The concept underlying bundles is to generate incremental sales. That is, bundles should encourage existing customers to buy additional or new products, and they should capture the attention of new customers. In addition, bundles can deliver other benefits, such as:
- They 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.
- The data from bundle transaction records can help better segment the customers according to their needs and behaviors. Future marketing efforts can be more targeted and effective if they are informed by knowledge of which customers want or need the additional products.
- Bundles can help improve the utilization of stores, warehouses, hotel rooms, etc. When there are high fixed costs, the incremental margin from the additional sales will mostly drop to the bottom line.
If you want to create profitable bundles, there are several things you should consider including:
- There should be at least one anchor product or service in the bundle. This is typically the item that causes the customer to be interested in your firm. It is rarely profitable to package multiple low-volume non-core items into a bundle.
- You will inevitably cannibalize some existing full-price sales if you introduce a bundle. Do the math to identify the breakeven point where new sales offset the discount on existing sales.
- The services or products in the bundle should complement each other. Completely unrelated products are unlikely to pique your customers’ interests.
- Items which have a high incremental cost are often not good bundle candidates. It is difficult to offer much of a discount on low-margin items and still make a profit. If the margin on one item in a bundle is 25%, but the discount on the bundle is 25%, the profit on that item would be zero.
- Make it easy for your customers to purchase. If they must do much work to qualify for bundle pricing, they will be less interested.
In the Streamsong example, most of the conditions for bundles and benefits of them were present. The Streamsong golf courses are spectacular, and they are the anchor products in the bundle. The chance to play all three courses is what attracts golfers. The customers have other hotel options, but the packages encourage golfers to stay at the resort.
The number of hotel rooms is fixed and the incremental cost of having a guest stay at the resort is very low. The incremental money from each golfer who stays at the lodge is almost pure profit. The Tour Package was a slight discount from buying golf and lodging separately, but not a large discount, so it does not require many incremental lodging guests to offset the cannibalization of full-price customers.
Although the resort is very nice, there are limited restaurants and bars, and limited other entertainment options. Those limited options are also somewhat expensive. Many golfers would be happy to drive 40 minutes or an hour to cities where there are more options for food and entertainment. However, if they stay at Streamsong, they are going to also buy lunch, dinner, and drinks at the resort. This increases the average revenue and profit per golfer.
Somewhat similarly, many golfers are likely to buy clothing or equipment with the Streamsong logo, but arguably more golfers would not buy anything. Including a $50 credit for resort shops in the package encourages the customers to spend more money, especially those who would otherwise not buy any merchandise. When customers look at the price of the package, they mentally include the value of the $50 in their internal calculations, even if they did not plan to buy anything. Once they are at the resort, the golfers do not want to waste their credit, so they buy something.
This leads me to the one aspect of the Streamsong bundle I would change. They do not advertise it, but when asked Streamsong will simply reduce a guest’s bill by $50 if they do not purchase anything. That is good customer service and ensures customers are happy; however, I don’t think it is necessary. Service at the resort is outstanding, and customers are already going to be happy. Even if they had not planned on buying any merchandise, they will be happy once they have it. Each guest has plenty of time to shop before or after playing golf, so they have enough time to use the credit. If for some reason a guest has not spent their credit by the time he or she must leave, it would be very easy for the resort to ship golf balls, shirts, hats, towels, etc. to the guest’s home. I am confident the guests would see that as good service also.
Overall, Streamsong is a good example of profitable bundling. Whether you are a golfer or not, you can appreciate how they have structured their packages. Look for similar opportunities in your own business, but make sure you consider the key factors above, and structure your offers accordingly.
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