Tag Archives: bundling

Matching Big ISP Tactics

There are three billing practices that are routine for the large ISPs that smart competitors avoid. First is offering special low prices to attract new customers. The second is bundling, which means giving a discount to customers buying multiple products. Third is what has become known as hidden fees, where there are routine monthly fees that are not included in the online advertised price offers to customers.

A lot of smaller ISPs wonder if they should match these same tactics. The argument for copying the tactic is that it allows advertising rates that can be compared to what the big companies advertise. The main argument against matching these tactics is that the practices are deceptive, and customers have made it clear that they don’t like these tactics. Fiber overbuilders tell me that the first customers they win in a new market are those who feel deceived and mistreated by the bigger ISPs.

Big ISP online advertising has felt sleazy for many years. I wrote a recent blog where Charter in Los Angeles offers customers drastically different introductory rates depending upon neighborhood – with the highest rates being offered to the neighborhoods with the highest level of poverty. It’s common to see broadband specials advertised for less than half of the list price. A customer has to click through multiple levels of footnotes to find out the rate at the end of the special – if it is online at all. It’s not hard to think that somebody could be attracted to low rates without understanding that big increases will be coming in a year or two.

Bundling is an interesting pricing strategy. Customers are given a discount for buying multiple products but are never told which products get the discount. If a customer tries to drop one of the bundled products, they inevitably find that the dropped product had all of the discount and the customer usually ends up paying full price for the products they don’t drop. This tactic is intended to bully folks into not breaking the bundle.

Hidden fees are just plain sleazy. A customer buying an online cable product will get socked with a range of hidden fees on the first bill. While they thought they were buying a $40 cable package, the first bill could easily be $60 or $70. The most common hidden fee for broadband is usually a high rate for the cable modem, which can be over $15 per month. Even more expensive are data caps, which can significantly add to the monthly bill.

The majority of the small ISPs I work with don’t use these tactics. They understand that these tactics are what drive consumers to seek them out. Most of the small ISPs I know have the philosophy of charging the same fair rate all of the time.

But I’ve seen ISPs that start with the simple, fair rate philosophy and get sucked into offering discounts to try to win new customers. Their marketing folks become convinced that matching the big company techniques is the only way to get new customers. I’ll grant that mimicking the big guys is probably the easiest sales technique, but acting like the big ISPs is a poor long-term tactic for many reasons.

  • Promotional rates tell customers that rates are negotiable, and once an ISP goes down that path, customers will ask for breaks forever. Many consumers are used to negotiating with the big ISPs and will do so with the small ISP as well.
  • These tactics tell customers that your rates are too high and that the real rate is the discounted rate. Customers who are too timid to negotiate for lower rates feel cheated.
  • Unplanned discounts can be devasting to cash flows and meeting financial objectives. If your business plan and budgets are based upon a specific set of rates, then giving discounts lowers the average revenue per customer. Do the math and consider what happens if the average revenue for all of your customers drops by $5 or $10.
  • Matching the big ISP tactics also attracts customers who will drop an ISP for a small discount elsewhere. Every few years, they will compare you against the competition and will take the best offer. ISPs with fair rates tell me that they rarely lose a customer to special rates – and that might be because they don’t attract customers who get a thrill out of bartering.
  • Finally, special discounts complicate your dealing with customers. The ISP now has to track when special promotions are finished and notify customers that rates will increase. This likely means having to talk with most of your customers, and calls to the call center will skyrocket. It’s important to remember that most customers view the perfect ISP as one they never need to talk with.

I’m a huge fan of keeping things simple because I have seen so many ISPs that thrive with the philosophy. The danger of mimicking the big ISP tactics is that the public will see you as just another untrustworthy ISP.

 

Pricing Strategies

One of the things that new ISPs always struggle with is pricing, and I’m often asked advice on the right pricing strategy. It’s not an easy answer and in working across the country I see a huge range of different pricing strategies. It’s really interesting to see so many different ideas on how to sell residential broadband service, which is fundamentally the same product when it’s offered on a fiber network. The following are some of the most common pricing strategies:

High, Low, or Market Rates? The hardest decision is where to set rates in general. Some ISPs are convinced that they need low rates to beat the competition. Others set high rates since they only want to sell products with high margins. Most ISPs set rates close to the market rates of the competitors. I sat at a bar once with a few ISPs who argued this for hours – in the end, the beer won.

