I recently did a podcast on bundling and subscriptions (which are a type of bundling). It’s an important topic in digital. And there is generally a bit more depth to the subject than is discussed.
The Basics of Bundling
Traditional bundling (both products and services) is about capturing more of the customer’s willingness to pay.
Here’s a typical bundling example is:
- You have 2 products. Shampoo and conditioner. Each are priced at $10.
- Customer A is willing to pay $10 for the shampoo. But only $6 for the conditioner.
- Customer B is the reverse. A willingness to spend of $10 for conditioner but only $6 for shampoo.
- If you sell them separately for $10 each, you get $10 from each customer. Therefore, a total revenue of $20.
- If you bundle and sell for $15, you get a total revenue of $30. Both customers buy the bundle.
- Each customer has a total willingness to spend of $16. The seller has captured much more of it.
- And the customer wins too. By selling for $15, the customer gets a surplus is $1 (willingness to spend minus price).
You can do this for goods and services. You can also do lots of cross selling of services. And up-selling.
That’s all good but limited. Because physical products and services have costs of goods sold.
However, bundling (and cross-selling) gets supercharged with digital goods. Because there are low and often zero marginal costs. You can endlessly bundle videos, photos, articles, digital services and even apps, with often little additional cost.
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Digital is just really great for adding features, versioning, cross-selling, upselling services, and bundling. The are few marginal production costs. And there are no natural limits on production capacity. You can really go crazy in this area.
And this means you also offer far more parts of solution. You can solve more of the customer’s problem. Offering and bundling complements is really powerful. And it can be done internally or by partnership and ecosystem.
Bundling and cross-selling complements is the primary strategy in digital.
- You develop a great service as a wedge to break into an established system (like payment by Stripe and messenger by WeChat).
- Then you build out complementary services.
- Then you cross-sell and bundle.
Bundling Is More Powerful in Content and Software
TV cable is an example of bundling in traditional media. There is a well-known example written up by Chris Dixon for this.
It is basically the same as the shampoo and conditioner example. But cable can scale up to tons of channels in one bundle. Netflix is also just a massive content bundle. The size of the bundle makes it hard to replicate (i.e., a barrier to entry).
One you get to software; bundling gets a lot more interesting. Think Microsoft Office, Adobe, and SaaS. Watch for:
- Big barrier to entry.
- Lots of built in switching costs.
- Integrated bundles – where each service works better when integrated with the others. That’s Adobe..
- Bundles as a weapon – which Microsoft does. You add a new and compelling service for free to your existing bundle but crush the standalone company that invented it. Microsoft did that to Slack. I did a podcast about that:
Bundling Is Great for Buyers and Sellers
So why are bundles good for sellers?
- As mentioned, it gets you more revenue. You capture more of your customer’s total willingness to spend.
- It naturally segments your customers. You can learn a lot about their preferences. But you also really need to understand who is buying your different products and why. Bundles have to be specifically constructed. What are the buying tendencies of different customer segments?
- It can reduce costs. Usually by economies of scope. Sometimes by economies of scale.
- They can create a barrier to entry.
- You can create higher than normal switching costs (for integrated services like Adobe and Microsoft).
Why are bundles good for buyers?
- It’s a better deal. They get more value. And a customer surplus is captured.
- It increases customization and tailoring (which is a type of customer value).
- I usually increases convenience. Netflix is very convenient.
You can also apply all of this to platform business models. You can bundle to both user groups. But that gets way more complicated.
Ok. That was the basics.
Here’s some of the complications to think about. There are mostly from an article I read years ago. But I haven’t been able to find it to source them. If you know, please let me know.
Complication 1: Bundling Doesn’t Work Without a Robust Product Suite
It’s generally easier to tier services. Consultants, lawyers and brokers do this all the time. Medical services do it too.
And you can bundle digital services and apps. However, this is different than versioning.
But none of this works without a robust product suite.
