Canadian movie exhibitor Cineplex began experimenting this summer with an offering that bundles a ticket to a first-run movie plus a downloadable digital copy of the movie to be downloaded months later when on-demand and DVD versions are released. One Ticket to Rule Them All. It is too early to determine the results, but it got me thinking about the topic as a pricing strategy – when do product bundles make sense?
The idea behind bundles is to entice customers who are likely to buy a certain product to also buy one or more products they might not otherwise purchase. Some examples of bundles are the fries and a drink with a sandwich from a fast food restaurant, Microsoft Office software, and an album from iTunes. With bundles, the seller offers a discount from the purchase price of the items bought separately in order to get more customers to buy all the items. Some customers undoubtedly would buy all the songs or the fries and drinks without the discount, but some would not. The test for the seller is whether the incremental profit they earn from the additional customers who buy the bundle is enough to offset the discounts given to customers who would purchase all the bundled items at regular price.
There are several benefits to the seller from bundling:
- Bundles can generate incremental sales and profits. Existing customers trying new products and new customers are welcome additions.
- Bundles can lower the marketing and acquisition cost per customer as a percentage of sales. Separate marketing and sales costs can add up, but bundles can avoid some of that.
- Transaction records on the sales of bundles can help better segment the customers according to their needs and behaviors. Knowing which customers want or need the additional products can categorize your customers, enabling future marketing efforts to be more targeted and effective.
- Available capacity of the store, warehouse, production line, etc. can be used. When there are high fixed costs, the incremental margin from the additional sales will mostly drop to the bottom line.
- Some bundles can build network effects. The more of your products the customer buys, the greater the appeal of the network of products you offer.
Despite all the advantages, there are other things to consider including:
- There should be at least one anchor product in the bundle. It is rarely profitable to package multiple low-volume non-core items into a bundle.
- Bundles will inevitably cannibalize some sales of existing items at full price. Do the math to ensure everyone understands the breakeven point where additional sales offset the discount on existing sales.
- The products in the bundle should be complementary, however if they have a high incremental cost, they are probably not good bundle candidates. If the margin on one of the products is 25%, but the discount on the bundle is 25%, the profit on that item would be zero.
- Ordering systems must make it easy for the customer to purchase. There either needs to be a SKU for the bundle, or the POS needs to recognize the components of the bundle have been ordered and adjust the price accordingly.
- How will the bundle be packaged? It may be perfectly fine to package and deliver the items separately, but in many cases they must be delivered together, such as the value meal or a music album. In either case, make sure your customer knows what to expect so there are no surprises.
I don’t know enough about movie buyers to know how Cineplex’s test will work out. On the surface, they have a good candidate for a successful bundle. The first-run movie is the anchor product and the digital copy is somewhat complementary. It is probably a small percentage of movie-goers who buy the DVD after seeing the movie in the theater, so it would seem to have a good chance of generating some incremental sales without too much cannibalization. The fixed costs of the movies are high, and the incremental costs of each digital copy are very low, so the incremental margin will be all profit. It will be an experiment worth watching.
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