Bundling is a business process where a series of blocks in a value chain are grouped to lock in consumers as the bundler takes advantage of its distribution network to limit competition and gain market shares in adjacent markets. This is a distribution-driven strategy where incumbents take advantage of their leading position.
Aspect
Explanation
Bundling
Bundling is a marketing strategy in which multiple products or services are combined into a single package and sold together at a discounted or competitive price. It involves offering customers the option to purchase a group of related items as a bundle rather than buying them individually. Bundling can take various forms, including pure bundling, mixed bundling, and mixed-leader bundling.
Characteristics
– Product Combination: Bundles include two or more products or services that complement each other. – Pricing Advantage: Customers often receive a price discount compared to purchasing items separately. – Choice: Customers have the flexibility to choose between bundled and standalone options. – Value Proposition: Bundling offers added value, convenience, and cost savings. – Cross-Selling: It encourages cross-selling and upselling of products or services.
Types
– Pure Bundling: All items in the bundle are available only as a package; customers cannot buy them separately. – Mixed Bundling: Customers can buy items in the bundle individually or as part of the package. – Mixed-Leader Bundling: One product (the leader) is available individually, while the bundle includes the leader and additional items.
Motivations
– Cost Savings: Customers are motivated by the potential cost savings when purchasing a bundle. – Convenience: Bundles provide convenience and simplify the buying process. – Value: Buyers perceive added value in bundled offerings. – Cross-Promotion: It enables cross-promotion of related products or services. – Inventory Management: Retailers can manage inventory effectively.
Examples
– Fast-Food Combos: Fast-food chains offer combo meals with burgers, fries, and drinks at a lower price. – Software Suites: Software companies bundle applications into suites for businesses and consumers. – Cable TV Packages: Cable providers offer bundles of TV, internet, and phone services. – Vacation Packages: Travel agencies bundle flights, hotels, and tours for travelers.
Challenges
– Customer Needs: Bundles may not align with individual customer needs or preferences. – Pricing Complexity: Determining bundle pricing can be complex, affecting profitability. – Inventory Management: Managing inventory for bundled items requires attention. – Customer Confusion: Customers may find bundle options confusing. – Competition: Competitors may offer alternative bundles.
Benefits
– Increased Sales: Bundling can increase overall sales by encouraging larger purchases. – Customer Loyalty: Bundling can foster customer loyalty and retention. – Competitive Advantage: It provides a competitive edge in the market. – Simplified Marketing: Marketing bundled products can be more straightforward. – Profitability: It can enhance profitability through higher sales and efficient inventory management.
Conclusion
Bundling is a strategic approach that combines related products or services into packages, offering customers convenience, value, and potential cost savings. It can drive sales, enhance customer loyalty, and provide a competitive advantage. However, effective pricing, inventory management, and alignment with customer needs are crucial for successful bundling strategies.
Usually, when a company has gained monopoly power, it will use bundling to make consumers get its whole set of products and lock them by leveraging its existing distribution networks (Microsoft Windows is an example).
Unbundling, instead, is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keeping those that, in a period in time, consumers value the most.
Bundling is very common in the business world in industries that tend to mature and become more and more competitive.
That happens because as startups enter new spaces, and those new spaces become viable and quite large, incumbents leverage their distribution power to quickly build an alternative to the new entrance while bundling it up with its other services.
Take the example of Microsoft, which tried to enter the Browser market quickly by launching its Internet Explorer browser within Windows.
This highly reduced the friction for the browser adoption, and it enabled Microsoft’s Internet Explorer to quickly gain traction against the most popular browser at the time, Netscape.
Of course, in this case, when bundling is aggressively executed by the incumbent might quickly turn into an abuse of dominating position.
It helps increase the perceived value of the company’s brands for their existing customers
For instance, going back to the case of Microsoft incorporating Internet Explorer, for free, into its Windows package, it enabled its existing users to have an additional service for free and with much-reduced friction.
At the time, using an Internet Browser was still quite complex.
It helps expand the customer base
As Microsoft introduced Internet Explorer, it automatically opened up the way to develop new products for a new and expanding customer base.
Microsoft Office Case Study
As Microsoft became a tech giant throughout the PC era, it built a strong distribution network to lock in consumers in the PC market for decades.
Indeed, Microsoft bundled its Windows in computers before they got purchased.
Thus, encouraging manufacturers to push Microsoft’s products.
If abused by a monopolist, a business model primarily built on bundling can turn into anti-competitive behaviors.
