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Bundling Your Way to Success
September |2009
Bundling Your Way to Success
Working hand-in–hand, Sales and Marketing teams of companies can generate significant cross-sales / up-selling by bundling products / services together. Of critical importance is piloting the concept to determine the best mix and to ensure revenue optimization.
In almost every sector, there exists a great, relatively untapped opportunity for generating cross-sales. The opportunity – bundling – is the concept of putting complementary products and/or services together and selling them as a package to the customer base. The critical point here is that some type of value is created for the customer, be it a discount, convenience, etc.
Some companies have for years been practicing bundling, and have even been defined by the concept – case in point , Microsoft’s Office software bundle. Their strategy to offer a package of solutions (Word, Excel, PowerPoint, etc.) rather than standalone software has been pointed to as one of the key reasons why companies like Novell or Word perfect failed with their offerings.
The software sector is only one example – bundling can be seen in practice in other sectors such as retail (i.e. toothbrush packaged with toothpaste), hospitality (i.e. discounted breakfast if packaged with the room reservation), and telecom (fixed-line, mobile line, internet, and IPTV packaged together), as the concept knows no boundaries. It cuts within and across sectors as well, as companies can team up to offer bundles (i.e. instant coffee bundled with coffee creamer).
The concept can support numerous strategies, and accordingly, the reasoning for using it should be well defined. The most common reasons include:
Generating cross-sales: By using the demand for one product to boost the sales of another. An example – bundling a printer with a laptop in order to boost printer sales, playing to the printing need of laptop purchasers that will develop sooner or later. Up-selling: By generating demand for a product through incentivizing the customer base. An example of this – bundling free basketball tickets and free monthly magazines with upscale VIP season tickets for a football club, hoping to drive up demand of more expensive tickets through offering additional benefits in the form of a bundle. Product uptake: Bundling a new product with an existing one to generate customer trials and then hopefully future purchases of the product separately. An example of this – a shampoo bundled with a new soap for free, generating trial usage and then uptake in the future.
When designing a bundle, there are two critical pitfalls to be wary of. First and foremost, the bundle should not strip away brand value – customer perception is critical and must be considered when designing the bundle, otherwise, it can harm the overall company value and have lasting consequences. Any cola brand, for example, would have to think twice about bundling its product with an
alcohol brand – while there could be a positive increase in sales in the short-term, the long-term harm that could come to the cola brand for being associated with an alcohol brand could be overwhelming.
Second, the bundle should make sense financially – extensive analysis and piloting need to be conducted to ensure this is the case. A certain degree of revenue cannibalization will take place, and could ultimately hurt the bottom line rather than help it. A scenario of such a case can help bring clarity to this point:
Non-Bundled Scenario Price
Total Monthly Sales (Units)
Total Revenue Margin
Total Net Margin
Product A 10 1000 10000 10% 1000
Product B 20 100 2000 50% 1000
2000
In the above case, despite a 1% increase in sales, there is a drop in net profits due to the pricing discount offered to the customer. The reason for this in that cannibalization has occurred – meaning customers who were already going to purchase the two products separately were given a discount that was not needed – they would have bought the products without any incentive anyway. Launching such a bundle would cause detriment to the bottom line rather than helping it, and is a common mistake made by many a company. The best way to avoid committing such a mistake is to conduct extensive piloting to ensure a financially sound bundle has been designed before mass roll out.
In the pilot, the following should be assessed, monitored, and fine-tuned:
Cannibalization Effect: The correlation between the packages sold and its effect on standalone product purchases, specifically to see the financial impact and the effect on consumer behavior.
Bundled Scenario Price Total Monthly Sales (Units)
Total Revenue Margin
Total Net
Margin
Product A 10 1000 10000 10% 1000
Product B 20 10 200 50% 100
Product A & B Packaged Together 25 100 2500 24% 600
1700
Customer Perception: The perception the bundle is creating with the consumer – is the package “cheapening the brand,” does the created value come across to them? Employee Performance: The scripts the employees are using, the messages that work best at selling to customers, the most effective way of convincing customers to make the purchase. Packaging: The physical packaging of the bundle, the marketing communications in place to promote the bundle, the location of the bundle.
The importance of conducting thorough piloting cannot be stressed enough around bundling. Only when the value proposition is well designed and the bundle solidly tested and determined to be financially sound should it be rolled out across all sales channels and further supported by more mass-scale marketing communications.
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