One Broadband Product. A few ISPs like Google Fiber, Ting, and a handful of smaller ISPs offer only a single broadband product – a symmetrical gigabit connection. Google Fiber tried going to a 2-product tier but announced this year that they’ve returned to the flat-rate $70 gigabit. The downside to this approach is that it shuts out households that can’t afford the price. The upside is that every customer has a high margin.

Simple Tiers. The most common pricing structure I see offers several tiers of prices. An ISP might have three-tier offerings at $55, $70, and $90, ranging from 100 Mbps to gigabit. Generally, such prices have no gimmicks – no introductory pricing, term discounts, or bundling. There are still ISPs with half a dozen, or even more tiers this would confuse me as a customer. For example, I don’t know how a customer would be able to choose between buying 75 Mbps, 100 Mbps, and 125 Mbps.

ISPs with this philosophy differ most by the gap between pricing tiers. Products could be priced $10 apart of $30 apart, and that makes a significant statement to customers. Small steps between tiers invite customers to upgrade, while bigger steps between tiers make a statement about the value of the faster speeds.

Low Basic Price. I’ve seen a number of ISPs that have a low-price basic broadband product, but otherwise somewhat normal tiers of pricing. This is done more often by municipal ISPs trying to make broadband affordable to more homes, but there are commercial ISPs with the same philosophy. As an example, an ISP might have an introductory tier of 25 Mbps for $40. This pricing strategy has always bothered me. This can be a dangerous product to offer because the low price might attract a lot of customers who would otherwise pay more. I’ve always thought that it makes more sense to offer a low-income product only to homes that qualify in some manner but give them real broadband.

Introductory Marketing Rate. Some ISPs set a low introductory rate for first-time customers. These rates are generally good for one or two years and customers routinely sign contracts to get the low rates. The long-term downside of this pricing philosophy is that customers come to expect low rates. Customers that take the introductory rate will inevitably try to renegotiate for continued low rates at the end of the contract period.

An ISP with this pricing structure is conveying some poor messages. First, they are telling customers that their rates are negotiable. They are also conveying the message that there is a lot of profits in their normal rates and they are willing to sell for less. Customers dislike the introductory rate process because they invariably get socked with an unexpected rate increase when rates jump back to list prices. The time of introductory discounts might be coming to an end. Verizon recently abandoned the special pricing strategy because it attracts low-margin customers that often leave at the end if the contract period.

Bundling. This is a pricing strategy to give a discount for buying multiple services and has been the bread and butter for the big cable companies. Bundling is making less sense in today’s market where there is little or no margin in cable TV. Most small ISPs don’t bundle and take the attitude that their list prices are a good deal – much the same as car dealers who no longer haggle over prices. In order to bundle, an ISP has to set rates high – and many ISPs prefer to instead to set fair rates and not bother with the bundle.

Why the Big Programming Cost Increases?

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I recently talked to several clients who are expecting an increase in cable TV programming costs of between 8.5% and 9% for next year. They are able to forecast this because most of the contracts for programming cover at least three years of baked-in rate increases.

Every one of these clients is bleeding cable customers. We hear about how the big cable companies are experiencing impact from cord cutting. Last year the big companies altogether lost about 1.7 million customers, which is a little less than 2% of their customer base. But my small clients seem to be losing cable customers at a much faster pace. Cord cutting is obviously a real phenomenon and I’ve seen recent estimates that the big companies are expected to lose around 1.9 million customers this year. But while the big companies are losing customers at a steady pace, smaller cable operators are seeing a much bigger impact.

I think there are a number of reasons that small cable providers are suffering more.

