I think generally the budget airlines generally operate on lower margins than the national ones;
Sure, but the principle of mix and match pricing applies to both.
Imagine a theoretical flight with 200 passengers paying a flat fare of £50 each (i.e. £10k income). Luggage is included, as is picking your seat. Airline gets to advertise a fare of £50pp.
Then someone notes that a fair number of passengers travel hand luggage only, so to fund cheaper fares they make people pay for checked luggage.
It magically settles down to 50% of the passengers paying £20 to check in bags, and the other 50% travelling hand luggage only.
The total revenue for the airline is the same (£10k) but the headline fare is now £40pp.
Repeat this for picking specific seats. Plenty of people on the flight simply won't care, or won't be prepared to pay for it (I never have and have been lucky that my family was never split up enough for us to do something about it). Whatever income it provides can be used to further drive down the base fare. If 25% pay £10 to pick their seats then you can knock off another £2pp to bring the advertised fare down to £38pp.
Dynamic pricing is a further extension of this. Offer even lower headline fares and recoup the "lost" money as the plane fills up, with the last minute passengers who have to get that particular flight getting screwed the most (I've been this person on many a flight but usually for business panic reasons and not personal reasons). Easier to do if you have premium/first class as you'll eventually get to the point that the higher class seat isn't much more than economy, which will make it more appealing to some people anyway.
Even the non-budget airlines have cut back on freebies (sandwiches, drinks, etc) on short haul flights in favour of a paid-for trolley service.