Tuesday, March 27, 2007

Innovation Tools Part 2: Bundles of Joy

At the end of the TV show The Price is Right, two contestants get to guess the price on what is called a “showcase.” The showcase is a large bundle of products which are described very quickly by the announcer and shown in rapid succession, one at a time (with a pretty woman in front to distract your attention).

Often times, when you look into the eyes of the contestant, they appear to have absolutely no clue as to what the bundle of items is worth. It was too many items shown too quickly. Later, when you hear their bid and then find out what the actual retail price is, you find out that your suspicions were true. They really did have no idea of what the entire bundle of items cost.

When a number of products are bundled together, it is often more difficult to decipher the true value of the entire package. It is difficult on The Price is Right and difficult in real life.

We are currently doing a series of blogs on ways to focus your thinking to create innovative new business ideas. One way to discover new ideas is to look at the concept of bundling. By changing the way products and services are bundled, you can create new and different business opportunities.

Often times, once can create new business opportunities without creating new products or services. Instead, all one needs to do is rearrange how everything is bundled together. Creativity in bundling can come in three forms:

1) Bundling things that were previously sold separately

2) Separating things that were previously sold together

3) Changing the Cross-Subsidies in the Bundle

We will look at each of these separately.

1) Bundling things that were previously sold separately
The best examples for bundling things that were previously sold separately are in the fast food industry. The first step in bundling was the voluntary bundle, where the cashier would try to get the customer to create their own bundle. It used the five powerful words that have created a fortune in added revenue: “You want fries with that?” It takes quite a pile of burgers to create the same amount of profit as found in a single order of fries. By bundling fires with a burger, the profitability of the entire transaction goes up significantly.

Not content with voluntary bundling, the industry created “combo meals” where the burger, fries and drink (another big profit-maker) were pre-packaged together at a “value” price. Sure, the combo meal was a better value than buying the items separately, but it caused people to still buy more than they otherwise would have, and caused them to skew their purchase more towards the items with the highest profit margins. So the customer gets a better price and the restaurant gets a better profit. It’s a win-win situation. Are you missing out on the “combo meal” equivalent in your industry?

Combos work on larger-priced items as well. You can sell a computer for virtually free if you can attach enough profit-makers to the bundle: items like cables, printers & ink, software, extended warranties, services to transfer your old files to the new computer, etc.

There is a trend to bundle luxury housing with exclusive high-end golf courses. Buy a house and get access to the golf course as part of the bundle.

Supercenters bundle food shopping with general merchandise shopping. Buy a music CD and get a video of the band bundled with it. Not only is this added value to the consumer, it helps cut down on some of the piracy of music since the video can be more difficult to stream. There are companies that are bundling all the services associated with getting married (like banquet halls, clothing, photographer, invitations, etc.) and bundling it all together. And on and on the list goes.

2) Separating things that were previously sold together
Lately, a more dramatic trend has been to do the opposite—break apart things that were previously sold together in a bundle and sell them separately. Typically, a bundle has a mixture of goods and services with different levels of profitability. The high profit items tend to subsidize the low profit items. However, what if you were able to sell just the most profitable item without the subsidies? That could become quite profitable.

The most profitable part of a newspaper is the classified section. It provides most of a newspaper’s profits. The gathering and reporting of news is a money loser. What if you could unbundled the sections of a newspaper and just sell the profitable parts? People are doing that. Monster.com just does the profitable want ads section of the newspaper. There are also a large number of dotcoms that provide just the automobile section of the classifieds. Even if these services do not have as large a volume of business as the newspaper, they can do well, because they do not have to subsidize the unprofitable aspects of news gathering.

Many of the functions provided by a bank are unprofitable. One of the most profitable services provided by a bank is giving loans. What if you could unbundled a bank and just do the loans without having to provide those unprofitable services? Thus spring up businesses like E-loan.

In order to save money on benefits, many employers are unbundling their benefit packages, allowing the employee to pick and choose which benefits they want. This way, the employer doesn’t have to pay for benefits that the employee does not want.

Selling movie theater popcorn is more profitable than selling movie theater tickets. What if you could find a way to sell movie theater popcorn to people watching movies on their home theater systems? Some high end home theater system retailers also sell institutional popcorn poppers just like the ones in the theater.

Let’s go back to the fast food example. If french fries are so much more profitable than burgers, then why not stop selling burgers and only sell fries? I have seen restaurants in mall food courts that have done this very thing, selling only french fries.

3) Changing the Cross-Subsidies in the Bundle
Often times a bundle will consist of a situation where you pay a full price for something and something else gets thrown into the bundle for free or at a large discount. What if you were to switch around the subsidy? For example, in computer printers, the general policy has been to sell the printer very cheaply, but force high prices on the ink. Kodak is introducing a business model which works in the other direction. You will pay a higher price for the printer, but the ink will be sold cheaply. Kodak hopes to capture the people who are fed up with paying too much for ink.

In the cellular world, some companies try to bribe you into subscribing to their service by subsidizing the price of the phone. Other companies get exclusive rights to sell really cool phones which people are willing to pay “full price” for and the phone service is just thrown into the bundle. There are many other creative ways cell phones are being bundled with a wide variety of services, as well as a wide variety of ways to pay for them.

Once you open your mind to the possibility that other pricing models are possible, one can come up with all sorts of creative solutions.

Just because products and services are sold in one fashion does not mean that it is the only way to sell them. Sometimes you can open up new pockets of profits by just rearranging the bundling. You can bundle things that were previously unbundled. You can unbundle things that were previously bundled. You can change the way the bundles are priced or paid for by rearranging the cross-subsidies.

As mentioned in yesterday’s blog, sometimes the most revolutionary innovations are not about creating a entirely new product. Instead it may just be about tweaking the bundling of the same old products and services in the industry.

If only I could figure out a way to sell just the extended warranty without having to sell the product…. Hey, wait a minute. When I bought my house, I was getting letters from independent companies wanting to insure my mortgage in case I lost my job and was unable to work. Maybe this extended warranty store could work after all.

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