  • Most of my small clients don’t pay the same billing games as the big cable companies. The big companies have created a number of ‘fees’ such as a local programming fee or a sports fee to disguise the real cost of cable. Many customers think these fees are taxes of some sort and they believe that the base price of cable shown on their bill is the actual price they are paying. That lower number is the one that they use when comparing to other alternatives.
  • The big companies are also far more aggressive with their bundling. They work hard to force customers into bundles and they penalize customers for leaving a bundle. Customers often don’t know what they pay for any specific product in a bundle and when they try to drop one product the full bundle savings are applied to that product. Even when small companies have bundles they don’t create a huge financial disincentive to leave the bundle.
  • Big companies are willing to give ‘special’ pricing to keep customers. They tend to give special pricing discounts aimed at new customers to anybody else who is willing to wade through the customer service minefield to ask for it. I think since smaller companies often don’t advertise ‘special’ prices they are far less likely to even be asked to reduce rates.
  • My smaller clients are generally more rural than the big companies, and as such they face far stiffer competition from the satellite companies. Both of the satellite providers now have a ‘skinny’ bundle that a lot of customers are finding attractive.

Why are the programmers raising rates so aggressively when it’s clear that the price of cable service is the number one driver of cord cutting? I have several ideas why they might be doing this:

  • These are all publicly traded companies and to some degree they don’t have a choice. Over 90% of cable channels are bleeding customers much faster than the rate of cord cutting. This shows that many customers are cord shaving and downgrading to smaller, less expensive packages. The programmers are compelled to increase profits, and with declining sales they can only compensate by raising programming rates. That sounds insane because it sounds like the beginning of a classic death spiral. But you must remember that any large publicly traded company that performs poorly is subject to being purchased by somebody else who will then force profits back up again. Our dreadful quarterly profit driven economy is forcing the programmers into a path that is not in anybody’s best interest.
  • They are all chasing hit shows. There are now a lot more companies like Netflix and Amazon creating unique programming, which adds to the pressure on the programmers. The financial rewards from producing even one hit show is gigantic, so they all keep spending money trying to find that next big hit, and raising rates to cover the cost of producing content.
  • Another theory is that the current rate increases are their last hurrah. They can see where the industry is headed. I saw an interview with the head of programming for FOX and he said that he expects that the company is going to have to ultimately collapse most of its many channels as they keep losing customers. And so perhaps these rate increases are the chance for making big profits for a few more years before the wheels come off. It seems that end is coming anyway, so maybe raising rates now is a way to milk every last penny out of a fading industry.

Programming content is certainly never going to go away. But companies like Netflix and Amazon are showing that there are reasonable alternatives to the huge TV bundles. I just wish I knew what to tell my clients. The most common question I seem to be getting these days is, “Should I even be in the cable business any longer?” I’m starting to think that the answer for many of these businesses is no – or it will be no within a few short years.

The Best Way to Bundle

I read an interesting quote recently in an article written by Mike Dano of FierceWireless. He interviewed Ronan Dunne, the EVP of Verizon Wireless. He quoted Mr. Dunne as saying, “In competitive markets, and the U.S. is one, if you’ve got real choice in the individual products, the cost of bundling is that you end up taking the second-best wireless product and you map it to the third-best TV bundle in order to get the cheapest broadband connection or fiber connection. No wonder you get $5 off at the end of the bill,”

That statement is a perfect lead-in to talk about the different ways to bundle. Mr. Dunne was referring to bundles like the one that AT&T does with DirecTV to try to get more video customers. That AT&T bundle is similar to what we see from most of the big ISPs. I wouldn’t even label these efforts as bundles, but rather as marketing specials that are designed to lure customers to buy specific product sets.

And Mr. Dunne is right. If you go to the web pages of all of the big ISPs you will see their pages splashed with really low-cost sounding specials. By now most people have figured out that the price for these specials increases at the end of the special term. And often people have found out that even with these specials that the actual price paid is higher because the ISP will load up these specials with all sorts of extra fees and charges that were not described in the advertising.

