Bundling, as a price model, is not new. Consumers are well aware of this pricing technique and embrace it. The most common example of its use is by the fast-food chains (were bundles are termed ‘combos’). But, bundles are widely used by insurance companies, banks, cable TV operators, content streamers, etc. etc. Bundled pricing is built on the theory that you can make more money selling a bundle of products vs. selling them individually. Over time, bundling has become an increasingly popular pricing model. So, I thought it would be wise to look at why it might be a good tactic for your business.
In the world of bundling there are three types of purchasers:
- Super-fans: customers that would pay full price for each product separately and seek out your products/services
- Casual-fans: customers that value your product but will not pay full price and do not seek out your products/services
- Non-fans: consumers that have no need and may even harbor negative opinions of your products/services
Assume that you sell three products and are wondering if you should sell them individually or as a bundle. If you sell them individually the consumers that purchase each product are Super-fans. If you sell these products in a bundle those purchasers are Casual-fans. So, bundling produces value for the Casual-fan vs. the Super-fan. As a consumer, I get value from a bundle because I get access to products I might only be a Casual-fan of. As a seller, I get value from a bundle because I get buyers who are Casual-fans and not just Super-fans.
Types of Pricing Models
What is Fair?
When asked what is fair, consumers are usually referring to usage. So, the question is: does the bundle have ‘anchor value’ or more precisely ‘marginal churn contribution’? What that means is that if you remove a product from the bundle how many consumers would churn (stop buying) and how much revenue would that churn represent.
Consumers have become acclimated to bundling. No one thinks that a McDonald’s combo is a rip-off because every item in that combo is available individually. No one is forcing you to buy the ‘bundle’ — but individually it would cost more.
The best bundle is one that minimizes Super-fan overlap and maximizes Casual-fan overlap. The best case scenario for a seller is when the customer wouldn’t purchase any of the three products individually but will pay for all three together. The seller is creating customers who would not have purchased any of the parts but would for the whole. Now you are building value.