Strategic Planning Analogy #508: Profiting from Free

THE STORY
When I was in college, I was desperate to find a job to help pay my college expenses. I ended up taking a job at a call center. The job consisted of calling people to tell them they had won three “free” magazine subscriptions. All they had to do to get their free magazines was pay a small “processing fee.”

As it turns out, that small “processing fee” just so happened to equal the cost of subscribing to those magazines. So the magazines were not free at all. It was a deception. I could not stand deceiving people that way, so I quit after three days.

THE ANALOGY
“Free” is an effective marketing tool. People love to get things for free. And if you cannot do “free” then selling below cost is the next best tool. The problem is that it is hard to make a profit if you give everything away for free or sell well below cost.

Therefore, if you price something as free, you need to get income in another way. That can be a difficult problem to solve. In the story, they solved the problem through deception. That is not usually the best long-term strategy, since the deceptions eventually tend to come out in the open—and people don’t like finding out they were deceived.

In this blog we will look at a list of other ways to bridge the gap so that you can hit a price the market loves and still make money.     

THE PRINCIPLE
The principle here is that the choice of one’s pricing strategy can be one of the most important strategic decisions one can make. And that decision should not be seen as an add-on at the end. In other words, don’t build your strategy first and then decide where to set the price. Pricing needs to be integral to the entire strategy formation—from beginning to end…Why?

1) Free Only Works If the Business Model is Designed to Make it Work

First, in order to support free or below cost pricing, you need a business model which pinpoints other sources of income. If you don’t predetermine those other sources when designing the business model, they will not magically appear later. You need a justification in the business model for why additional money should flow into company (and where it comes from), so that enough money will show up to cover the losses on the core product.

The entire revenue stream needs to be looked at simultaneously, to ensure that total inflows cover your outflows and produce a profit. In this holistic approach, you may find that the model needs adjustments in order to make it all work. For example, you may need:

1.     An additional type of sales force (like people to sell advertising in addition to people to give away the product); or

2.     An additional appeal to an additional customer base (like finding a way to appeal to both premium paying customers and free customers); or

3.      A different production or product design (like a stripped down free model so that you can sell upgrades or perhaps a version more appealing to advertisers).

4.     A broader portfolio of products in the mix (like adding highly profitable french fries to the menu in order to compensate for the loss on selling the hamburger)

Unless you look at all the pieces together, there is a good chance you won’t get enough pieces right to make the whole business work.

2) Subsidies Are Becoming the Norm

The second reason why pricing concerns need to be up-front and integral to the business model development is because the idea of selling free or below cost is becoming the norm. This is no longer just a problem for people selling low cost hamburgers. It is impacting nearly every industry. For example, almost the entire social-based economy has a free element to it. The younger generation who grew up with social media have an expectation that a whole host of items should be free (or highly subsidized), like information and entertainment.

You even see it now in portions of the large durable goods and business-to-business spaces. And if it isn’t there now, it will get there eventually.

The competitive pressure is too great. To create a strategic position which stands out in a hyper-competitive, hyper-saturated environment where consumers are bombarded with too many messages and too little time, you have to exaggerate. To own quality, you need to offer ultra-high quality to get noticed and get credit for it. Similarly, to own service, you need to offer ultra-high service. To own price, you need to offer ultra-low prices. These exaggerations make it difficult to price the core products at a level to cover what it takes to achieve “ultra” status.

Therefore, one cannot count on always being to sell everything one offers at a price which covers all of its costs. It is safer to say that one should count on at least a portion of one’s business to always need some kind of subsidy in order to price at market levels.

Strategies to Win With Free or Below Cost Pricing

So how do we create strategic business models so that below cost pricing is covered? Here are some suggestions:

1)     Bundling. This is epitomized by the fast food combo meal. To sell the below cost burger, they bundle it with a high margin drink and fries, so that the whole bundle becomes profitable, even if the burger is still priced below cost. This is why salespeople try to sell below-cost computers in a bundle with cables, extended warranties, software, etc.

2)     Fees: To make money on low airfares, airlines add all sorts of fees for baggage, preferred seating, meals and anything else they can think of. Offers for products on TV add “postage and handling” fees to the low price. My telemarketing story added fees.

3)     Freemium Model: Common with social media sites are free basic sites, with others paying a premium price for premium features found in the premium version. The idea is that the more users there are on a site, more valuable it is to premium members (network effect). Therefore, it is worth it to sites like Linkedin to build a large free base in order to increase its value to recruiters (who are more willing to pay to access a large base).

