One of the prevalent trends in startups recently is the bundling of products into one, with a combined value greater than the sum of its parts.
This is not a new concept; product bundling is a strategy that has historically been effective in selling products and maximizing economic value.
Product bundling is most effective when bundling high volume, high margin products, commoditizing the individual products and increasing the value of the bundle as a whole. This means that bundling is particularly effective with information and digital products.
In some cases, bundling of inferior products can actually be more compelling than individual, unbundled superior products.
Here are 6 examples of bundling and the value bundling adds:
Example 1: Pokémon Cards
Value: Randomness and Potential Expected Value
This is where I expose my nerd card. Pokémon cards were a big fad when I was a kid. We would buy booster packs of Pokémon cards, which included a random unknown selection of 10 cards.
In the case of Pokémon cards, the randomness of the unknown selection of cards within the booster pack drove large sales of the booster packs. My friends and I would buy 10 booster packs and hope to get 1 holographic Charizard card. As a business, it would be difficult to sell the more common cards individually, so by bundling them with the potential of the rare card, you increase the value of the booster pack and drive huge sales of the booster packs. The booster pack’s value was greater than the sum of its parts.
The value of the “rare” cards was driven by scarcity of and demand for the rare physical product rather than any real value itself. And the potential (read: expected value) of that booster pack was driven up by the fact that those rare cards were bundled with the common cards.
Example 2: Subscription Services: Birchbox, Quarterly, Craft Coffee, Trunk Club, Foodzie, etc.
Value: Discovery; Convenience; Curation
Subscriptions services bundle individual products into a recurring box of unknown products. The idea is that you receive products that you wouldn’t have otherwise known about or bought for the following reasons:
Discovery: You find products that you wouldn’t have discovered otherwise.
Convenience: You can try out the products without having to leave the comfort of your home. Then, the hope is that you will buy the full sized product (conversion to purchase) or become a loyal customer (customer acquisition to lifetime value).
Curation: You get advice for which products are better, or a better fit for you. This is especially powerful when products are commoditized and the market is saturated to the point where it is difficult to choose which one is better.
Example 3: Information: NYTimes, Twitter, News.me, Summify, Social Weekend
Another type of bundling is the bundling of information and content.
One of the reasons people read the NYTimes is because they trust the NYT editors and writers to give them the perfect balance of information and news, both the must-know breaking news as well as the interesting reports on stuff off the beaten path.
I personally get all of my news through Twitter. Others might get that information through News.me as a filter on top of Twitter. We all choose our own filter bubbles and arbiters of information. We trust those arbiters to bundle information together. In some cases, we value it so much that we even pay for it in the form of a subscription.
Example 4: Products/Interest Graph: Pinterest, The Fancy
Startups like Pinterest and The Fancy let people create digital bundles of products and images. The analogy that Pinterest uses is the digital scrapbook. The value proposition here is that I am interested in what products people with similar tastes like.
The startup that can successfully convert this bundling to purchasing behavior will be well-positioned to win. The Fancy is getting good early traction around converting curated digital bundles into single purchases.
Ultimately, I think the opportunity is to convert curated digital bundles into buying whole bundles of products.
Example 5: Media: Music (CDs, Napster, BitTorrent, iTunes, Spotify/Rdio)
There were two major shifts of bundling in the music industry.
The first was the shift from the physical to digital medium, from CDs to MP3s. The critical effect here was the idea that consumers could suddenly get songs a la carte, and buy individual songs separate from the bundled album. There was more value in debundling the songs from the CDs, because the consumer didn’t get much value out of the predetermined album bundle. They wanted to create their own mixtapes, burning MP3s on CD-R’s.
The second major shift was from MP3s to streaming services like Spotify and Rdio. Here, the idea of owning any form of content is completely removed. People now listen to playlists of songs they don’t own, curated by other people they many times don’t now in real life.
Example 6: Financial Products: CDOs
Value: Hedging Risk
Finally, an example in the financial services space. Not to oversimplify the financial crisis in 2008, but collateralized debt obligations (CDOs) gained instant notoriety in 2008 for being the financial instrument that caused the financial crisis. CDOs were originally intended to hedge risk; specifically, mortgage-backed securities of varying risks of default were bundled together into a larger financial product.
Ultimately, however, rather than hedge risk, CDOs incorrectly masked risk. The models behind the CDOs did a bad job of predicting how risky the underlying securities were, and the ratings agencies did a bad job of realizing this.
Conclusion: Bundling and the Commoditization of Complements
As a parting thought, the overarching idea of bundling is the idea of the commoditization of complements. By bundling products, you commoditize the individual products. This in turn increases the value of the bundled product you are selling.
The classic example is the hot dog stand. Take a hypothetical situation with two competing hot dog stands. One of them charges for the hot dogs, ketchup, and soda individually. The other hot dog stand bundles them all together into a “happy meal.” The value of the bundled product is much higher if the customer would have bought all three items anyway.
In fact, bundling may actually be a good antidote against “race-to-the-bottom” pricing, where the only competitive advantage among commoditized products is price.
Bundling is an incredibly effective tool to increase the value to your product offering.