Key Takeaways
- A price bundling strategy works best when it reflects what customers value and are willing to pay for.
- Bundle features customers value highly, but avoid giving away extras that add little value.
- Test bundle features and prices with customers instead of relying on assumptions.
- Unbundle features when doing so can increase perceived value and create new revenue.
What keeps customers happily buying more from our businesses as they go about their busy lives? Do customers really spend more money with us simply because we focus their attention on lots of low-priced products? Or is there a unique offer, value configuration, or price bundling strategy that we are offering them, which is working wonders to attract more customers?
If so, what is the perfect price bundling strategy? How do we create an effective price bundling strategy that monetises what customers want and grow our share of their wallet?
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In this article, we’ll be discussing a series of bundling pricing strategy examples and retail case studies. This will show how other retailers think about growing total lifetime basket margin.
We’ll assert that businesses that focus on understanding what customers want and are willing to pay for when building a price bundling strategy outperform those that don’t (i.e., retailers that simply assume what customers value and implement a top-down bundle pricing strategy without understanding customer value). Finally, we’ll provide some tips and advice on what you can do to improve your price bundling strategy going forward.
Price Bundling Strategy Definition
If your job involves building a price bundling strategy or bundle marketing strategy from scratch, no doubt you have a strong desire to learn some hard and fast rules on when to bundle and when to focus on separate products.
But, unfortunately, there are no easy rules for price bundling strategy development. There is, however, one piece of lasting advice we can give you:
When you attempt to create bundles (as demonstrated in the examples below), what you’ll inevitably find is that the optimal price bundling strategy will depend on the distribution of customers’ willingness to pay.
A price bundling strategy is a process for determining whether bundling or unbundling value is more profitable for the business and more valuable for customers. This is done by measuring your customers’ value and willingness to pay for that value. (It is not what you think is valuable or important.)
How to Build a Profitable Price Bundling Strategy
A profitable price bundling strategy starts with understanding what different customers value and are willing to pay for. The key principles are:
- Do not give away valuable features to everyone. If only a small group of customers values a feature highly, bundling it for free can reduce the value of the offer and limit what you can charge.
- Test bundle features and prices with customers. Do not assume customers will value an add-on simply because it seems like a good product bundle. Customer testing can reveal which features customers actually want and value.
- Unbundle when a feature reduces value. Porsche found that some premium customers valued its cars less when a TV system was included. Separating the TV option and pricing it individually created a new revenue stream.
- Focus on the value of the bundle, not just price savings. Verizon found that price-focused bundles encouraged customers to compare competing offers. It instead focused on convenience, improved device performance and the specific problem the bundle solved.
The right combination depends on customer willingness to pay, so bundling and unbundling should be tested against what different customer segments actually value.
Case Study: Price Bundling Strategy
Credit Suisse provides a historical example of price bundling in financial services. One example is the Bonviva package, which combined banking and other services into different package tiers.
The Bonviva package is a product bundle combining banking, insurance, and non-banking services. The Bonviva package was offered in different tiers, including Silver, Gold and Platinum, with eligibility and product conditions varying by package.
The package combined banking products with additional benefits, such as account services, cards, preferential conditions and other customer rewards.
The package also included additional rewards and services. These included other related value-added products and services that complemented the core offer.
These include:
- emergency services (lost phones, keys, and cards)
- subscription to business and lifestyle magazines
- access to their rewards shop
- special offers and deals for a range of events and travel options
- a wide range of discounts for restaurants
- hotels
- car rentals
The Credit Suisse example shows how non-financial benefits can complement a core financial-services bundle and add perceived value for customers. The offering was designed to keep existing customers engaged with new rewards and benefits and, to some degree, encourage loyalty to the core offer and brand.
The Credit Suisse example also illustrates the importance of understanding customer needs when developing a price bundling strategy.
The example shows how a business can develop a shortlist of bundled features and rewards to support upselling and encourage customers to use more of its products and services. The company has developed partnerships and deals which it, in turn, offers to customers at minimal expense, generating additional goodwill.
The historical example also describes a segmentation framework that categorised customers according to their net wealth at the time and their potential future value. This ensures they only focus on their target segments (i.e., high-net-worth individuals). They use information from this segmentation to inform and build out their ‘good, better, best’ price bundling strategy. This, in turn, continues to attract the right calibre of customer (i.e., people who are, or have the potential to become, high-net-worth or cash-rich individuals).
The example illustrates how value-based segmentation can help businesses move customers towards higher-value packages without exceeding their willingness to pay.