Microsoft’s Teams Case Study
As Microsoft saw the rise of Slack disrupting the productivity space, it quickly acted to create its own version, as a knockoff of Slack called Teams.
This worried Slack so much that the company bought an entire page in The NY Times to write an open letter to Microsoft’s bundling Teams, as am abuse of its position.
Source: @stewart Twitter
It was November 2016, and Slack was correct, Microsoft would soon make its Teams very successful, thanks to its distribution power.
This is a perfect example of how powerful bundling can be when combined with a dominant position and massive distribution.
This sort of move is risky as it might awaken the regulator.
However, if you’re Microsoft, you might accept the cost that comes later (a significant fine) as the cost of doing business, yet stay relevant in a quickly evolving market.
And with productivity representing the core of Microsoft’s business model for decades, the company understood that either it was going to defend its core or it was going to lose an important chunk of its business.
Slack merging with Salesforce
Since regulators did not intervene in Microsoft’s bunding of Teams, Slack was either going to fight a very fierce battle, or it needed to understand how to compete against Microsoft’s massive distribution power.
Salesforce left Slack to operate independently while it smoothly integrated it into its offering to expand the value of its CRM.
Thus, by joining Salesforce, Slack could compete against Microsoft’s massive distribution power.
This is a perfect example of how powerful bundling can be and how it can shape a whole industry to consolidate as the stronger players roll out their bundling strategy.
Was Netflix disrupting Disney?
Another interesting case is the opposite of Microsoft vs. Slack, where Slack has been pushed into the corner and had to sell to Salesforce.
Let’s take the case of Netflix, which has been disrupting Disney for years until…
Disney bundling up its streaming empire
By September 2022, Disney counted 235,7 million subscribers, whereas Netflix counted 223 million subscribers.
By 2022, Disney’s bundle of streaming services (comprising Disney+, ESPN, and Hulu) passed Netflix’s subscriber count!
Disney+ only started to build its streaming services in 2019, yet by 2022, it became a powerhouse.
Of course, Disney threw a considerable amount of resources into it by launching its Disney+ service, and by purchasing Hulu.
By September 2022, Disney counted 235,7 million subscribers, whereas Netflix counted 223 million subscribers.
Yet, this helped Disney reverse the disruption from Netflix, which by 2022 faced a substantial threat from Disney, as the company used its distribution power to bundle up its streaming services to create a compelling offering on the market.
In this scenario, Disney stopped Netflix’s dominance successfully by using a powerful bundling strategy.
Unbundling
Unbundling is a business process where a series of products or blocks inside a value chain is broken down to provide better value by removing the parts of the value chain that are less valuable to consumers and keeping those that, in a period in time, consumers value the most.
Usually, in business, depending on the context, companies might gain a competitive advantage by either bundling or unbundling some of the activities within a value chain.
Usually, when a company has gained monopoly power, it will use bundling to make consumers get its whole set of products and lock them by levering on its existing distribution networks (see Microsoft Windows).
Unbundling is the opposite process when a newcomer enters a traditional and established industry by removing the parts of the value chain less valuable to consumers and only capturing the most valuable part (think of how Amazon unbundled retail stores by designing in a whole new experience, that leveraged on digital real estates).
When entering the market as a startup, you can use different approaches. Some of them can be based on product, distribution, or value. A product approach takes existing alternatives and offers only the most valuable part of that product. A distribution approach cuts out intermediaries from the market. A value approach offers only the most valuable part of the experience.
The digital era has brought several business waves that led to the creation of new industries and companies, once newcomers, then become giants themselves.
Let’s look at some of those trends that shaped and shaped the business world in the web era.
Disintermediation
Disintermediation is the process in which intermediaries are removed from the supply chain, so that the middlemen who get cut out, make the market overall more accessible and transparent to the final customers. Therefore, in theory, the supply chain gets more efficient and, all in all can produce products that customers want.
Where Unbundling looks at the product offering to break down what’s most valuable and offer it more conveniently.
Disintermediation looks primarily at distribution to understand what actors can be driven off the market, as they primarily work as fragmented intermediaries.
The classic example is how platform business models have been disintermediating several industries.
As they did so, former intermediaries were wiped out, and the whole market grew.
Yet, this process often leads to the consolidation of a new ecosystem created by the super-platform.
As this ecosystem adapts to the new rules and policies created by the super-platform (implicit or explicit).
The ecosystem adapts to it, and the new intermediaries that enhance that ecosystem spring up.
