bundling

What Is Bundling And Why It Matters In Business

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.

Bundling vs. Unbundling

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.

The bundling strategy has a few key objectives:

It helps gain quick distribution

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.

By 2021, Slack was acquired by Salesforce for over $27 billion.

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

disney-vs-netflix
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.

disney-subscribers
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
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).

entry-strategies-startups
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
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
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 

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

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.

Connected Business Frameworks

AI Supply Chains

data-supply-chain
A classic supply chain moves from upstream to downstream, where the raw material is transformed into products, moved through logistics and distributed to final customers. A data supply chain moves in the opposite direction. The raw data is “sourced” from the customer/user. As it moves downstream, it gets processed and refined by proprietary algorithms and stored in data centers.

Bullwhip Effect

bullwhip-effect
The bullwhip effect describes the increasing fluctuations in inventory in response to changing consumer demand as one moves up the supply chain. Observing, analyzing, and understanding how the bullwhip effect influences the whole supply chain can unlock important insights into various parts of it.

Supply Chain

supply-chain
The supply chain is the set of steps between the sourcing, manufacturing, distribution of a product up to the steps it takes to reach the final customer. It’s the set of step it takes to bring a product from raw material (for physical products) to final customers and how companies manage those processes.

Data Supply Chains

data-supply-chain
In a data supply chain the closer the data to the customer the more we’re moving downstream. For instance, when Google produced its own physical devices. While it moved upstream the physical supply chain (it became a manufacturer) it moved downstream the data supply chain as it got closer to consumers using those devices, so it could gather data directly from the market, without intermediaries.

Last Mile Delivery

last-mile-delivery
Last-mile delivery consists of the set of activities in a supply chain that will bring the service and product to the final customer. The name “last mile” derives from the fact that indeed this usually refers to the final part of the supply chain journey, and yet this is extremely important, as it’s the most exposed, consumer-facing part.

Backward Chaining

backward-chaining
Backward chaining, also called backward integration, describes a process where a company expands to fulfill roles previously held by other businesses further up the supply chain. It is a form of vertical integration where a company owns or controls its suppliers, distributors, or retail locations.

Revenue Modeling

revenue-model-patterns
Revenue model patterns are a way for companies to monetize their business models. A revenue model pattern is a crucial building block of a business model because it informs how the company will generate short-term financial resources to invest back into the business. Thus, the way a company makes money will also influence its overall business model.

Pricing Strategies

pricing-strategies
A pricing strategy or model helps companies find the pricing formula in fit with their business models. Thus aligning the customer needs with the product type while trying to enable profitability for the company. A good pricing strategy aligns the customer with the company’s long term financial sustainability to build a solid business model.

Dynamic Pricing

static-vs-dynamic-pricing

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
A price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Other key business concepts:

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