1. Intro

    Back in the 90s, at Savoy Hotel, London, Jim Barksdale, CEO of Netscape from 1995-1999, said, "Gentlemen, there’s only two ways I know of to make money: bundling and unbundling." Something that was quite funny back then, Barksdale had actually described what was happening all this while and what would happen in future.

  2. Examples of Bundling

    When you bundle something, you also unbundle something else. Some examples:

    1. Cable TV unbundled community antennas and bundled channels into same time slots,
    2. MP3s unbundled music CDs and bundled different artists,
    3. Internet unbundled newspapers and bundled access to everything else,
    4. Netflix unbundled DVDs and VHS tapes and bundled content. This list continues.
  3. Why Bundling Works

    One reason why bundling works is that [it allows you to refactor and repurpose value](https://personalmba.com/bundling-unbundling/#:~:text=Bundling means repurposing value that,offers into one large offer.&text=Unbundling is the opposite of,offer into multiple smaller offers.). The best example that comes to mind from finance is CDOs. I'll let Mark Baum from The Big Short explain CDOs for you: "So mortgage bonds are dog shit. CDOs are dog shit wrapped in cat shit."

  4. Spotify + Hulu + Showtime

    Going off in the same spirit, I didn't quite like how Spotify bundled Hulu and Showtime. All I really wanted was a Spotify subscription. What I really got was Spotify and two streaming services which I rarely even used. It felt like a rip-off but it got me thinking about how clever the bundling strategy of these services is.

    1. Hypothesis (A digression)

      My hypothesis is this: As a former Berkeley student (I bought my subscription in college), I think college students are more likely to want to subscribe to Spotify for less than $1.99/month or $0.99/month than to subscribe to Spotify + Hulu + Showtime for $4.99/month. So, one idea that strikes me here is from Nathan Baschez, who says:

      The relationship here is very clear: if people have zero demand for most things in your bundle, it’s a bad idea to try and force a bundle on them. But if people have a little demand for everything, and a lot of demand for some things, then a bundle is a great idea.

      So, college students are essentially looking for some entertainment and music. Since they have a "little demand" for everything, they'd be happy to pay a bit more for Spotify + Hulu + Showtime. But now, as someone who has graduated, I don't find value in passive entertainment from Hulu + Showtime. So, I only want Spotify at a cheaper price than $4.99/month.

  5. Gestalt

    The Spotify bundle reminds me of 'Gestalt,' an Austrian and German school of thought which says that anything is 'gestaltic' when "an organized whole is perceived as more than the sum of its parts."

    1. Perhaps I subscribed to the Spotify bundle because somewhere, I felt that the whole gave me much more value than Spotify by itself. Other students might go for the Spotify bundle for different reasons; for example, if they badly want Spotify such that their willingness to pay for Spotify alone is more than their willingness to pay for these services, individually. In other words, if you fall in the green zone for Spotify, the bundle is probably a good idea for you.


    2. It's the same math you do when you go to buy a footlong vs a 6-inch at Subway. Taxes not included, a six-inch veggie patty will cost you $4.25 and a footlong will cost you $6.75. Even though you may not be hungry, you end up buying the $6.75 footlong veggie patty. You think that net "savings" are $1.75 (ie $4.25*2 - $6.75), but really, note how you weren't even looking to get a footlong in the first place.

    3. Subway does an incredibly good job at bundling — in this case — bundling more 'perceived value' into a footlong.

  6. We expect bundles

    1. Imagine if you had to pay $100 for FaceTime, $100 for iMessage, and even $100 for the Phone app on your iPhone, but that the iPhone were $300 cheaper. You would probably question the idea of buying an iPhone in the first place, because you expect the basic value of an iPhone to be bundled with the phone itself, even though there is no difference in the price. This is post-purchase dissonance. Once we have purchased something, we wish that 'something' had more of 'X'. We don't know what 'X' is, but we just want it to have more of 'X'. That's just how the brain works.
  7. How Does Bundling Work?

    1. As I wrote in point 5.1, to see if a bundle will work or not, you have to play around with the 'willingness to pay' and minimize 'deadweight loss.' Let's look at this simple example below. Let's say you have two consumers — A and B.


    2. A is willing to pay $13 for Apple TV and B is willing to pay $13 for Prime Video. Assuming you don't know both A's and B's willingness to pay, you charge $12 to A for Apple TV and $12 to B for Prime. Your total revenue is $24.

      In the graphs below, as the 'willingness to pay reduces,' the number of consumers increases. (See demand curves.)

      Deadweight loss represents the consumers you could have gotten had you reduced the price more.



    3. Now, if you were to bundle both Prime and Apple TV, and sell them for $14 together, your total revenue would be $28. Assuming that buyers lie on different points on the x-axis, you can stack demand curves together by adding consumers' willingness to pay. So, $13 + $5 would be a 'willingness to pay' of $18 for both Prime + Apple TV. But, the consumer is getting both Prime + Apple TV for $14, which means that the consumer is saving $4 in a bundle, vs $1 in individual packs. The best part, though, is that you get access to a large consumer base, because as you add up the 'willingness to pay,' your demand curve becomes flatter.


    4. So, bundling helps both the entrepreneur and the consumer.

  8. Why does bundling work?

    1. Above all, though, the main reason why bundling works is because it helps expand your customer base, even though you slash prices.


    2. The way we can look at it, bundling allows you to retain tier $T_1$ customers while also giving you access to a broad base of $T_2$ customers. Together, then, $T_1$ and $T_2$ give you more revenue per bundle subscriber as compared to high-revenue of $T_1$ customers.

  9. How to quantify bundling?