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.
Examples of Bundling
When you bundle
something, you also unbundle something else. Some examples:
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."
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.
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 abundle
on them. But if people have a little demand for everything, and a lot of demand for some things, then abundle
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.
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."
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.
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.
Subway does an incredibly good job at bundling
— in this case — bundling
more 'perceived value' into a footlong.
We expect bundles
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.How Does Bundling
Work?
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.
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.
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.
So, bundling
helps both the entrepreneur and the consumer.
Why does bundling
work?
Above all, though, the main reason why bundling
works is because it helps expand your customer base, even though you slash prices.
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.
How to quantify bundling
?
Bundling
and unbundling work in mysterious ways, leveraging insights from the way our minds work.bundling
and its impacts.
bundles
my type B travel insurance with another insurance (type C) of his own. The bundle is now called type Z bundle
.bundle
will cost you $1K.bundling
, I take a wild guess and think to myself, "Hmm, if I don't include type B insurance in the type Z bundle, I think 1M people will not buy the bundle."bundle
. You have a total of 10M people buying your bundled insurance (type Z). Give me at least 10% (ie 1M / 10M) of $1K, so that I can realize the actual value my insurance is adding to your bundle
."bundling
type B insurance with type C insurance. This, friends, is the 'anchor value,' and how we can quantify bundling
from a provider's perspective.bundle
if I sell them the type (B) insurance in my bundle
?" So, this is the 'subscriber value' that I get, for which, I can do some simple math, see how much money I make, and then, share the profit with you — win-win for all.In the many posts that I'll link down below, this concept is technically referred to as 'marginal churn contribution,' (MCC) meaning that we can quantify bundling
by MCC, not usage. I like the mathematical expression of this formula, which is this:
$Pr(X) \in Y = Pr(Y) * MCC(Pr(X) \in Y)$
In other words, the actual price (or value) of product X in bundle
Y is the retail price of bundle
Y times the loss of revenue due to the number of subscribers you lose if you unbundle X from Y.
So, take the example of the bundle
below. You own the keyboard; I own the bundle.
Let's say the bundle
costs $ $150$ instead of $ $180$ (ie 5 + 10 + 15 + 30 + 35 + 40 + 45).
If you were to unbundle the keyboard, I would lose $5$ subscribers to the bundle
. Total lost revenue for me = $ $5$ $*$ $ $150$ = $ $750$.
Now, let's say I have a total of 50 subscribers. That's 10% of my subscribers gone, if you unbundle your keyboard.
So, to act rationally, and to make sure you stay in my bundle
, I should say, "Okay, you bring a ton of value to my bundle. I'm going to pay you 10% of the bundle cost, ie 10% of $ $180$, which equals $18." So, even though your keyboard will actually cost $15 in the 'free market,' with the bundle, it brings you a value of $3 more, and that's how you quantify bundling, and why bundling works.
WIP
bundling
works, but these are some of the initial recollections + musings I had after reading a bunch.Strava's Unbundling and Bundling: Why Didn't It Work (and When It Will)
How bundling benefits sellers and buyers