A decade ago you’d pay more than $7.00 to watch a movie for about two hours. Today, Netflix lets you watch more than a thousand for a couple dollars more per month. Netflix broke records. Apple Music used to cost $10 per month for their standard plan. Today, they sell upwards of 50GB of iCloud data, Apple Arcade, an Apple Music subscription, and an Apple TV+ subscription for just $5 more.
How are these companies able to sell more for less? They all use the magic of bundling.
In marketing and most business related terms, bundling is offering several products and services for sale as one combined service package or product.
Though, it may seem like a modern strategy with large tech companies like Apple and Netflix using bundling”, bundling has been around for a while. In his paper The Dynamic Effects of Bundling as a Product Strategy, Harvard Business School’s Vineet Kumar details how Nintendo’s decision to sell video games and a GameBoy console as a bundle in early 2001 saw it selling more than a million and a half copies of each separate game.
So far it seems bundling is an illogical strategy, but in fact it’s economically sound.
The Magic of Bundling, Unbundled 🙃
When several different products vastly differ from each other, the willingness to pay amongst different people will vary with some choosing not to buy at all.o when you set your profit maximizing price you lose certain customer segments. This is referred to as deadweight loss. The idea behind bundling is that it increases profits by selling all the items together at an average price all customer segments are willing to pay so you don’t lose any customers for any individual item in the bundle.
To understand the economics behind bundling, we refer to the superfan test .
The SuperFan test is as follows: Super Fans are consumers who would 1) pay retail price for a good, and; 2) and go out their way to find the product
Casual Fans are consumers who lack one of the 2 Super Fan criteria above
Non Fans are consumers, who ascribe zero (or perhaps negative) value to having access to the good
To understand how the SuperFan test works, here’s a look into Apple’s bundle.
The table below describes the Apple One bundle.
Based on individual pricing, paying $15 for the bundle only makes sense for consumer types in example A (Super Fans of Apple Music + Apple TV Plus) or example B (Super Fans of Apple Music + Apple Arcade). The additional benefit that one may procure comes from being a CasualFan of the services that you’re not a SuperFan of.
A good bundle is one that would entice Casual and Non Fans to purchase a bundle - something they wouldn’t do otherwise. By doing this you reduce the aforementioned deadweight loss.
Lyft’s Bundling Strategy 📱
It’s a well known fact Lyft is not a profitable company. But what probably is not well known is Lyft’s strategy to become profitable involves ….. bundling!
Lyft is using bundling to bundle deals like 10x points on their credit cards and even free Grubhub+ to acquire customers for their Lyft Pink subscription service. Although this probably will not lead to profitability outright it presents some interesting insights into Lyft’s intentions.
It seems Lyft is moving away from being just a ride sharing service and a lifestyle service. We definitely could see Lyft expanding into providing on demand services such as grocery delivery and retail store pickups.
Lyft is building a bundle to primarily target a young user demographic. By hyper targeting this demographic with food and travel perks (they offer Delta Sky miles) they are setting their sights on profitability in the far future.
Only time will tell if Lyft’s creative bundle will lead to financial success for the company as it has for many others. Why don’t you try applying the SuperFan test to Lyft?
SX Speaker Spotlight - Kyle Porter 👨🏻💻
Last week we had the pleasure of having Kyle Porter come speak to the Startup Exchange community. Kyle is the CEO of Salesloft and during his talk he left us with a number of nuggets of wisdom. A message of his that resonated with us, was diving deep into things that interest you to figure out what you want to do with your life. We hear this advice often, but Kyle communicated it with a great quote from Nick Saban, “If you’re gonna be a street sweeper, be the best street sweeper you can be.” The logic behind this is even if you dive deep into something you realize later you don’t want to do, you at least now know what it takes for you to be the best at something and you can replicate that process for another interest of yours. And this was the mentality Kyle used for building Salesloft. He knew at a young age he loved sales and dove deep into the field, and today he is CEO of one of Atlanta’s most exciting companies.
If you want to learn more lessons like these from top founders and VCs, come join us at our event with Heidi Rozen on Friday, February 5th to learn the inner workings of VC.
Co-founder search 👀
Elbowroom | Elbowroom is an early-stage startup building the future of density-sensing technology. They are looking for a co-founder with data science expertise. If this sounds like you reach out at firstname.lastname@example.org.
Distract.bl | Distract.bl is an early-stage startup building a tool to help people focus online. The Distract.bl team is seeking to add a co-founder passionate about designing consumer products and helping people be more productive. If this sounds like you email email@example.com.