Strategy & Best Practices

Software Bundling: Leveraging the Opportunity

By Nat Robinson / January 18, 2012

The concept of product bundling has been around for decades and is now part of our everyday lives: In fast-food, multiple items are combined to form a meal; in music, songs are compiled into anthologies; and in the home, providers combine entertainment and communication products to form packages. The products work together to provide a solution, reduce complexity of choice and usually offer substantial cost-saving.

Software, too, can be bundled, either with hardware, other software titles or services such as warranty or support. The key is to build a bundle that works together to solve a business challenge for your customers. Also, the right bundle can help you reduce costs, increase efficiency and challenge the competition.

To leverage bundling to drive your business, it is helpful to look at how bundling is defined and the factors that lead to successful implementation of a bundling strategy.

Bundling Defined

Bundling can be defined as combining two or more products or services together to create differentiation and value and thus enhance the offering to customers. Pure bundling occurs when customers can only purchase an entire bundle and mixed bundling occurs when consumers can choose between purchasing the entire bundle or one of the separate parts of the bundle.

Another and less obvious form of bundling is unbundling or pure components, which means customers can only buy products separately. Figuring out the best form of bundling for your products, industries and market segments is key.

A classic example of a mixed software bundle targeted to the graphic design and web development market is the Adobe Creative Suite. Adobe released its first version of Creative Suite (called CS1) in September 2003. This bundle has evolved over the past eight-plus years to combine a complimentary set of popular products like Photoshop, Acrobat, Illustrator, InDesign and Dreamweaver. This bundle provides an economic advantage for the customer, and a fully integrated, comprehensive set of tools for developing high quality graphic design projects.

The United Kingdom’s Barclay’s bank provides a more recent example of a software bundle for business customers. Its bundle contains the basic tools necessary for running a business, including business planning, accounting, legal assistance, data backup and business training, all delivered via the web. While these products are not integrated, they are complimentary when offered to a particular market segment, in this case small to medium businesses (SMBs). Buying this bundle lets SMBs get a useful collection of software at a sum smaller than the total of the prices of the individual packages. More importantly using this software allows business owners to focus on important things such as driving revenue, customer satisfaction, business planning and more.

Why Bundling Adds Value

It is important to understand why you might consider creating an application bundle in the first place. Here are a few examples where bundles can add value to the equation:

• Customers want recommendations on what applications they should use and which ones work well together.
• Bundles allow customers to quickly and easily identify a set of products that solve their overall business needs without the need for researching and procuring a series of individual point solutions.
• When properly designed, bundles provide a user-friendly method to increase productivity because the applications are integrated to improve workflow and efficiency when performing routine tasks.
• Bundles can increase sales because they simplify the customers’ purchase decisions and provide greater benefits through the value of the combined solutions.
• Customers appreciate working with a single source to procure several solutions and a single source for service and support.

How To Develop A Bundle That Makes Sense

Maximize your reach and your profits by making sure your bundle meets your customers’ needs:

• Identify a market need within a customer segment or vertical. Determine if there are similar requirements among these customers’ businesses and the range of functionality the users need to do their jobs.
• Identify a bundled solution by selecting applications that satisfy the needs of the target segment and preferably applications that work together and complement one another.
• Decide which form of bundling to pursue and how to price the bundle and the individual products.
• Perform testing on the bundle to ensure it is going to meet your customers’ expectations for functionality, ease of use and support.
• Consider what it will cost you to build the bundle and evangelize its availability and the unique benefits.
• Choose carefully. Bundling can also drive consumer surplus, which is the difference between the total amount consumers are willing and able to pay for a good or service and the total amount they actually do pay (i.e., the market price for the product). Sellers can actually decrease their revenue by including specialized products in a bundle because the benefits may be diluted across a mass market that doesn’t put the same value on the specialized product.

The following table compares the impact bundling has on several factors including consumer surplus, marketing effort and ease of consumption.

When Does Bundling Make Sense?

For bundling to be truly effective, you need to understand what market forces are in play and how you can take advantage of them:

• Bundling makes sense when customer acquisition costs are high because bundles allow you to sell multiple products and services to the same set of customers, thereby increasing the Average Revenue per Customer (ARPU).
• As you increase the number of products promoted, you can reach more people per dollar spent. This provides an economy of scope in your distribution.
• If the marginal cost of bundling multiple products is low, you can gain the benefit of selling multiple offerings without a proportionate increase in expense.
• Bundling can make your prices lower and offer competitive differentiation.
• Bundling makes sense when buyer behavioral decision theory outweighs classical economics.

Where Should You Offer Bundles?

Bundling can have many benefits to you and your customers if you understand your market well:

• If you have identifiable customer segments or verticals and an ability to understand the right grouping of products or services to meet the needs of those segments, bundles can benefit your business.
• If you have a large customer base, bundles allow you to increase efficiency by combining your marketing and distribution efforts to reduce costs.
• If you have traditionally sold a closely coupled set of services or products, bundles can provide new ways to reach new customers and increase your ARPU
• If you are supporting a range of applications, bundling helps you avoid possible integration issues or incompatibilities among component pieces because you test everything to ensure it is documented, packaged together and delivered to the customer as one item.

When NOT to Bundle

Bundling can have drawbacks as well:

• Some customers may be concerned that bundling increase risks due to over dependence on a few suppliers. The more they bundle with one supplier, the more they will be tied in with that provider. This exposes issues such as pricing leverage where they become dependent on fewer vendors and have less negotiation capability.
• Another area of consideration is quality of service. Customers may be concerned that the supplier will not be able to provide them with the same level of service across all the products in the bundle.
• Finally, there is the issue of governance. Because bundles often offer functionality to multiple different business units, customers must involve decision makers from multiple parts of their business. They may be concerned that this will impact the quality of service and the service level agreements.

Summary

Software bundling provides a mechanism to simplify the lives of customers by providing a collection or suite of applications that support the needs of their businesses. Bundles also provide value to the vendor because they allow you to leverage economies of scale in sales and marketing efforts as well as distribution. If you put some thought into creating effective bundles, tailored for your customers needs, you can increase your ARPU and proliferation of your product and service offerings.

Additional Resources:

• Wikipedia - Product Bundling
• The Design and Pricing of Bundles: A Review of Normative Guidelines and Practical Approaches (2009) by R. Venkatesh and Vijay Mahaja (PDF)
• Optimal Bundling of Technological Products with Network Externality (2010) by Ashutosh Prasad, R. Venkatesh, Vijay Mahajan (PDF)