Tuesday, January 29, 2013

The 2 dimensions of Bundling versus Unbundling - a PM tool

I'm sure you've been faced with the decision on whether to bundle or unbundle certain features or related offerings with your core product from time to time?

Bundling means including the feature, or related offering, into the basic package that is your product. This means that the price of the feature is included in the price of your core product and hence effectively hidden from the customer.

Unbundling is obviously the opposite. Meaning to keep the feature seperate from your core product, thus pricing it seperately, enabling the customer to select or de-select the feature at will.

There are very good reasons for bundling a feature, such as "forcing" the customer to buy the full package or differentiating your product specifications from competition etc. Likewise there can be very good reasons to unbundle a feature, such as increasing transparency, enabling up-selling, making the core product more price-competitive etc.

What I'd like to do today is present to you a small, simple framework that might help you with this difficult decision.

Basically you can look at features from two dimensions:
- The Cost for you to produce the feature (and I'm assuming that this will be true for your competition as well. If not, then you have a different more fundamental problem that needs to be adressed first)
- The Value of the feature for your customer

You are of course aware that pricing a feature has to be done independently of the cost to produce the feature ... right ? :-) but Pricing is an entirely different discussion. By the way, this analysis is valuable for both new features and existing bundles. It is actually a good idea to revisit your bundling/unbundling decisions on a regular basis as part of the normal Product Life Cycle.

For now I've drawn the two dimensions into below 2-by-2 matrix:

As always, there are 4 outcomes of such a matrix (see figure):
- The Differentiators (high cost, high value)
- The Nice-to-haves (low cost, low value)
- The Obvious (low cost, high value) ... and
- The Irrelevant (high cost, low value - I won't spend more time here, but remember to be aware that these features are often requested by your channel and hence you need to seriously challenge such requests).

"The Obvious" are features you could bundle to differentiate yourself. And you will often experience a significant pressure from your channel (sales) to include this for free in an offer to "help close the deal" and "hey, it's almost free for us to do, so why not" ... on the contrary! These are features that you know have a high value for your customers. This in general means that they should always be priced seperately to make the value clear to the market. If you bundle such a feature into the core offering the incremental value of this specific feature falls to zero making it very difficult to extract the revenue from the upsell. Only bundle these features when you're forced to, typically by competition. And then make sure your channel understands how to get maximum benefit of the bundling in the sales process by including this newly bundled, valuable feature in the updated set of Unique Selling Points.

"The Nice-to-haves" are up for discussions. You have two options: firstly you could decide, for the sake of simplicity which is a noble objective for any Product Manager, to dismiss the feature alltogether. Secondly you can also decide to bundle these features, if not for anything else, then to differentiate yourself from your competition with a longer list of included features. But you would never unbundle these features.

"The Differentiators" are features you will never bundle! They help you towards competitive pressure and you enable your channel to increase valuable, and hopefully easy, upsell be adding these valuable features to the sales mix.

Comments are welcome. My primary point being that you need to carefully consider what your bundling/unbundling strategy is. My take is that this is merely another of the wide range of tools in your PM toolbox but this could have significant influence on your P&L so use it carefully.

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