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.