4)     Subsidy (Advertising): If you can get a lot of people interested in something due to being free, then there are often advertisers (or others) who will pay to access those people you’ve gathered. This is common in entertainment (like magazines or web sites). Also, check out a doctor’s office to see how many items have ads from pharmaceutical firms. There are ads everywhere! If you can advertise there, why not anywhere else?

5)     Addiction: In the illegal drug trade there is a saying that “the first dose is always free.” The idea is that it is worth it to give away the first dose of the drug, because it will create addictive behavior that will get them coming back to pay for additional doses for many years. This can work for free chips at a casino. Also, I know of a company that gave away free bags of premium dog food. They knew that if they got the dogs hooked on the premium brands, they would refuse to eat the cheap brands anymore.

6)     3rd Party Payers:  If you cannot get customers to pay, get someone else to pay on their behalf. Lots of firms advertise “free” products or services which are subsidized by the government (through programs like Medicare). Convince children to beg their grandparents to buy something for them. Sell “free” benefits to employees by getting their employers to buy it for them (like health club memberships or pet insurance).

7)     Add-ons: Put a low price on a stripped-down basic automobile and then charge a fortune for all the deluxe add-on features.

8)     Refills: Charge a low price for the razor and charge a fortune for the razor blades. Or charge a low price for the printer and a fortune for the ink refills. Or sell the Barbie doll cheaply and charge a bundle for all of the outfits. The idea is to establish your base cheaply and then get a high margin on replacing the items that go with the base.

9)     Delayed Timing: Make it free now, but get paid later. This is the idea of extending credit so that customers pay nothing at time of purchase. This works for automobiles (just sign and drive). There has been a leap in demand for solar panels since going from an upfront purchase model to more of a pay-as-you-go model.

And the list can go on.

SUMMARY
In the hyper-competitive world of today, about the only way to create a position which stands out is by exaggerating features to the extreme. And often, it is difficult to charge a high enough price to cover the cost of that exaggeration. Therefore, one needs a business model which finds other ways to get adequately compensated. And the only way to ensure that occurs is to design it into the core business model from the very beginning. So address your pricing and income strategy at the beginning and all the way through the business model development. It is too important to try to just tack pricing on at the very end.

FINAL THOUGHTS

The whole world is becoming more like those telemarketers or the fast food combo meals. Therefore you need to think more like them and look for ways to subsidize below cost pricing.

Strategic Planning Analogy #503: Unbundled Subsidies

THE STORY

When I used to eat at a fast food restaurant, I’d order a burger and fries. But then I realized that the low price menu would have burgers for about the same price as those french fries. After that, I skipped the fries and ordered a second burger.

My logic went like this: Fries are merely grease sponges—just empty calories filled with fat and covered with too much sodium. By contrast, at least with the cheap burger I was getting some protein. They cost about the same and filled me up about the same and were equally tasty. Therefore, instead of getting a burger and fries, I started getting two burgers.

That was all fine by me. But I don’t think the fast food restaurants enjoyed my new decision. After all, they made a good profit on the fries but were losing money on that low-cost second burger.

THE ANALOGY

No matter what business you are in, your customer has choices. Even in a monopoly situation, the customer has choices. They can choose a substitute from another industry or choose not to purchase at all.

Many of the decisions businesses make affect those choices, such as product assortment and pricing. When the fast food industry added low-price value items to their menu, they changed the way I made choices about how I eat.

Unfortunately, my change was to the detriment of the fast food restaurants. I switched from high-margin fries to a negative margin value burger. And it was THEIR decision which caused my changed behavior to work against them. Their actions made me a less profitable customer.

So don’t limit your discussions about what is strategic only to big issues like positioning and productivity. Even smaller issues, like the pricing of a burger, can have a huge impact on performance for years to come.

Think of it like making a small decision about whether or not to bring a woodpecker on board your boat. It’s just a little bird. But one day the woodpecker pecks a hole in the boat. Even then, one little hole is not a big deal—it can be repaired. Over time, however, the woodpecker pecks a great many holes in the boat and it sinks. It is the accumulation of many small, bad consequences from that one little decision about birds which sank the boat.

This is also true for business. It is usually not the big decisions which bring a company down. After all, executives spend a lot of time making sure they get the big decisions right—that’s why they’re called “Big Decisions.” No, it’s the accumulation of many small daily decisions (decided poorly) which sink a company.