For instance, as Amazon is disintermediating the delivery industry with last-mile delivery, that might create a situation where key players that have existed for decades (FedEx, DHL) might be kicked out of the marketplace or perhaps just remain niche players with marginal market shares.
That might happen as Amazon might create a much larger industry, driven by its last-mile delivery ecosystem that might favor the birth of new intermediaries aligned with Amazon’s last-mile delivery policies.
Reintermediation
Reintermediation consists in the process of introducing again an intermediary that had previously been cut out from the supply chain. Or perhaps by creating a new intermediary that once didn’t exist. Usually, as a market is redefined, old players get cut out, and new players within the supply chain are born as a result.
This process of reintermediation will help industries and markets to be born on top of new ecosystems made of incentives and disincentives.
Decoupling
According to the book, Unlocking The Value Chain, Harvard professor Thales Teixeira identified three waves of disruption (unbundling, disintermediation, and decoupling). Decoupling is the third wave (2006-still ongoing) where companies break apart the customer value chain to deliver part of the value, without bearing the costs to sustain the whole value chain.
In a decoupling process, the decoupler takes the most valuable part of the customer value chain and offers it to customers.
That is how it gains traction.
Coupling
As startups gain control of new markets. They expand in adjacent areas in disparate and different industries by coupling the new activities to benefit customers. Thus, even though the adjunct activities might seem far from the core business model, they are tied to the way customers experience the whole business model.
In a coupling process, instead, the coupler expands in new areas and activities that might seem disconnected from the overall business model, and yet, the way those activities are offered to final customers also enhances the whole business model.
Examples of Bundling in Various Industries:
Tech Industry:
Microsoft: Microsoft bundled its Internet Explorer browser with its Windows operating system, which helped Internet Explorer quickly gain market share against competitors like Netscape.
Apple: Apple bundles its native apps, like Safari, Mail, and iMessage, with its devices.
Streaming Services:
Disney+: Disney bundled its streaming services (Disney+, Hulu, and ESPN+) to offer them at a discounted combined rate.
Amazon Prime: Amazon bundles video streaming, music streaming, and e-book reading under its Prime subscription, along with other benefits like free two-day shipping.
Telecommunications:
Cable Providers: Many cable TV providers bundle television, internet, and phone services, offering discounts for subscribing to multiple services.
Fast Food:
McDonald’s: McDonald’s offers “Extra Value Meals” that bundle a main item, side, and drink at a reduced price compared to purchasing each item separately.
Video Games:
Console Bundles: Manufacturers often bundle video game consoles with popular games as a package deal, especially during holiday seasons or game launches.
Software:
Adobe: Adobe offers its Creative Cloud subscription, which bundles various software applications like Photoshop, Illustrator, and Premiere Pro, rather than selling each separately.
Music Industry:
Spotify and Hulu: For a while, Spotify and Hulu offered a bundled subscription where users could get both services at a discounted rate.
Travel Industry:
Travel Packages: Many travel agencies offer bundled packages that include flights, hotels, and sometimes even tours or car rentals.
Retail:
Costco: Costco offers bundled products, often selling items in bulk or in sets, which can be especially common in their electronics section where they might bundle TVs with sound systems.
Banking:
Banking Services: Some banks offer bundled services, combining savings accounts, checking accounts, and credit cards under one umbrella, sometimes with added benefits for using multiple services.
Insurance:
Insurance Packages: Many insurance companies offer discounts when customers bundle home, auto, and life insurance.
Automobiles:
Car Features: Car manufacturers often bundle popular features together in packages, such as a “sunroof and sound package” or a “safety package” that includes multiple related features.
Key Highlights
Bundling is a business process where blocks in a value chain are grouped to lock in consumers and gain market share.
It is a distribution-driven strategy used by incumbents to leverage their leading position.
Unbundling is the opposite process, breaking down a value chain to provide better value to consumers by removing less valuable parts.
Bundling is common in mature industries and when companies have gained monopoly power.
Bundling helps gain quick distribution, increase perceived value, and expand the customer base.
Microsoft bundled Internet Explorer with Windows to quickly gain traction in the browser market.
It can lead to anti-competitive behavior if aggressively executed by a monopolist.
Disney bundled its streaming services to successfully compete against Netflix.
Unbundling is a strategy used by newcomers to enter established industries and capture the most valuable part of the value chain.
Unbundling can be based on product, distribution, or value approaches when entering the market as a startup.
Disintermediation is the process of removing intermediaries from the supply chain for more efficiency and transparency.
Amazon’s platform business model has disintermediated the delivery industry with last-mile delivery.
