Price Bundling: The Simple Strategy that can Optimize your Pricing and Boost Sales
Feb 13 2020
Think back to the last time you had fast food or purchased a new phone. You likely didn’t just get a hamburger or a new mobile device—you got fries and a drink or a case and a wireless charger. That’s price bundling.
When consumers purchase complementary products together, whether it’s a set package or a choose-your-own bundle, it’s easier to see the value those products provide. That’s the great thing about a bundle pricing strategy—not only do customers experience the benefits of a suite of products for a single purchase price, but the company also displays more value.
In today’s article, we’re going to talk through what price bundling is and how it can help your business, and we’ll provide a few examples of it in practice. When you understand the different products or features your customers need to achieve their goals, and then you bundle them together, you set yourself and your customer up to win.
Price bundling is a strategy where businesses combine multiple different products or services into one package at a single price. These complementary products are typically sold at a lower price than if they were purchased individually. Although each item in the bundle is technically sold at a discount, this strategy can potentially increase average revenue per user (ARPU) and user engagement.
Common examples of price bundling
Price bundling is used in many industries to entice potential customers to purchase additional products or services that companies know will be valuable. You’ve likely experienced this in situations like the following:
Mobile devices sold with a data plan
Microsoft Office 365 and G Suite
Soup, salad, and breadsticks
In each of these examples, the customer is able to purchase everything they need at a single price, whether it’s software tools or dinner. The company selling these products provides more value in a single purchase than if each item in the bundle were purchased separately. Think about it: your phone would be less useful without a data plan, and breadsticks really tie a meal together.
We’ve even seen successful subscription ecommerce companies like Dollar Shave Club implement this strategy for their own products.
Price bundling is a great strategy to use when you have a suite of products or services to offer, or when you want to increase the value of low-volume items. Selling these complementary products together gives customers the functionality they need to get the most value out of your service or product. That makes customers’ purchase experiences better and can lead to more engaged customers over time.
Your product has necessary integrations
In today’s interconnected SaaS and subscription market, certain types of services are built on top of existing functionality to increase value or facilitate integration. When your product requires these types of connections to function properly, price bundling makes it easy to provide every new customer with the functionality they need in a single purchase. There are lots of examples of this in subscription billing platforms, which bundle subscription management with additional features, such as payment gateways, analytics, and revenue recognition.
You need to offer discounts for certain products
Whether it’s a new competitor that’s eating up your customer base or it’s a lack of engagement from existing users, there are times when offering a discount is a necessary part of doing business. While actively discounting products can chip away at their perceived value, price bundling helps you offset these negative effects by combing discounted products together. This helps you capture more revenue for each individual purchase and increases the value add for the customer.
When you’re considering price bundling, it’s important to understand how customers derive value from every part of your business. If you bring together products that don’t increase in value as a bundle, it could drive down sales.
Two types of price bundling
Price bundling falls into two broad categories: pure bundling and mixed bundling. Within pure bundling, there are two subcategories based on how customers get value from different products or features.
Pure bundling takes place when a customer only has the choice to purchase the bundle as-is or not at all. This type of price bundling is simplest to accomplish, because the creation of a bundle is entirely controlled by you. Joint bundling and leader bundling look at the different features in your bundle and how they work together.
Joint bundling is the process of offering two or more products together for a single price. The products can be obtained only through a single purchase. G Suite is an example of this because you don’t have the ability to purchase Gmail or Sheets as a stand-alone product.
Similar to joint bundling, leader bundling is the process of offering two or more products together for a single price. The difference is that, in this bundle, one product is inherently more valuable and is therefore referred to as a “leader” product.
Mixed bundling isn’t as strict as pure bundling. When you create a mixed bundle, you’re giving customers the option to purchase each feature together, or individually for a higher price. Microsoft Office 365 offers mixed bundles as well as the ability to purchase stand-alone instances of either Excel or PowerPoint.
Benefits of price bundling
Price bundling helps you overcome the difficulty of getting potential customers to make a purchase of specific products or services. It simplifies their buying experience and can potentially increase average order values through the combination of high-value and low-value products.
Simplify the buying experience
When you offer a bundle of normally separated products or features that, together, your customers need to accomplish their goals, you make the purchase decision easier. Instead of expecting them to cobble together different products or features, you’re offering a one-stop shop for them. That makes the experience of interacting with your business and purchasing your product simple and efficient.
Bundling is a great way to increase your sales and profit margins as well as the value you provide to customers. We see this in companies like Amazon, which often create dynamic product bundles based on complementary products their customers typically purchase. This allows Amazon to create larger margins for themselves while also offering a lower price than their competitors.
Let’s take a look at an example with sticky notes of different colors. When a customer purchases orange sticky notes for $6.72, Amazon can bundle those together with aqua sticky notes for $9.03.
This results in a 34% markup from the customer’s intended purpose, helping Amazon tap into more revenue through the bundle while still offering a low price for orange sticky notes.
With a bundle pricing strategy you’re not just putting together products that complement one another from a business-perspective; you’re also giving customers more value through the bundle than they would receive from each individual purchase. That compounding value makes customers more loyal and can lead to future purchases.
Move lower-volume products
If you have a product or feature that’s underperforming, price bundling helps you boost customer engagement by selling it alongside a more popular one. Just make sure that both of the products you’re bundling together increase in value as a result of the bundle. You don’t want to decrease the value of a more popular product or feature by connecting it with one that your customers don’t actually need.
Downsides of price bundling
The benefits of price bundling outweigh the disadvantages, but it’s still important to understand how a bundle pricing strategy affects your customers. If you’re not careful, you may actually be decreasing the value of certain products or services by bundling them together with others that aren’t as useful for potential customers.
Customers may prefer to buy separately
There will always be customers who want to make their own decisions. When you bundle different products or services together, you’re taking the element of choice away. Doing so can potentially have a negative effect on the customer experience if you’re working in an industry where customers have more purchasing power. Consider how the bundle you’re creating adds value not only for your business but for your customers as well.
Customers may not need all the bundled products
A solid bundle price strategy is predicated on how much value you’re adding for the customer, for the specific products or features, and for your business. It’s important to make sure that you’re always fulfilling an actual need of your target buyer personas. Customers who don’t need certain features will feel like they’re unnecessarily paying for something and will seek out other options.
Price bundling helps you provide more value to customers
When you bundle the right features or products together, you not only make it easier for customers to make a purchase but also give them more value for a single purchase than if they were to buy everything individually. That creates a more engaged and loyal customers base that’s primed to make additional purchase down the line.
If you need help creating your bundles, ProfitWell’s tools and expert pricing strategists will help you identify which products or features are the most ideal for bundling. They will help you determine the optimal price for any bundle and will share best practices for how to use bundling to grow your business.
By Patrick Campbell
Founder & CEO of ProfitWell, the software for helping subscription companies with their monetization and retention strategies, as well as providing free turnkey subscription financial metrics for over 20,000 companies. Prior to ProfitWell Patrick led Strategic Initiatives for Boston-based Gemvara and was an Economist at Google and the US Intelligence community.