Is product bundling an effective sales tool and sales incentive? – Part One

This is part one in a series of posts I’m going to be making about pricing strategies that provide great value to your customers while also helping to increase sales.  As we move to a mass customization economy where the consumer wants what they want (read John Bernard’s blog post called “Shifting From Then To Now” at http://www.massingenuity.com/2010/now/shifting-from-then-to-now/), we have to rethink pricing strategies to create a more flexible and engaging experience where the customer gets exactly what they want.

I had an interesting discussion with one of my clients last week about using product pricing bundles in their product marketing strategy.  I define product pricing bundles as groups of products that are sold together for a single promotional price.  The basic goal of the bundle is to encourage customers to buy a group of products together rather one at a time.  Companies usually implement bundles for four main reasons:

1. Pair highly profitable items with less profitable items to increase the overall profitability of the sale.
2. Make it easier for salespeople to cross sell products by offering attractive pricing for the bundled sale.
3. Sell predefined configurations that help customers derive more benefit from the full line of products by bundling recommended solutions together based on need or industry.
4. Create more perceived value so that it’s possible to charge more for the combined set of products.

All of these reasons make complete sense to me.  Maximizing profitability, cross selling, customer satisfaction, and value selling are great objectives.  However, if we take a closer look, it quickly becomes apparent that the bundle itself puts these three goals at odds with each other.

One of the best examples I can give comes from my local cable provider.  They offer a bundle that puts cable television, broadband, and telephone services together for a very attractive price.  On the surface, the bundle seems to meet all three goals defined above. 

1. Digital telephone is a very profitable service for the provider because it requires an additional long distance plan that is not included in the bundle price.  It is a natural choice to pair with television and broadband.
2. They’ve done a great job of selling it as “one low price”.  In fact, it is really the only option.  It is much easier to buy the bundle than to purchase a la carte services.
3. They tout “one number to call” as key selling point.  For the most part, they are right.  Their customer service is great so having all three services with them is probably easier for the customer in many cases.
4. They do a great job of positioning the bundle as the best value for the money even though it is ultimately a way for them to actually charge more for the group of services.

Unfortunately, I’m a technology guy and I know that most VoIP services have no long distance charges.  Since the cable company’s digital telephone service requires a fairly expensive long distance plan, why would I want the phone service when the fast broadband connection is more than adequate to support VoIP service?  The answer is simple.  The price for buying digital television and broadband separately from the digital phone is much higher than buying the bundle.  So, I went ahead and bought the bundle… added an outside VoIP service…and we simply don’t use the bundled phone service for long distance calling.  Even with the extra cost of the added VoIP service, we still save $60-$120 per month!

My point here is that the bundle itself did very little for me, as the consumer, other than provide a way to buy television and broadband service at a discounted price.  Yes, this is valuable to me.  And, I do get some value from the provider’s customer service.  They have fast response times on the phone and they maintain one installation in my home.  I remember the days when I had to go to the infamous “phone company” for voice and the cable company for cable.  It is truly better to have one point of accountability.  However, I would derive a lot more value if I could:

1. Either simply save the money by not having the cable provider’s phone service and still get some kind of discount on the other services.
2. Have the choice to add additional bandwidth to the broadband service as a replacement for the phone service.
3. Have a lower priced VoIP option with the cable company and the additional bandwidth.

In conclusion, I would rate the overall effectiveness of the bundle as low because I have to make a series of concessions as the buyer to finally get what I want.  It would be simpler if I could start with the bundle and then have the ability to switch out certain components with other options – like my additional bandwidth.

However, this is a simple example involving 3 services.  Imagine how this looks when you have a much more complicated product line.  In the case of the client I was working with last week, they have 3 main product lines with between 200 and 600 products in each line.  They now have something close to 100 different pricing bundles in just one of the product lines.  How many bundles are enough?  How do you educate your sales force on how to effectively use the bundles?

In part two, we’ll discuss a different approach to bundling that meets our four goals but allows the customer to customize to get what they want.  In part three, we will discuss how to implement flexible bundling as a part of a needs based or consultative selling strategy.