But Mr. Dunne is making an even more important point in that these specials end up luring customers to buy the smallest and least profitable products that an ISP sells. In order to get a cheap web price the ISP will pair their slowest broadband product with a small cable TV package. When customers contact the company to buy this special the customer service rep answering the phone then has an uphill battle to talk the customer into anything better – because they already have the advertised low price in mind when they call. Mr. Dunne went on to say that this kind of bundling is not attractive to Verizon wireless and that they would much rather sell premium products at a fair market price.

My clients face this same dilemma all of the time. I have some clients that take the exact opposite approach. They list all of their possible packages on the web, including those that might cost over $150 per month. But companies that do this face the opposite problem in that the high prices on the web might drive customers away from buying what they really want.

Many of my clients don’t post bundled pricing on their web sites for these exact reasons. They don’t want to lure people with false specials and they don’t want to chase customers away by talking about high prices. I see these clients taking several different approaches on how to handle bundling.

Some provide a discount for buying multiple services. For instance, they might discount $5 when somebody buys two products and $10 when they buy three. I’ve never particularly liked this kind of discounting for a few reasons. First, if a customer does buy your lowest margin products, such as your smallest cable package and a basic telephone line, then this discount might be giving away most of the margin on those small products. Another customer that buys the two highest margin products would get the same discount. I also don’t like the message that sends – it says that in general your products are overpriced.

I have other clients that don’t give any bundling discounts. They try to right-price each product on a standalone basis. They are not afraid to tell this to their customers and they take pride that they think each product is a bargain at the price they sell it at. I like this approach because I like the math. If a company ends up giving some sort of bundling discount to most of their customers then they have given up margin on every one of them. If you do the math you’ll see that you’d make more money with no discounts even with significantly fewer customers. A $10 bundling discount is giving away $10 of bottom line margin, which for most ISPs is a significant amount.

I’ve always asked clients who give big bundling discounts if they think they are saving any money when customers buy multiple products. The answer I get back – when they really think about it – is that they don’t save much. I think a lot of small companies bundle because the big ISPs do it and they think it’s the only way to do business. But I look at companies like Google and many of my other clients that don’t bundle and I see them getting similar market penetrations as my clients that offer bundles.

There is no question that it’s harder to sell without the bundle. It largely means that a sales call with a customer needs to be consultative and a good salesperson will ask a customer to define what they really want before talking price. Then, if the price is too high they will work with a customer to find a compromise they can live with. This kind of sales approach is going to sell a lot more of your premium products. And it’s going to make customers better understand just what they are buying. I think a lot of the customers that buy the cheap advertised bundles are not really happy with their products and are likely to churn at the end of the contract. What they really might want is faster data speeds or more TV channels, but when they start the conversation with the ISP based upon getting the lowest price that real desire gets lost in the transaction.

The main point of this conversation is that ISPs really need to examine their bundling practices. Just copying the big companies might mean giving away a lot of bottom line needlessly. And offering big discounts to new customers might not be adding many new customers after considering the churn and loyalty from customers who only buy due to the specials.

 

Quad Bundling

Since Comcast and Charter are now embarking in the cellular business we are soon going to find out if there is any marketing power in a quad bundle. Verizon, and to a smaller degree AT&T, has had the ability to create bundles including cellular service, but they never really pushed this in the marketplace in the way that Comcast is considering.

Comcast has said that the number one reason they are entering the cellular business is to make customers “stickier” and to reduce churn. And that implies offering cellular service cheaper than competitors like Verizon, or to at least create bundles that give the illusion of big savings on cellular. For now, the preliminary pricing Comcast has announced doesn’t seem to be low enough to take the industry by storm. But I expect as they gain customers that the company will find more creative ways to bundle it.

The Comcast pricing announced so far shows only a few options. Comcast is offering a $45 per month ‘unlimited’ cell plan (capped at 20 GB of data per month), that is significantly less expensive than any current unlimited plan from Verizon or AT&T. But this low price is only available now for customers who buy one of the full expensive Comcast triple play bundles. The alternative to this is a $65 per month unlimited plan that is $5 per month lower than the equivalent Verizon plan. Comcast also plans to offer family plans that sell a gigabyte of data for $12 that can be used for any phone in the plan – for many families this might be the best bargain.

