Andrew Bass’s Pragmatics Newsletter May 2013
Practical techniques and thought-provoking ideas
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Amplifying profit through bundling
If you go to a rock concert, you’ll see impressive banks of speakers all around the stage, even suspended dramatically from the rafters. A good PA (‘public address’) system takes the input provided by the band, adds a different form of energy, and, without changing its essential character, makes it much louder. From a business point of view, what’s interesting is that the extra energy, electricity, is much cheaper per hour than a rock star. It amplifies not only the band’s sound, but their profit too.
An important feature of building a value architecture is to find ways to take your basic product or service, and by adding the right sort of boost, amplify its profit disproportionately.
One of the ways to do just that is through bundling. People like bundles or kits, and if you bundle something appropriately, you amplify its value to them disproportionately to your extra input.
The liking for bundles seems to start at an early age. My brother tells me that my niece, who is 4 ½, would rather have an ‘okay’ doll with a little plastic hairbrush, mirror, shoes and hat, than a better doll – more lifelike, of more costly materials – but with no accessories. The first doll, though cheaper to manufacture, is more fun to play with. The value of the doll is amplified.
Grown-ups like bundles too – maybe it appeals to the inner child, who knows? Here are some ways you can use bundles to amplify the value of your offerings, often disproportionately to the extra cost.
Bundling can help you escape a commodity trap.
Cardinal Healthcare were in the commodity business of surgical supplies: gloves, sutures, syringes, that sort of thing. But they hit on an extremely powerful idea: bundling supplies into kits that were perfectly matched to specific surgical procedures. So for example, for a hernia operation, they would deliver a kit on the day of the operation, with all the supplies sequenced correctly, simplifying setup, minimising risks of error, and of stock outages, and so reducing hospital inventory and inventory management costs. With the same basic products, insight into their customer’s real needs, and well-thought-out packaging, they cornered the market and earned a well-deserved premium.
Bundling can help you benefit from others’ brands.
I used to work with an executive development programme director – one who dramatically outsold her peers and built fierce client loyalty – who clearly understood this principle. When she ran a workshop, she would give each delegate a kit of items such as post-it notes, pens and so on to accompany the programme notes. She also included a Moleskine notebook.
Now a Moleskine notebook is £15.00 -£16.00 – a premium far in excess of its cost of manufacture, earned largely because of the brand. Rymans do a really very nice bound note book for less than £5.00. But Ernest Hemingway didn’t shop at Rymans, he used a Moleskine, and if that matters sort of thing matters to you, you will pay the extra.
How expensive were the Moleskines really? The programme director was buying such low volumes, and it was such a small proportion of the overall fee, that they were almost free to her. But I observed its disproportional effects on a number of occasions. It created an instant cachet, made groups feel special, and was more than once an explicit positive talking point with the programmes’ buyers. Not a bad investment for £15.00 per delegate.
Bundling can be subtle.
An advertising executive I was talking to recently told me how smart bundling worked for a luxury car manufacturer. Luxury cars are offered with multiple options. But from a buyer’s point of view, the most desirable options are sometimes the hardest to justify. For example, few people really need an enhanced sports suspension kit. They may want it, but feel guilty about ordering it. But bundle it with a ‘sensible’ option like rear parking sensors, and you have an attractive option that people are comfortable buying.
Products and services can be disproportionately amplified – i.e. made more profitable – by intelligent bundling. You can use bundles to reduce the many hassles of using commodity products, to borrow and transfer emotional appeal from one item to another, to help people find a rationale for treating themselves, or simply to take advantage of the fact that people of all ages like ‘kits’ (I’ve concentrated on products in this issue but will return to the subject of services in a later one).
What’s the potential for you?
We’ve had some exciting results from this kind of approach, and it’s likely that you can too. There are a range of tactics for approaching this systematically, but even a quick and dirty approach can yield rapid and low-cost improvements to profitable sales growth.
The way to get started is to ask yourself: how can you bundle or rebundle what you offer to create profit amplification?
© 2013 Andrew Bass. All Rights Reserved.