Little decisions start chain reactions in how customers make choices. Any one of them may not hurt you, but in total they can create a disaster. If those daily decisions are not made within a strategic context or are not thought through thoroughly, they can destroy the grand design or your larger strategy. After all, your strategy is not what you say, but what you do. And what you do is determined every day with those small decisions. So strategy needs to “sweat the small stuff.”

THE PRINCIPLE

The underlying principle behind the fast food mess is “unbundled subsidies.” And if you are not careful, unbundled subsidies can ruin business models for a lot more industries than just fast food.

1) The Origin Of Subsidies

Many industries are highly competitive. This creates severe downward pressure on prices (competition won’t let you raise prices). And to top it off, we’ve trained consumers to not have to pay full price for anything. Just ask the customers of JCPenney. When JCPenney eliminated sales, they lost over one quarter of their business. It turns out that people expect deals and won’t willingly pay full price.

Therefore, highly desired items are often sold at little to no margin (or even a negative margin). So how do you make money when your key items are sold at or near a loss? The answer is subsidies. You get customers to buy additional items that have a high enough margin to offset the loss on the core.

In fast food, the high margin drinks and fries subsidize the low margin burgers. On big-ticket electronic items, high margin extended warranties traditionally subsidized the low margin device. The base sticker price on a car is kept low, but they get you with high margin upgrades, accessories, financing and repair work. Low margin industrial goods are often subsidized with service contracts. Low margin printers are subsidized with high margin ink.

It has become the way of the world. In order to compete on price versus competitors and satisfy customers who want a deal, core items are becoming like loss leaders, forcing businesses to surround them with subsidies in order to survive.

2) Unbundling of Loss Leaders and Subsidies

Originally, the idea was to try to bundle the loss leaders and subsidies as tightly as possible. That way, every purchase could still remain profitable because the loss leaders and subsidies were sold together. In the fast food world, they were called “Combo Meals”—you had to buy the whole bundle of food to get the deal.

Other industries followed with their own version of the bundle. Cable and telecom companies bundled phone/internet/TV. HP used patents so that you could only use their high margin ink on their printers.

But the hypercompetitive world started causing the bundle to fall apart. Between 2000 and 2002, McDonald’s rolled out the Dollar Menu in the US. Now you could buy the cheap items without also buying the subsidies.

In the telecommunications industry, companies started turning subsidies into additional loss leaders. For example, charges for texting used to be the subsidy for voice calls. Then texting became free and had to be subsidized by data downloads. I was talking to someone in the industry who said it is a constant race to find the next subsidy, because someone in the industry is always trying to turn the current subsidy into a loss to get an edge.

And then the dotcom world came up with the “Freemium” model. In this model, most people pay absolutely nothing for the service (it’s free) while a small minority pay for a premium version. This is how linkedin works. I pay nothing for the basic service because it is subsidized by a totally different customer, usually a recruiter, who buys a premium version. Or Zynga had most people playing Farmville for free while a small minority subsidized the whole system by purchasing virtual farm equipment.

This all starts to become dangerous territory when loss leaders and subsidies are unbundled. In fast food, you get people like me who now load up on the loss leaders and avoid the subsidies. In telecommunications, there is the risk of running out of new sources for subsidies to support the ever expanding list of loss leaders.

The price of loss leader consumer electronics got so low that it became “disposable pricing.” If something went wrong, you could afford to just replace it, erasing the need to buy the extended warranty subsidy.

The freemium model runs the risk of the two audiences getting out of balance, with not enough payers to subsidize the freeloaders. Zynga just announced huge layoffs because they are having trouble with their business model.

And it is hard to go backwards on these trends. The telecommunication folks want to dial back the unlimited data plans but are meeting strong resistance. When the fast food people try to dial back the value menus, the customers revolt. Newspapers have been trying to get people to pay for the online version (which used to be free) with only varying levels of success.

Once you set up a subsidy system, you redefine the expected cost for the loss leader. “Regular” price becomes the loss leader price. Consumers see anything higher as outrageously high pricing. This makes it very difficult to reverse the pricing once the loss leader position has been made.

But now that the subsidies are becoming ever more unbundled from the loss leader, it is more difficult to ensure that enough subsidies are sold to offset the loss leader prices. Profits become more elusive. Risk of failure is increased.

