A Complete Guide to Bundling Strategy

In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets.

What is Bundling Strategy?

Bundling is the practice of offering (or requiring) by a seller the inclusion of one product or service with another for a single price. This typically happens either at the point of sale or when the customer changes their underlying consumption to include the new product or service in addition to an existing one. Bundling typically happens when a firm has pricing power in one product. This is because the bundle can be priced higher than the sum of the individual prices if the second product is scarce/rare. This is an effective marketing strategy that offers several specific advantages over simply selling the products or services individually.

In the past, there was a huge buzz surrounding the sale of bundled products. The reason was that one firm was bundling an existing technology/product with a new technology. This is known as value bundling. In such a case, one product is designed for the present customers while the other product is designed for the potential customers. The promise is simple, if you are an existing customer, we will give you more on the current product buy than what you are currently paying. In the case of value bundling, the bundlers are basically intending to retain their customers and to attract new customers. The acquiring firm does not have to go to the market to find new customers for the new product but can instead sell the product to their existing customers.

What is Magnitude Bundling?

For the customers, the value of a bundle of products is the sum of its parts. The main idea of this strategy is to sell the whole bundle at a lower price than if the customer was to buy just a part of it. It works better than value bundling because there are more opportunities to sell to a potential customer. Instead of needing to readjust the price of the future bundle, the firm simply needs to adjust the price of one part of the bundle in the present. The major drawback is that often the price of each of the bundled products in the future needs to be greater than the price of the total bundle in the present.

What is Frequency Bundling?

If the customers are considering to purchase multiple products within a specific time window e.g monthly or yearly, tiered or frequency bundling can be very beneficial. Under this strategy, the customer can purchase their products in a bundle and receive a discount over their purchase of each product individually. For instance, if a mobile phone plan is $50 for 1GB of data, the customer can purchase 10GB of data for only $300 under an annual plan. Instead of paying $5 per GB of data if the data was purchased individually, the customer receives a discount if they purchased 10GB of data at once. This strategy is beneficial to the company and the customer because it saves the customer money, while providing the company with a sufficient amount of recurring revenue each month.

Advantages of Bundling:

The strategic position of the firm is strengthened
The sales mix becomes more favorable
The utility the consumer gains from each bundle part increases
Reduces the perception of the total price of the product.
The consumer’s choice set is reduced.
Though bundling benefits the seller, there exists a cost for the buyer, such as carrying an unwanted product or service.
Bundling reduces the overall search costs for the consumer.

Disadvantages of Bundling:

Occasionally, customers may feel forced towards accepting the entire bundle package when they would not have purchased each product separately
Wasted resources for each of the products purchased
Risk of extra returns as customers might not want each product
Loss of revenue from customers who would have bought each product separately
The firm might not find it worthwhile to sell particular products separately.
Costly for the firm to promote and service each product separately
Complexity of the pricing structure for the product
Marginal volume/profitability may be smaller than if sold separately
Some customers may purchase one or more of the bundled products
It is a common practice to bundle serviced products such as maintenance or inspection services with goods. As a result, a higher price is charged to the consumer.
High-volume customers receive greater benefits and are less sensitive to the incremental price of the bundle
Physical bundling is costly, particularly if the underlying products in the bundle vary significantly in size.
Establishing a pricing strategy for a bundled product is complicated and requires the seller to perform a delicate calculation to set a price that allows for all the products to be sold in a bundle.
Performance issues may arise

Is Bundling Strategy right for you?

None of the bundling strategies above is right for every firm, and none of them are even right for every product, as many factors in price and production affect whether a particular bundling strategy will help or hinder your company’s or product’s success. This article shows you what to look for and what to avoid in making the case for your own bundling strategy, and also explains how to design your bundling strategy and implement it with ease.

The first step in planning your bundling strategy(market centric) is to identify where you want to be in terms of expertise and differentiation. Are you a high end product? Are you aiming to be the lowest cost provider? Very often firms choose where they want to be with respect to a target market, and then try to do everything in their power to move to that position regardless of how other products are positioned. However, what is better is that you start with the customer and then decide which position you want to be in and then build your product or services strategy around that.