Reintermediation introduces or creates new intermediaries as markets are redefined.
Decoupling is the process of breaking apart the customer value chain to deliver part of the value without bearing all costs.
Coupling involves expanding into new areas and activities that enhance the overall business model and benefit customers.
Related Frameworks
Description
When to Apply
Value-Based Pricing
Value-Based Pricing is a pricing strategy that sets prices based on the perceived value of a product or service to the customer. It focuses on understanding customer needs, preferences, and willingness to pay, and pricing products accordingly to capture a fair share of the value created for the customer. Value-Based Pricing allows organizations to maximize revenue and profitability by aligning prices with the value delivered, rather than relying solely on cost-based or competitor-based pricing approaches.
Value-Based Pricing is applied when launching new products or services, entering new markets, or repositioning existing offerings to emphasize their value proposition. It helps organizations capture the full value of their products or services and differentiate themselves based on customer value rather than price alone.
Product Lifecycle Management (PLM)
Product Lifecycle Management (PLM) is a strategic approach to managing the entire lifecycle of a product from inception through design, manufacturing, distribution, and disposal. It involves coordinating cross-functional activities and information across different stages of the product lifecycle to optimize product development, enhance quality, reduce time-to-market, and maximize profitability. PLM enables organizations to streamline processes, improve collaboration, and make informed decisions throughout the product lifecycle, from concept to end-of-life.
Product Lifecycle Management (PLM) is applied throughout the product development process, from conceptualization to commercialization and beyond. It helps organizations manage complexity, increase efficiency, and drive innovation by aligning product development activities with strategic goals and customer needs.
Customer Segmentation
Customer Segmentation is a marketing strategy that involves dividing a target market into distinct groups of customers with similar needs, characteristics, or behaviors. It helps organizations identify and prioritize target customer segments, tailor products and marketing messages to their specific needs, and allocate resources more effectively to maximize customer value and satisfaction. Customer segmentation enables organizations to deliver more personalized experiences, improve customer engagement, and increase customer loyalty and retention.
Customer Segmentation is applied when developing marketing strategies, designing products or services, and allocating resources to target specific customer segments effectively. It helps organizations understand their customers’ diverse needs and preferences and develop tailored solutions and marketing campaigns to address them.
Freemium Model
The Freemium Model is a business model that offers basic services or products for free, while charging a premium for advanced features or premium offerings. It allows organizations to attract a large user base with free offerings, while monetizing a subset of customers who are willing to pay for additional value-added features or services. The Freemium Model balances the acquisition of users with the monetization of paying customers, enabling organizations to scale their user base and revenue simultaneously.
The Freemium Model is applied when launching digital products, software applications, or online services that can benefit from a large user base and network effects. It allows organizations to penetrate the market quickly, acquire users at a low cost, and monetize premium features or services to generate revenue and sustain long-term growth.
Solution Selling
Solution Selling is a sales methodology that focuses on understanding customer needs, pain points, and business challenges and offering tailored solutions to address them. It involves collaborating with customers as trusted advisors to identify opportunities, co-create value, and deliver comprehensive solutions that meet their specific requirements. Solution Selling emphasizes building long-term relationships with customers, uncovering hidden needs, and demonstrating the value of solutions to drive customer satisfaction and loyalty.
Solution Selling is applied in complex sales environments, B2B sales, and industries with consultative selling approaches. It helps sales teams understand customer needs deeply, position solutions effectively, and differentiate themselves based on the value delivered to customers.
Cross-Selling and Upselling
Cross-Selling and Upselling are sales techniques that involve offering additional products or services to customers based on their existing purchase behavior or preferences. Cross-selling involves recommending complementary products or services that enhance the value of the initial purchase, while upselling involves offering higher-tier or premium options that provide additional benefits or features. Cross-Selling and Upselling enable organizations to increase average transaction value, maximize customer lifetime value, and deepen customer relationships by anticipating and fulfilling their evolving needs and preferences.
Cross-Selling and Upselling are applied during the sales process, customer interactions, and marketing campaigns to increase revenue and customer satisfaction. They help organizations leverage existing customer relationships, increase customer loyalty, and drive incremental sales and revenue growth.
Agile Marketing
Agile Marketing is an iterative, data-driven approach to marketing that emphasizes flexibility, collaboration, and rapid experimentation. It involves breaking marketing initiatives into small, manageable tasks or experiments, testing hypotheses, measuring results, and adapting strategies based on feedback and insights. Agile Marketing enables organizations to respond quickly to changing market dynamics, customer preferences, and competitive pressures, improving marketing effectiveness, efficiency, and ROI.