One interesting feature of the Comcast plan is that it will automatically offload data traffic to the company’s WiFi network. Comcast has a huge WiFi network with over 16 million hotspots. This includes a few million outdoor hotspots but also a huge network of home WiFi routers that also act as a public hotspot. That means that customers sitting in a restaurant or visiting a home that has a Comcast WiFi connection will automatically use those connections instead of using more expensive cellular data. Depending on where a person lives or works this could significantly lower how much a consumer uses 4G data.

There are still technical issues to be worked out to allow for seamless WiFi-to-WiFi handoffs. Comcast has provided the ability for a few years for customers to connect to their WiFi hotspots. I used to live in a neighborhood that had a lot of the Comcast home hotspots. When walking my dog it was extremely frustrating if I let my cellphone use the Comcast WiFi network because as I went in and out of hotspots my data connections would be interrupted and generally reinitiated. I always had to turn off WiFi when walking to use only cellular data. It will be interesting to see how, and if Comcast has overcome this issue.

A recent survey done by the investment bank Jeffries has to be of concern to the big four cellular companies. In that survey 41% of respondents said that they would be ‘very likely’ to consider a quad play cable bundle that includes cellular. Probably even scarier for the cellular companies was the finding that 76% of respondents who were planning on shopping for a new cell plan within the next year said they would be open to trying a cellular product from a cable company.

I wrote recently about how the cellular business has entered the phase of the business where cellular products are becoming a commodity. Competition between the four cellular companies is already resulting in lower prices and more generous data plans. But when the cable companies enter the fray in all of the major metropolitan areas the competition is going to ratchet up another notch.

The cable companies will be a novelty at first and many customers might give them a try. But it won’t take long for people to think of them as just another cellular provider. One thing that other surveys have shown is that people have a higher expectation for good customer service from a cellular provider than they do for the cable companies. If Comcast is going to retain cellular customers then they are either going to have to make the bundling discounts so enticing that customers can’t afford to leave, or they are going to have to improve their customer service experience.

Even if Comcast and Charter have only modest success with cellular, say a 10% market share, they will hurt the other cellular companies. The number one driver of profits in the cellular business is economy of scale – something you can see by looking at the bottom line of Sprint or T-Mobile compared to Verizon or AT&T. If Comcast is willing to truly use cellular to help hang on to other customers, and if that means they don’t expect huge profits from the product line, then they are probably going to do very well with a quad play product.

And of course, any landline ISP competing against Comcast or Charter has to be wary. If the cellular products work as Comcast hopes then it’s going to mean it will be that much harder to compete against these companies for broadband. Bundled prices have always made it hard for customers to peel away just one product and the cable companies will heavily penalize any customers that want to take only their data product elsewhere.

The FCC’s Cable Price Report

FCC_New_LogoOnce a year the FCC releases a Report on Cable Industry Prices and this year’s report came out a few weeks ago. This current report has some very odd findings that make me think that perhaps this report is no longer needed.

The report looked at the prices charged for basic cable and expanded basic cable in 485 communities in the US, some where cable has a declaration of effective competition and others with no competition.

I think the results shown in the report are off because the findings show average rate increases that are far below what is reported everywhere else in the industry. The FCC says that the price of basic cable increased by only 2.3% over the last year to reach a price of $23.79. More surprisingly, the average price of expanded basic cable increased by only 2.7% to reach $69.03 which was slightly lower than the increase in inflation. This compares to the 10-year historical average of 4.8% increases per year from this same report.

The increase in basic cable might be accurate because there are years when many companies don’t increase this rate. But the expanded basic rate increase is baffling. I wrote a blog back in the beginning of the year showing much larger increases for all of the big cable companies this year except Charter, due to their impending merger – and they caught up later in the year.

I think that perhaps the FCC is no longer asking the right questions. It’s certainly possible that the published prices for expanded basic cable increased as they have said – but that doesn’t tell us anything about what customers are really paying.