As there are three levels to most markets it is important to understand the implications and advantages of each level as they relate to bundling. The three levels are:

Level one: Market level – This is where you are selling to a mass market that has homogeneity, it is a large mass of customers whose needs are pretty much the same with very little differentiation. This is where bundling can make the most sense as you are able to pool customer costs together and increase your unit sales by including an additional product. For example, toothpaste is a great example for this level, most people brush their teeth and they all require toothpaste. The cost to add whitener, flavor, etc is negligible and the perceived value of the product is increased, as whitener is more desirable than just plain old toothpaste.

Level two: Product level- This is where you product is differentiated in the market in one or many dimensions, maybe you have a better package or you are more brightly colored or you are cheaper but not by much. Bundling can be useful to build perceived value as it may be hard to sell your product by itself, particularly if the other products are substantially worse. Microsoft Office is a great example for this level, if a consumer wants Office but they have another product with similar capabilities but does not include office they may decide to purchase the cheaper product and buy Office separately. The bundle allows them to save on the difference of the individual products and they still get Office.

Level three: Product family level – This is where you are producing and selling two or more essentially different products that all appeal to the same customer. A great example for this is consumer electronics where you have a TV that has a built in DVD player. The bundling can be done at level one where you package everything together or at level two where each product can be purchased separately depending on customer needs.

The decision of which level you would like to sell your product at is a strategic decision that will affect all aspects of your pricing and bundling strategy. It requires that you think through the positioning of your product or service compared to the competition. For example, if you are competing with ten other firms and all of them are high quality products, the most desirable position would probably be at level one a market level. By this I mean that you want your product to be enough that the customer might consider purchasing your product even if they don’t need/want the extra features. However, if the product is at level three corporation level then if you are offering, say a service, separate products like a consulting service and a security service, these products may have to be bundled together in order to make the sale.

Once you have determined where your product sits in the market it is important to think through what the benefits of bundling would be for you and what the costs would be. The costs are fairly straight forward but the benefits require some strategic thinking, fortunately it is not rocket science.

Consider the following questions to help you think through the benefits:

Will it increase market share and penetration as it lowers the barrier to entry for the customer?
Does it create a perceived gap between the customer and the competition?
Will it make the product educationally easier for the customer to understand?
Does it get the customer to try new product features?
Is it more profitable to sell the product as a bundle versus separate parts? Do you receive a better return on your products if sold as a bundle?
Does it save on the costs to promote?
Does it create a cycle of repeat business?
Do you increase the average dollar per sale?
Is it a strategic fit in the portfolio of your products and services?
Does it require less servicing per customer?
Does it result in a more profitable customer?

There are very few advantages of bundling versus unbundling, and a firm should use this to his or her advantage to focus on which of the benefits she will be offering to her customers.

Once you have thought through the benefits of bundling you need to decide how you will implement the bundling strategy. There are many ways to implement bundles and it is important to look through the three levels to see where there are potential inefficiencies that could be improved upon.

For example, the market level might appeal to your companies needs, but say the product level may appeal to the customer, and the product family level may match the value to the customer. It is important to avoid a one-size fits all approach as this usually leads to unfriendly customer interfaces and unattractive pricing to the customer, which will lead to a product or service that is very difficult to sell. What, then, is the answer?

The answer is to let customer needs lead the way. Know what your customer wants and how they would like to buy; then design the best fit for that need. This will cost the firm some time and effort in the beginning in case there are multiple options but will pay back substantially in the long term.

Lastly, let us move from what to how?

The how has been the focus of this article. To sum it all up, the strategy of everything you need to know to create successful bundling strategy.

Decide on the level of the market you want to be in and then design your value proposition around that level
Design your bundling strategy to fit the level of the market you are targeting
When creating your bundling strategy, keep in mind your customer’s needs
Create an interactive customer interface for ordering that makes the customers experience a pleasant one
Implement the strategy, test it, modify it, and then implement again

Conclusion

Bundling can be used to create market share, increase customer value and price perception, and differentiate your product from the competition. With the help of a Bundling Strategy your company will be sure to succeed in the market. Enjoy please comment.