Listed below are a few basic price bundling principles. The historical Credit Suisse example illustrates how these principles can be used to design and develop a price bundling strategy. They not only position the business as a premium player but also build a strong customer attraction and retention model.
Rule 1: Don’t give away features in the bundle for free if a small number of customers see value in it, even if you want to sell more to a broader group of customers.
A historical example involving Elton John illustrates the principle. Fans of a popular artist may have different willingness to pay for different seats, with some placing substantially more value on premium or front-row access.
A ticket marketplace could theoretically promote a bundled package featuring two artists, encouraging loyal fans of one artist to attend another artist’s concert as well. This could encourage loyal Elton fans to spend more money seeing Clapton as well. It could also increase attendance at both concerts compared with selling Elton John tickets alone. However, they would also know that fans would not be as willing to pay to see Eric Clapton as they would to see Elton John, but would be interested enough to buy the bundle and spend more money.
This offer, of course, would only work if customers were reasonably willing to pay for both parts of the bundle. If, however, the bundle were poorly designed and Elton John fans were not as interested in seeing Eric Clapton, they would have to give customers a high discount to sell the bundle and lose a lot of money on the deal.
Rule 2: Test your hypotheses about features and prices directly with potential customers to gauge how much they want the product and are willing to pay for it and complementary add-on features. Don’t assume they will want it because you think it’s a good product bundle at a good price.
Porsche, for example, has used unbundling and bundling to test how customers value different features. Over time, they’ve found that a certain group of ultra-premium customers don’t want all the trimmings they once thought they would, particularly the TV entertainment system.
Porsche has used optional entertainment and connectivity features across several vehicle models, providing a useful example of how businesses can separate optional features from a core product. Its initial hypothesis appears to have been that all customers would want a TV in the car. However, over time, they’ve found that some of their premium customers don’t want a TV in the car at all, and that a small group of premium customers valued the car and the price bundle less when the TV was bundled in.
The example highlights a broader pricing principle: customers within the same market can place very different values on optional features. The findings showed that this fairly small and exclusive group didn’t even know that the TV function was available. They didn’t care much for it when they were offered it. They also found that when the TV was bundled in, customers perceived the car to be less valuable. Many of those who did get a premium-range Porsche with a TV didn’t even use it that much anyway.
The company looked at its broader customer group and how customers valued a car with or without a TV.
The historical case study found that customers who valued the TV add-on most were generally people who bought Porsche models, including the Cayenne, Macan and Panamera, particularly customers with young children.
This illustrates how separating optional features from the core product can allow businesses to charge customers according to the value they place on those features. Unbundling the TV and pricing it separately can create an additional revenue stream when customers value the feature enough to pay for it. This allows the company to generate additional revenue.
Rule 3: Don’t encourage customers to make price or cost-based comparisons. Doing so encourages them to compare your price bundling strategy with competitors. They will inevitably look for the lowest price.
A Verizon example illustrates another approach to bundling: emphasising convenience and product benefits rather than presenting the bundle primarily as a price saving.
A price-focused bundle can appeal strongly to price-sensitive customers, but it can also make direct price comparisons with competing offers more likely. These people need a reason to make a purchase sooner rather than later. However, the trials also found that these price-sensitive customers would price-shop competitors. (i.e., a cost-focused approach).
When customers compare similar bundles primarily on price, businesses can find themselves competing more directly on price rather than on the broader value of the offer (Verizon and its alternatives). In the price trials, these customers compared similar offers and tended to choose the lowest-priced option. The findings suggest that Verizon risked competing primarily on price if its bundle was positioned around cost savings.
A problem-specific bundle can instead combine a core device with relevant accessories to solve a specific customer need.
This involved evaluating the non-price benefits that their customers would get. It included the outcomes of the bundle and the value to their customer. They also focused on value rather than the lowest-priced bundle strategy to remove any price-based comparisons the customer may have had when they started their buying journey.
Implications
Optimise your marketing mix. Bundling is an attractive option, but your customers value individual products to varying degrees.
The more segments, products, and services you have, the more critical it is to understand customers’ underlying willingness to pay before putting bundles together.
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Bottom Line
Once you have a clear and objective understanding of your customers’ pain points, preferences and willingness to pay, you can make better price bundling strategy decisions. For example, you can determine what products and services to offer and how to bundle them. Ultimately, your investment in bundle pricing is most effective when you can direct specific customer segments to the products that suit them. Aim for this rather than encouraging increased buying activity for the entire market.
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