I suspect the FCC is not picking up the plethora of new ‘fees’ that are being used to disguise the price of cable. These might be called network programming fees to cover the cost of buying local programming. Or they might be called sports charges to cover the ever-rising cost of sports programming. Every big company labels these fees a little differently. But these fees are part of the cable bill that people pay each month and the primary purpose of the fees is to allow the cable companies to claim lower cable rates. These fees also confuse customers who often think they are taxes. My guess is that the FCC did not include these fees – and they must be included because they are nothing more than a small piece of the cable bill labeled differently.

Additionally, I’ve seen a number of estimates that say that around 70% of households buy cable as part of a bundle, and for these households the change in the list price of the components of the bundle doesn’t matter – customers only care about the overall increase in the price of the bundle. Customers don’t know or care which piece of the bundle increases since they are rarely shown the cost of bundle components.

And this leads to a discussion of the fact that cable companies have recently began increasing the prices of other products in order to keep cable rates lower. Rather than raise the price of cable they might instead raise the fees mentioned above, raise the price of the cable modem or the settop box, or raise the price of the broadband products. And all the cable companies care about – and all most customers see – is the increase in the total bill.

Finally, we know that there are now many different rates in every market. Cable companies sell specials or negotiate contract renewals with customers. At CCG we often gather customer bills to try to understand a market and we often see customers with an identical package with prices varying by as much as 10 or 15 dollars. None of the variation in actual rates makes it into the FCC report. I think this report only looks at the published list price and those prices are largely irrelevant since they don’t reflect what customers really pay.

So I think the usefulness of this report is over. If I recall this report was mandated by Congress, and so the FCC is probably obligated to keep producing it. But the results it now shows have almost nothing to do with the rates that customers actually pay for cable TV in the real world.

The Downside to Bundling

bundleIt’s so common for triple play providers to bundle their services that it’s become the standard product of the industry. There aren’t any great stats on the percentages of bundles sold at the big cable companies, but I’ve seen speculation that it’s north of 70% of all residential customers. Certainly, with that kind of success it’s not hard to see why triple-play providers like bundles.

Back when bundles were first created all of the talk in the industry was that bundles would make customers ‘stickier’ – meaning that customers with a bundle were less likely to churn to another provider. The original lure of the bundles for customers was that they saved money over buying each product a la carte – and customers saw savings when they bought bundles.

But in much of the country the cable companies have won the competition battle. They now offer data speeds in most markets that are faster than their competition, and so customers no longer have an equal choice between two providers. We can see this by watching the huge ongoing shift of DSL customers to cable modems in the cities – just last year Comcast added almost 2 million new customers, most formerly from DSL.

I suspect that customers don’t look at the bundle in the same way they did years ago. If customers don’t have a real competitive alternative then the bundles are no longer saving them anything. When you consider the impact of a decade of high rate increases, one has to think that most homes are finding the bundle to become more of a burden than a boon. I just saw a statistic yesterday that showed that the average price of just the cable TV portion of the bundle has increased from $70 to $103 since 2011.

My guess is that bundles have lost their appeal for most customers. The stickiness that the cable companies crowed about can feel like a trap to somebody who wants to downsize. The industry has been abuzz for several years about the big movement towards cord cutting. But none of the articles I have read on the issue mention how hard it is for somebody to drop cable TV while keeping a data connection.

I’ve written in this blog a number of times about how Comcast forces me into buying basic cable TV in order to get a fast broadband product. I didn’t want that cable product on day one and I have tried over the years to ditch it. But I’ve always been told that I would have to drop my data speeds to a really slow product in order to buy standalone data. So what I have is a forced bundle – one with no options for breaking the bundle into the components and only buying what I want.

There are bundles in the industry that are not as rigid as mine, but which instead impose a harsh monetary penalty for breaking the bundle. Customers don’t know what they pay for any given piece of the bundle. But if you try to break a bundle, you find out that there was very little value assigned to whatever product you want to ditch and, thus, the savings when breaking a bundle are never as large as expected.

