SaaS companies have adapted roll-your-own or bundle pricing for subscription services. Recurring revenue bundles, sometimes shortened to “rundles”, combine multiple subscription services or products into one package. Bundling allows retailers to take advantage of the consumer surplus to increase their sales volume and average order volume while also potentially subsidizing long-tail product development.
Companies can also benefit from partnership bundles whereby they include their partners’ offerings in their bundles or vice versa. This strategy can be mutually beneficial resulting in expanded reach, a bolstered reputation, and cross-platform data sharing leading to enhanced market knowledge.
However, achieving a bundled billing model with the right mix of desirability and profitability is no easy feat. You will need a strong understanding of your buyer personas, excellent product management, and accurate revenue allocation to perform frequent margin analyses. Read on to discover the perks and pitfalls of bundling.
Want to explore a specific aspect of bundling? Skip ahead by clicking on the topic.
- Unpack the pros
- Unpack the cons
- 5 bundle pricing strategies
- Understand revenue recognition and deferred revenue
- Implement and manage the complexity
Understand the benefits and challenges of bundle pricing
Unpack the pros of bundle pricing
- Discounted pricing for the customer leads to revenue growth for the retailer. Customers are paying less while also buying more, which generates revenue for the seller and subsidizes long-tail product development. It’s a win-win.
- One-stop shopping simplifies the buyer’s journey. It can be tedious to keep track of multiple billing invoices and go through different customer service channels. Customers will appreciate only having to manage one subscription and interact with one provider of customer support.
- Bundling can create a personalized experience if customers are given the choice to select limited customizations to their bundles.
- The likelihood of pricing disputes decreases with bundled billing. Without the pressure of a line-by-line breakdown, customers tend to be more accepting of the overall pricing.
- Bundling allows you to boost sales of certain products. You can promote new products or sell underperformers by including them in bundles with your more popular products.
- Partnerships benefit companies and provide more options for consumers. Smaller companies can build brand awareness and expand their customer base, while helping larger companies to grow partner revenue, before supporting their own subscription service.
- Cross-platform data sharing enhances partner marketing and promotion. Companies can develop a better understanding of the market to improve their offerings and business strategies.
Unpack the cons of bundle pricing
- Bundling offers less choice than a la carte services. Customers may be unable to pick the exact options they want and decide to look elsewhere.
- It can be complicated to attribute revenue to the appropriate stream without robust accounting processes handling revenue allocation. Errors can skew product analytics and create problems for management.
- Bundles can hurt the sales of popular products due to the presenter’s paradox. Customers may not view the deal as valuable enough and would rather buy the products individually, which can hurt the sales of your popular products if they’re only accessible through bundles.
- Bundles can create a barrier to entry as some customers may feel pressured into buying more than they want and decline the offer outright.
- Your partner might bundle your offer at too low a price. Therefore, the market learns that your product is an add-on or low value.
- Partnerships may cause you to lose connection with your subscribers and control over the end-to-end customer experience. You won’t be able to harvest data on their behaviours or quickly respond to feedback.
- Customers may choose not to renew their subscriptions after the initial discount wears off. Many bundles charge a reduced price for new subscribers for a set amount of time, if this is poorly managed you can increase your churn metrics.
5 bundle pricing strategies with examples
There are several different ways to create a bundled billing model, so this list is to help you determine which approach might work best for you. Below quickly summarizes the various strategies, and you can click the pricing strategy of your choice to jump ahead:
1. Organic bundling| Explanation and example
If the customer can only purchase specific products or services through bundles, that’s known as organic bundling. This pricing strategy takes advantage of the psychology principles of exclusivity scarcity and uniqueness theory to entice buyers by enhancing the rarity of their offering and allowing them to feel special.
Humble Choice is a membership subscription service that provides the user with 12 PC games to own for $15/mo. The membership can be counted as an organic bundle because it also gives you exclusive access to over 75+ data-rights-management-free games and Humble originals via the Humble Trove.