Agile Marketing is applied in dynamic and competitive markets where speed, responsiveness, and adaptability are essential for marketing success. It helps organizations align marketing activities with business objectives, prioritize initiatives based on impact and value, and deliver measurable results iteratively and incrementally.
Customer Journey Mapping
Customer Journey Mapping is a visualization technique that helps organizations understand and optimize the end-to-end customer experience across various touchpoints and interactions. It involves mapping out the customer journey from initial awareness to post-purchase support, identifying key touchpoints, emotions, pain points, and opportunities for improvement. Customer Journey Mapping enables organizations to gain insights into customer needs, preferences, and behaviors, and design more seamless, personalized experiences that drive customer satisfaction and loyalty.
Customer Journey Mapping is applied when designing or optimizing customer experiences, marketing campaigns, product features, and service interactions. It helps organizations align their offerings and touchpoints with customer needs and expectations, enhancing overall satisfaction and loyalty.
Network Effects
Network Effects, also known as Metcalfe’s Law, describe the phenomenon where the value of a product or service increases as the number of users or participants grows. It occurs when the utility or benefits of using a product or service are enhanced by the size or activity level of its user base. Network Effects enable organizations to leverage network effects to drive user adoption, engagement, and retention, creating virtuous cycles of growth and value creation.
Network Effects are applied in platform-based businesses, social networks, marketplaces, and other environments where user participation and interaction drive value creation and competitive advantage. They help organizations build and scale networked products or services by attracting users, fostering engagement, and sustaining growth over time.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
The innovation loop is a methodology/framework derived from the Bell Labs, which produced innovation at scale throughout the 20th century. They learned how to leverage a hybrid innovation management model based on science, invention, engineering, and manufacturing at scale. By leveraging individual genius, creativity, and small/large groups.
According to how well defined is the problem and how well defined the domain, we have four main types of innovations: basic research (problem and domain or not well defined); breakthrough innovation (domain is not well defined, the problem is well defined); sustaining innovation (both problem and domain are well defined); and disruptive innovation (domain is well defined, the problem is not well defined).
That is a process that requires a continuous feedback loop to develop a valuable product and build a viable business model. Continuous innovation is a mindset where products and services are designed and delivered to tune them around the customers’ problem and not the technical solution of its founders.
Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.
In a business world driven by technology and digitalization, competition is much more fluid, as innovation becomes a bottom-up approach that can come from anywhere. Thus, making it much harder to define the boundaries of existing markets. Therefore, a proper business competition analysis looks at customer, technology, distribution, and financial model overlaps. While at the same time looking at future potential intersections among industries that in the short-term seem unrelated.
Technological modeling is a discipline to provide the basis for companies to sustain innovation, thus developing incremental products. While also looking at breakthrough innovative products that can pave the way for long-term success. In a sort of Barbell Strategy, technological modeling suggests having a two-sided approach, on the one hand, to keep sustaining continuous innovation as a core part of the business model. On the other hand, it places bets on future developments that have the potential to break through and take a leap forward.
Sociologist E.M Rogers developed the Diffusion of Innovation Theory in 1962 with the premise that with enough time, tech products are adopted by wider society as a whole. People adopting those technologies are divided according to their psychologic profiles in five groups: innovators, early adopters, early majority, late majority, and laggards.
In the TED talk entitled “creative problem-solving in the face of extreme limits” Navi Radjou defined frugal innovation as “the ability to create more economic and social value using fewer resources. Frugal innovation is not about making do; it’s about making things better.” Indian people call it Jugaad, a Hindi word that means finding inexpensive solutions based on existing scarce resources to solve problems smartly.
A consumer brand company like Procter & Gamble (P&G) defines “Constructive Disruption” as: a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. According to P&G, it moves around four pillars: lean innovation, brand building, supply chain, and digitalization & data analytics.
In the FourWeekMBA growth matrix, you can apply growth for existing customers by tackling the same problems (gain mode). Or by tackling existing problems, for new customers (expand mode). Or by tackling new problems for existing customers (extend mode). Or perhaps by tackling whole new problems for new customers (reinvent mode).
An innovation funnel is a tool or process ensuring only the best ideas are executed. In a metaphorical sense, the funnel screens innovative ideas for viability so that only the best products, processes, or business models are launched to the market. An innovation funnel provides a framework for the screening and testing of innovative ideas for viability.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