This phenomenon certainly has to be a contributing factor for homes not buying data from Google Fiber. It’s been widely reported that many people really like the cable products the big companies put out these days. The products are much improved over past years with cloud DVR, slick remotes and the ability to watch programming from anywhere on any device. But breaking a bundle to keep cable TV and then buy data from somebody else comes with such a significant financial penalty that it’s hard to justify.

Where bundles were once used to attract customers in a somewhat competitive environment, they have turned into anchors around customers’ necks. I have to think that a lot of the low rankings that the cable companies get on customer satisfaction surveys comes from the resentment over bundles. Nobody likes feeling of being forced to buy something they don’t want. From time to time I see articles ruing that we don’t have a la carte cable programming so that we can buy the channels that we want. But the fact is, that for most of us, we no longer even have many options for a la carte products that are not in a bundle.

The Real Value of Bundling

Numismatics_and_Notaphily_iconMost telecom providers these days offer some sort of bundled product. Bundles have become such an automatic pricing tool that I think many providers don’t consider the value proposition behind bundles. Originally bundles were created to try to make customers want to stay with a provider – to make them sticky, in industry jargon. If your bundles don’t do that you are probably missing something.

Consider two different companies I know that have the best bundles. The first is not even a telecom company. I have a friend who owns and operates a CPA firm that has been in business for fifty years. His firm always did traditional bookkeeping and tax preparation work. A decade ago he started getting a lot of competition from other tax-preparation alternatives – the big companies like H&R Block and also software packages like TurboTax. He realized that his primary product didn’t offer any significant advantages over his competitors, and that if he didn’t change something he was going to see a lot of customer churn and he would always have to spend a lot of marketing just to retain a customer base.

So he decided to create bundles by offering other services that his customers already used and bought elsewhere. He first added a payroll service and made it easy for his customers to pay their employees. This was a product that was available from many other places, but he found that his customers preferred to buy the service from somebody they already trusted. He then added credit card processing since almost all of his customers accepted credit cards. Again, this is a widely available service, but many of his customers over time moved their business to him.

In recent years he has become even more creative. He’s become an insurance broker and can offer policies from a wide array of different insurance companies. Probably the most creative product he’s developed is a point of sale system that he developed himself. His customers are small retail stores like restaurants, nail salons, grocers – and he has a system on an iPad that can take credit card payments and that automatically logs each sale into the accounting system.

The bottom line is that he has created a suite of products that make his customers very sticky to him. He has priced each of these products competitively because his profit comes from selling the whole suite of products, not any one product. He has found that offering the bundle of services has greatly reducing churn and he rarely loses A customer. Customers have a hard time leaving him since they would need to find multiple vendors to replace him.

I have a telcom client who has done something similar. While they are a rural telco, they decided twenty years ago to expand into the business market in some nearly cities. They did okay selling telephone lines at first, but they saw churn and found that customers had no reason to be loyal to them as a provider.

So they decided to tackle a bundle of a wide variety of technical services needed by small businesses. Of course, that meant providing broadband as soon as that became a common need for businesses. But over time they have done a lot more.

They first tackled being the IT shop for small businesses. When they started this it meant installing and maintaining a server at a customer location. Over time that function has moved back to their own data center, but they still provide this service for most of their customers. They also created their own version of the Geek Squad, before there was such a thing at Best Buy. They will purchase, program, maintain and repair customer computers and associated electronics. They also have gotten into other lines of business – they resell, install and train on various major cloud software packages. For a while they offered video conferencing (before Skype made it free and easy). They even offer copiers, postage machines and other major office equipment.

Their goal was to make themselves indispensable to a small business by becoming a one-stop shop to buy everything electronic. And it has worked. They won over a significant portion of the businesses in their markets as customers and those customers are remaining loyal to them. A customer doesn’t have an easy time leaving them since that means replacing them with at least three or four other vendors.

These are two examples of bundles done right. If your bundles are only used as a pricing tool then you are missing the biggest benefit of the bundle – which is to create loyal customers who won’t leave you. Worse yet, I see mandatory bundles that trap customers into buying services they don’t want – and when these customers finally get fed up and find an alternative you’ll never see them again.