2. Mixed bundling | Explanation and example
Mixed bundles are ones where all the items or services associated with the bundle can also be purchased individually by the same retailer. This pricing strategy helps to counteract one of the common pitfalls of bundling—accidentally hurting the sales of popular products. Some customers just want the individual leader products, it’s better to have them purchase less than nothing at all, and you don’t have to sacrifice bundles to give them that option.
The Clean Crate Company sells Canadian brand cleaning products that are eco-friendly, non-toxic and free of harsh chemicals. You can either purchase the individual cleaning items that you need or subscribe to one of their crates and have seasonal cleaning essentials delivered monthly, bi-monthly or semi-annually.
3. Aggregator bundling | Explanation and example
Aggregator bundling offers maximal choice to the customer. Buyers can customize their bundles by selecting elements from limited options. In traditional cost-based pricing, aggregator bundles can look like buy one get one free or pick-three deals. When it comes to subscription services, the model can support either choices that are locked in at the start of the contract or choices that can be changed at the start of each pay period.
To promote their Surface products, Microsoft allows buyers to build a bundle that includes their choice of a Surface device, an annual subscription to Microsoft 365 with an additional three months free, and a two-, three- or four-year protection plan.
4. Limited time bundling | Explanation and example
Limited time bundles are typically rotating offers that provide discounted access to a set of services or products for a specified amount of time. Each offer is usually only available to purchase for a short period of time, which creates a sense of urgency and makes the savings seem even more desirable.
Phone, cable, and Internet companies often sell their services in limited time bundles. Shaw offers a range of television and internet bundles on two-year plans. After the two years are up, you go month-to-month until you cancel or sign up for another value plan; however, if you cancel your subscription early, you’re required to pay early cancellation fees.
5. Partnership bundling | Explanation and example
Partnerships allow one retailer to sell the services or products of other companies through bundles with their own products. Collaborating with other companies can offer a host of competitive advantages like expanding or tapping into new customer bases, sharing cross-platform market research, trialing subscription services before committing to the costs, and so on.
Birchbox is a beauty and grooming subscription service. For $15/month for the beauty box and $10/month for the grooming box, you will receive five curated deluxe samples based on preference settings in your user profile. You can also buy individual full-sized products from their website. The company currently carries 40 prestigious brands and, in 2015, launched their own line of products.
Revenue recognition for bundle pricing
The most important aspect of revenue recognition for bundled billing, in addition to remaining compliant with accounting standards like ASC 606 and IFRS 15, is ensuring that you’re able to accurately attribute income to the correct revenue stream.
Margin analyses are crucial for making strategic business decisions and understanding the performance of each of your products or services. However, errors in your revenue allocation data could jeopardize these processes—leaving you unable to tell how much is being earned by each revenue stream.
Investing in a robust recurring billing solution is one way to eliminate manual errors and simplify revenue allocation. It can also help you to maintain compliance and efficiently handle changes to your customers’ bundles and invoices.
Managing the complexity of bundle pricing
Avoid subpar management of your bundling strategy by familiarizing yourself with these three critical elements of the pricing model that will aid your growth journey.
The 3 critical elements of your bundle pricing strategy
1. Understand target customers
Take your time to ensure that the pricing and value metrics are aligned for each of your bundles. If customers are unable to grasp why your bundle is a great bargain, it’s highly likely that they will search for a better deal elsewhere. Analyze your customers’ behaviour and build your bundles to meet specific needs or desires that are currently not being fulfilled.
2. Boost sales of certain products/services
Bundles are great for adding another layer of control to your pricing management. In the same way that you want to carefully craft your bundles to be desirable to your customers, you should also appropriately pair products and services to maximize your overall sales. Bundles that are not well balanced can hurt sales of your popular offers and lead to frustrating overstock.
3. Manage revenue allocation
Keeping track of which earnings are coming from what revenue stream doesn’t have to be complex. A powerful recurring billing solution can automate revenue allocation with an internal line-by-line breakdown, so you’ll always be ready to perform margin analyses. The right system will also help you maintain compliance with ASC 606 and IFRS 15, as well as streamline any additions to your billing model or updates to your customers’ invoices.
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