

Again that leaves you with a scale advantage on what to do on the over overhead parts, the marketing, sales, IT, etc. And also on the product side, if you look at other countries there are some bus services on okay quality, but in most countries it’s pretty shabby. We think we can bring a better product to the people there too.

Interviewer: What I would be very interested in is how are the different markets close to Germany related to the bus or transportation in general?

Jochen: Germany has been a train market ever since the law protected Deutsche Bahn from competition, it’s just been that way. So now that it has opened up the market it’s rapidly developing and it’s growing fast. But also in other countries the market structure is really what differentiates. If you look to France, for example, they have a situation that is comparable to Germany, about one or two years before deregulation, so you’re still not allowed to offer inter-city bus trips. We’ll see where that goes, it might be very interesting because we have a similar situation with the local train companies there.

In Spain, for example, there is a bus network, there’s large players, but they’re more like corporates, slow, conservative. It might be interesting too. If you look into Italy, it’s very fragmented, you’ve a lot of small players that provide individual lines, there is no overall brand marketing. Different market situation, but also interesting.

And then if you look into Eastern Europe, there’s loads of smaller providers too. The bus is that one means of transportation there, they usually don’t have very good train networks, so the bus market is very mature, the way that people buy the product is not very mature at all.

Interviewer: And that is where you come into play.

Jochen: That’s where we might come into play. So there’s different situations in all countries, and we’re thinking about what is our go-to market strategy in these individual counties, and what’s the timeframe in which we are going to do it. We are in the middle of that discussion, and we’re probably going to look into next year to take that expansion step towards other countries.

Interviewer: In Europe, which market is the most developed? Because when I was in the UK I was traveling by bus from city to city, and it was quite cheap. So how big is the market in the UK, how much sales are the bus transportation companies doing?

Jochen: UK is probably the most developed market if you look into bus services. There’s National Express and Stagecoach, they’re the two big players, and their total market value should be around 350 to 400 million. Germany is going to be like three times that size at least.

Interviewer: Driven by what, why is the size in Germany supposed to be much bigger?

Jochen: Because the structure is different. If you look at other countries, France is very Paris-centric, UK is pretty London-centric—

Interviewer: They don’t travel a lot.

Jochen: Londoners don’t travel too much around the country, true. In German it’s different, you have a lot of centers, there’s Munich, there’s Berlin, there’s Hamburg, Frankfurt, Cologne, and there’s all this area. So there’s big cities, big centers, and people are traveling a lot more. So if you look into overall traffic volume and compare that to other countries, you can easily project how big the market is going to be. If we just take the share of the bus in other countries and take that to Germany, it easily comes to a volume of over a billion Euros.

Interviewer: The next thing I would be very interested in is what is your forecast for the market development in countries like Italy or Germany in terms of fragmentation, whether there’s going to be some consolidation cases. And the second thing, what would be your forecast for countries like France where they’re currently regulated, whether they will deregulate someone as well?

Jochen: If I look at Germany, there is going to be a consolidation phase. There won’t be ten or fifteen players around because it just doesn’t make sense. As I said, you need a certain level of scale to be able to provide good service. So we are going to be seeing consolidation here. Timing-wise, it’s really difficult to say when it is going to happen. We are sure we are going to play a very active part in that. In other countries there has either already been consolidation, Spain has maybe one or two players dominating the market, UK is the same. In Italy we’ll where that goes. At the moment there’s a lot of players. Especially with the online and the marketing part there might be consolidation over the next years too. And then we will see where this is going.

For us we think that in our business model we are one of the driving forces also for market development. So the demand is just there, the demand is growing, people will always look for a cheap mobility, and it’s just a question of how we approach that.

Interviewer: And for the regulation in France, what would be your forecast?

Jochen: Difficult to say. It’s always difficult to look into politicians too deep. We are looking at the market, we are closely following what’s happening, and there might be a comparable development to what’s happened in Germany. It’s not given that large transport companies are going to take the market, and the same with Germany, people were surprised and Deutsche Bahn is still very surprised how fast the market developed, and why shouldn’t that happen in the same way in France?

Interviewer: I totally understand why Deutsche Bahn is moving very aggressively into this market, because they don’t want to cannibalize their core business.

Jochen: That’s what they still say, that was the same speech that airlines gave fifteen years ago, why should we go into low-cost airlines, and now Lufthansa is working with Germanwings together, and you see that in other countries too, and Ryanair is the most profitable airline in the world. So they are underestimating the market still, and we’ll see how that develops over time.

Interviewer: We always try to give our readers some kind of advice on how they can become better entrepreneurs. I would be interested in your advice for first-time entrepreneurs.

Jochen: If I look into what we learned over time there’s probably two things that are most important. One is we have had a lot of senior advisers, we had business angels in the beginning, and they were just going to give us some advice, and we thought we know better anyways. It would be better to have his opinion , but we know better. And in the end it turns out they were always right. So my advice would be to really listen to what they’re saying. If you have senior guys that you trust – and we do trust them because they’re one of our first business angels, really cools guy, we really trust him, we should have listened in the first place and not make the same mistakes over and over again. So if you have senior advice, just listen to these guys and follow.

Interviewer: That is one very good point, because when people ask me about this I always tell them you have two conditions that you need to test. First condition is, is the other guy in a position to know better than you? And the second thing is, does he want the best for you and wants to help you? And if both conditions, and only both conditions, are positive, then listen and follow this advice, please.

Jochen: Absolutely true. There are some mistakes that you just have to make yourself to get the learning out of it, we’re doing it every day, we are living trial and error. Especially in the marketing side, we are trying out new things, measure if it works, if it doesn’t we just throw it away, if it works we continue doing it and scale it up. So trial and error is very important, but, as you are saying, there is no point in not listening to senior guys if you trust them and if they are in your favor, so why shouldn’t you do that.

The other part is, as I said in the beginning, at some point you just have to be pragmatic and just go and do it. There’s always going to be difficulties and you never know if it’s going to work out or not, but at some point you just have to go and do it. We came to hate that guy called Murphy, if you know Murphy’s Law. We do a transportation company, and we didn’t estimate that dimension in that beginning, and we do processes today, we were like if this comes and that and that, this this not very likely that this happens and that, and then the process should be like that, and we’re like, it’s going to be exactly like that. The most unlikely event is still going to happen with us, because with the pure number of passengers we’re transporting everything is going to happen. So we have to adjust our processes to that point, but still you’ve got to be pragmatic at some point, you’ve just got to start and just go and do it and then improve over time. That’s one of the most important learning we took.

Interviewer: One other learning was also very interesting, because you convinced local operators to basically invest in your business, not really on your balance sheet, but at least they put some money the floor. What advice can you give for pitching or acquiring this kind of partners?

Jochen: It’s very difficult. You need a certain seniority level, you need to talk to them on eye-level, that’s very important I think. And you need to be fair with them, if they feel you’re going to drag them over the table or try to cheat them or something, they’re not going to work with you. So you need to develop a really fair model that gives risk and chance to both parties in a fair and balanced way. That’s really key. Obviously there is some sort of symmetry between us and the operators, we have much more transparency on how the business goes, how the numbers are, etc. But in the end you’ve still got to find a fair and balanced way to work with them. That’s really key. If the other party has an impression – and it’s usually on a personal basis – that these guys treat me well and treat me in a fair way, then there is a high chance they’re going to work with you.

Interviewer: Jochen, thank you very much.

Jochen: You’re most welcome.

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I would actually love to get in touch with Jochen or other senior management. I have experienced several difficulties with Flixbus and their customer service is simply not adequate.