3. Lessons Learned

What can we learn from this? First, small actions today have consequences well into the future. And it may not be initially obvious today what those consequences may be. Therefore, before making some of these small actions, we need to take time to consider their impact on the larger picture. Otherwise, we may unintentionally be dismantling our grand strategy one brick at a time.

Second, if strategists (or strategic thoughts) are only limited to an annual offsite meeting, they will be unable to adequately impact all those little day to day decisions. We need to get strategic context around a larger proportion of our decision making.

SUMMARY

Strategy should be more than just big thoughts around big decisions. It needs to permeate the organization more regularly and further down the organization, where many of the more mundane decisions are made. After all, these more “mundane” decisions can accumulate to the point to where they threaten the entire strategy.

FINAL THOUGHTS

How many decisions are made in your business without asking the question “How can this decision impact the long-term viability of our strategy or company?”

Strategic Planning Analogy #456: Who Do They Love?

THE STORY
When I was in college, I was a DJ on the college radio station.  Every day the radio station used to get a pile full of new albums from the record labels.  I was shocked by the huge amount of music being issued.  And pretty much all of these albums were selling at least in some quantity to the public.

I understood why most of the top selling albums sold.  It was pretty good music.  What baffled me were the less popular albums.  Who was buying them?

At first, I thought there just must be a lot of people out there with unusual tastes, who loved a different kind of music than the mainstream.  And to a small degree, this was true.

But when I did my investigation in the sales of these lesser albums, I found out that most were not sold to people who loved these bands more than normal people.  No, most of the people buying their records agreed with the majority that they were lesser albums.

The difference was that these people really, really loved music and loved buying music.  They happened to buy more music than normal people.  As a result, these people first bought all the popular music and still wanted to buy more, so they also bought the lesser albums (because that is what’s left to buy after you already have the popular ones).

So, for the most part, people weren’t buying music from these lesser bands because they loved these bands, but because they loved having as much music as possible.

I don’t think that information would have encouraged those lesser bands.  It implied that even though they sold a bit of music, they really didn’t have many avid fans.  They were just getting money from people who would spend it rather indiscriminately on almost ANY band.  So they didn’t get the money out of love, but out of convenience.   

THE ANALOGY
In the business world, a successful business needs a stream of income.  That’s why we get so happy when sales go up.

But let’s not fall into the trap of thinking that every purchase of our goods and services is an indication of their undying love for us.  As we saw in the story, lesser bands weren’t receiving a lot of love with their sales.  Their customers still loved the popular bands more.  The lesser bands were just getting some of the leftover money from heavy spenders after they had already purchased music from the bands they loved more.

In fact, people often make purchases from companies they hate.  For example, when AT&T was the only service connected to the iPhone, people who loved the iPhone purchased their mobile services from AT&T, even though many of them hated the AT&T coverage and service levels.

So, when considering the sales component of your strategic plan, don’t automatically assume a direct correlation between sales and love.  Otherwise, you may create the wrong strategy.

THE PRINCIPLE
The principle here is that just because your business has an income does not mean that people love you.  And depending upon the type of love relationship you have with your customers, you may need a different strategy.

Let’s face it.  We can’t all be the best or the most popular.  We can’t all even be above average.  And if your offering is not the best, then “best at” strategies won’t work.  For example, if you are not the lowest cost operator, it doesn’t make sense to pursue a lowest price strategy.  It won’t work for you.  Strategies designed to exploit strengths don’t work very well if you do not have a strength to exploit.

So what should you do if you find yourself in such a situation?  Listed below are four tactics to consider doing and two tactics to not do.

“To Do” Option #1: Connect to Another Love

If people don’t love you, then find ways to get yourself associated with something people really love.  As we saw earlier, in order to get sales AT&T connected itself with the iPhone, something people really loved.  AT&T hid themselves in the package.  If you wanted the much-loved iPhone, you had to take the “unloved” AT&T. 

The more and the tighter you can bundle yourself into packages with other items people love, the better you are.  Kmart is not one of the most loved retail brands, so it tries to tie itself to brands that are more loved.  It has done so over the years by creating exclusive selling arrangements with names more loved than its own, like Sesame Street, Martha Stewart, Jaclyn Smith, Selena Gomez, and Sofia Vergara.

“To Do” Option #2: Become Most Convenient

Sometimes being “good enough” is good enough.  That occurs when you exceed the minimum threshold of acceptance and are more convenient than superior offerings.  In other words, it you create barriers making it more difficult to get the superior product, people may say the extra effort isn’t worth it and then settle for your slightly inferior offering. 

