Note: The article was originally published on Channel Partners.
Bundling the right products and services is an effective way to create demand and boost recurring revenues. Before we get into specifics, let’s define what we mean by bundling and how it differs from, and relates to, another recurring revenue term, “tiers.” These two concepts are sometimes used interchangeably, but they are distinct.
“Bundling” commonly refers to the practice of combining multiple units of a product or service in a package deal, typically for less than the same items would cost if purchased individually. Phone minutes are a prime example. Bundling can also involve merging two or more different products or services into one offer. For example, getting your home and car insurance in a single policy often costs less than carrying two.
A tier, on the other hand, refers to the way recurring revenue businesses segment offerings, usually by price. Tiers often contain bundles. From a pricing standpoint, bundles tend to reflect volume discounts: The more expensive the tier, the lower the per-unit price of the items in the bundles. A good example is Box, a file storage and collaboration service. Its Business tier offers far more volume and bundled services than the Starter plan, but for a rate that’s only incrementally higher.
Bundled offers can also exist outside of tiers. Amazon Prime is a perfect example. Available at just one subscription level of $99 a year, it combines a host of free bundled services, including two-day shipping on thousands of items, unlimited streaming movies and music, unlimited photo storage and half a million Kindle titles. Sounds like a lot of stuff for the money. That’s the point.
How Bundling Works
In order to succeed, subscribers of a bundled service must perceive the whole as more valuable than the sum of its parts. Take cable TV. In its early years, the cable TV industry competed with free over-the-air broadcast networks. To gain subscribers, cable providers had to offer something worth paying for — access to a universe of channels unavailable through regular TV.
However, instead of charging by the channel (which would have been prohibitively expensive) cable companies bundled entire blocks of channels together for one monthly fee. Over the years, the cable industry became adept at the art of bundling, crafting channel lineups in different combinations and price points, segmented by tier. As with most bundled offers, the more channels customers subscribe to, the less they pay per channel. As an incentive, providers add premium channels like HBO and Showtime, which they incorporate into bundles and price by … you guessed it, tier.
Solutions providers can take lessons from bundles offered by a broad assortment of recurring revenue businesses. Essentially, anything you can package and price in a way that delivers greater cumulative value, purchased incrementally, is suitable for bundling. In addition to the industry examples mentioned earlier, here are a few more that are making hay with the bundling concept.
- Software: SaaS applications, packaged together and delivered through the cloud, are among the easiest to bundle. Examples include Microsoft Office 365 and Salesforce.com.
- Consumables: Everything from shaving products to cosmetics to gourmet foods is being sold not just in physical bundles, but also as bundled services offered through subscription.
- Cable services: Since the mid-1990s, cable providers have steadily added a diversity of service bundles to their TV packages, including high-speed Internet, phone and home security.
Bundling can be a powerful way to boost recurring revenues. If you haven’t done so already, it’s time to assess your product roster and recurring revenue business for bundling opportunities. Do your homework. Discover how your customers are using your services and where bundling might make sense. And always remember to test and retest your assumptions before you begin in earnest.