The products need to be “need” or “nice to have”. They can’t just be ok. In my mind, I always think they need to be 6-7 or 8-10 out of ten. Bundling in products that are 3-5 probably doesn’t help you. And it may take away from your good products. Don’t put in garbage. At best it is distracting. More likely annoying.
Also, customers will probably buy the “needed” products (8-10/10) no matter what. So, you only use a small discount to bundle it.
If you bundle in “nice to have” (6-7/10), you will need a bigger discount.
Complication 2: You Want to Bundle with a Low Attach Rate
The attachment rate is the percentage of buyers of the core product who also buy this specific second product. If it’s low attach rate for that specific second product, there isn’t much risk in putting that in a discounted bundle. You’re not going to lose revenue or margin.
However, if the attachment rate is high, you are probably cannibalizing other sales by creating a bundle. They were likely willing to pay full price for it.
Complication 3: Bundles Can Complicate the Customer Experience
Netflix is a big bundle and it increases convenience. That’s a win-win.
But usually, a bundle adds complexity to the customer experience. It adds complexity to the customer journey.
That’s not great.
They can be confusing. What are all these packages?
They can make the customer think twice about buying products. Maybe I should wait for it be bundled and discounted?
You usually want to use these sparingly.
Complication 4: Bundling Works Best with Different Varieties for Similar Customers
The magic of bundling woks when the customers have a similar total willingness to pay, but different tastes.
The shampoo / condition and Chris Dixon examples both had a similar total willingness to pay by the customers. They just had different tastes and priorities. By bundling, you capture more of the total willingness to pay. And it lets you segment the customers cleanly.
However, differences in total willingness to pay make bundling much more complicated. And the benefits are often not obvious.
Complication 5: Unlimited Bundles Can Create Cost Problems
Netflix is an unlimited bundle (i.e., a subscription without a limit).. You can watch as much as you want. And that works ok for content like blogs. Netflix gets around the cost problem by either owning the content or having usage terms that are capped in costs.
But unlimited bundles in services can have problems if there are significant costs. A well-known example is MoviePass, which let you watch unlimited movies at movie theaters. ClassPass was similar, where you could do unlimited gyms sessions at participating gyms.
They also limit your revenue per user. You lose your ability to charge more.
Complication 6: Bundles Don’t Work Well When Willingness to Pay is Positively Correlated with Demand for Variety
As mentioned, the best bundles are when customers have same total willingness to pay. But different tastes.
The opposite situation is when customer’s willingness to pay increases with more and more variety.
Netflix could charge a lot more for those that just want to see lots and lots of movies. And most are only watched once. They are really leaving a lot of money on the table for these customers by charging a flat fee.
Spotify is another interesting example. People definitely want variety. But it’s different than Netflix. They only want specific popular songs. And they want to listen to them over and over. So, variety is valuable but less so.
Complication 7: Bundles Don’t Work with Superstar Content or Services
This is why hit movies and the UFC is not in the cable bundle. You buy them separately on demand. It’s why Netflix only has hit movies that it created itself. Really popular content or services don’t want to be in bundles. They can charge more separately.
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Ok. That’s it for today.
Jeff
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Related articles:
- Why Data Network Effects and Data Scale Aren’t Moats. Plus, More on Bundling. (Tech Strategy – Podcast 260)f
- Extreme Personalization Playbook (PrISM): Add Services – Surround Your Customers with Ever-Increasing Value (3 of 3) (Tech Strategy)
- How Amap Beat Baidu Maps. My Summary of the Alibaba Playbook. (Tech Strategy – Podcast 252)
From the Concept Library, concepts for this article are:
- Bundling, unbundling and cross-selling
From the Company Library, companies for this article are:
- n/a
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I am a consultant and keynote speaker on how to accelerate growth with improving customer experiences (CX) and digital moats.
I am a partner at TechMoat Consulting, a consulting firm specialized in how to increase growth with improved customer experiences (CX), personalization and other types of customer value. Get in touch here.
I am also author of the Moats and Marathons book series, a framework for building and measuring competitive advantages in digital businesses.
This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.