For example, you can pursue a distribution strategy which makes it easier for customers to stumble upon your product than the competition.  You can try to tie up shelf space in the most popular stores to block ease of access to competitors.   You can buy up all the key words on search engines to make it more convenient for people to click to your site.

If you are not loved enough to get people to come closer to you, then go out to become closer to them.  For example, those unloved bands can sell more music and more tickets if they get closer than other bands to where the music lovers are.  They can hang out at the music festivals where you can find the people who have more desire for and are more in the mood to spend on music.  Seeking out these people will work better than waiting for them to seek you. You imposed more convenience through your efforts to get closer.

In both option #1 and #2, the idea is to make it harder for a customer to substitute a competitor’s product for your own.  Product bundling, exclusivities, and other such tactics can often serve both purposes—get you closer to where customers want to be and make it harder for competitors to do the same.  

“To Do” Option #3:  Find a Niche

Sometimes, if you narrow your focus, you can find a way to become the best alternative to a niche audience.  You won’t be the best option for everyone, but if the niche is large enough, you will be the best with enough people to make a good profit.  You can then use a “best at” strategy within that targeted niche.

To do so, you may need to change your business model a bit.  You may need to move away from more conventional approaches and make bigger trade-offs.  This could even make you less desirable to the masses.  But if it makes you more loved by a niche, then it can be worth it. 

Many retailers found they could succeed against Wal-Mart by going after the niches Wal-Mart left behind in areas such as superior quality, superior service, a higher level of fashion taste, etc.  Becoming best for a niche ignored by Wal-Mart was a better strategy than being an inferior Wal-Mart imitator. 

“To Do” Option #4: Exit the Business

One of the first questions I like to ask in a strategy session is this:  Why should anyone naturally prefer your offering over the competition?  If you cannot think of a meaningful reason for people to naturally prefer you, I have a second question:  Why, then, should you stay in business?   If you are unloved now, and the first three options aren’t viable, the best option may be to exit the business.

“Not To Do” Option #1: Get Overconfident

If you think that your sales are there mainly because people love you, then you may try to exploit that love by raising prices, cutting features, etc.  But if that love is not really there, then attempts to exploit it could backfire.  For example, if one of those lesser bands charges too much for their music, the money will go to a different lesser band.

Most of the time, customers have alternatives.  Even if you think you have a monopoly, there can still be alternatives.  For example, even if you own 100% of the rail business, people can use other forms of transportation, or maybe telecommute via Skype.  And if you haven’t been using the options mentioned above to curtail alternatives, these alternatives may be even more abundant with easier switching than you think.

Therefore, think it over carefully before trying to exploit the love you think you have. 

“Not To Do” Option #2: Assume Unwavering Loyalty

The marketplace continues to evolve; circumstances change over time.  If you are not well loved, those changes could work against you to cause massive customer defections from your offering.

For example, you may be the most convenient option now, but that does not mean it will always stay that way.  Blockbuster video rental stores used to be the most convenient way to get video.  But then Redbox put video vending machines in far more convenient locations and Netflix let you download video from the convenience of your sofa.  Suddenly, Blockbuster went from most convenient to less convenient.  And since Blockbuster did not have much of any superiority anywhere else, people switched away from Blockbuster in droves.

Similarly, AT&T lost sales opportunities when the iPhone became available on other systems.  Kmart lost business when Martha Stewart took her brand away from Kmart and put it in Macy’s. 

Since preferences are more fickle with unloved brands, one needs to be more vigilant in holding on to whatever small advantage one can maintain.  If convenience is your advantage, keep on top of any developments that can become even more convenient.  If tie-ups with others is your advantage, make sure that you are always tied up with the best deal of the moment.

Never get comfortable in thinking the loyalty is locked in forever.

SUMMARY

If your offering is not the best in the industry, then don’t try to win with a “best at” strategy.  Instead, look for ways to bundle with others more popular, become more convenient or create a niche.  

FINAL THOUGHTS
It’s human nature to think well of our own offerings.  We may love the products and services we sell.  But our opinion is not the one that matters.  In many cases, the consumers may hold a much lower opinion of them than we do.  So pay attention to their opinion and don’t get caught up in your own sense of loyalty.

Innovation Tools Part 2: Bundles of Joy

THE STORY
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.

THE ANALOGY
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.

THE PRINCIPLE
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.

SUMMARY
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.

FINAL THOUGHTS
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.