Ways to Use Bundling to Drive up Your Average Sales Price (ASP) and Customer Lifetime Value (CLTV)

“But wait…there’s more!”

We’ve all heard the infomercials with the two for the price of one special.  Or the five accessories we theoretically should never need since the first one is supposedly indestructible.  All of this for only $19.99 plus shipping and handling.  Bundling at its finest.

But wait.  Is this really bundling at its finest?

If your objective is to increase ASP or CLTV, then the answer is “no”.  To increase our ASP and CLTV, we need to coordinate our product, pricing, and marketing strategies.  This means we need to understand the relationships and impact of each on bundling.

Download the Bundling Planning Tool to work through a step by step process to evaluate exactly what the impact of bundling will be on your company, identify a problem that you want to solve via your bundling strategy, and utilize thinking points on creating your bundling strategy most effectively.

The Relationship Between the Product and Pricing Strategies

Effectively executing bundling means product and pricing strategies must be tightly aligned.

To do this, you should first ask yourself the following questions from a product perspective:

• Are the value propositions of the products or services complementary? – If not, you are just trying to sell two discounted products.  And if only one is of value to the customer, that is all they will buy.

   

• Does bundling the products help solve a problem the market is trying to solve? – This age-old question applies whether you are trying to sell any number of products.  We need to know this answer for our go to market plan.  This will allow our marketing team to weave the message around both products.  It will also allow the sales team to be more effective storytellers.

   

• Is there an integration factor that will make a customer resistant to change? – Highly valued products with effective integration create a stickiness and increase the CLTV.

   

• Will this create differentiation and a competitive advantage for you? – Understanding this reinforces why you are bundling and how to win in the market.

   

And then we ask ourselves the following for pricing:

• Is there a willingness to pay for the sum of the parts? Are you creating a highly valued asset, or implementing a discounting strategy?  Is the propensity to buy more with the bundle, or to buy only one of the products?

   

• Do the production or implementation costs create an opportunity for bundling to improve margins? Can you take advantage of lower average production costs by bundling?  Does implementing two products at once save time and resources?

   

• Do the customer acquisition costs (CAC) justify bundling? For more details about the impact of targeting CAC, click here.  What is the effort to initially acquire a customer?  Long sales cycles requiring many resources can be expensive.  Effective bundling essentially means you are conducting two sales cycles at one time.

   

Knowing these answers provides you with insights into your bundling opportunities and approach.  Let’s first review how we can increase our ASP and related margins through bundling.

You first need to review if bundling products increases margins based on production or implementation costs?  Let’s assume it costs $10,000 to implement the first product and $8,000 for the second.   But if we implement simultaneously, it costs $12,000.  We only need to send a team out one time, train once, etc.  This immediately provides a benefit to bundling and allows you to increase ASP and margins.  To learn more about pricing KPIs, click here.

To play this out further in simple terms, let’s assume our list price is $20,000 per product.  Our sales team can also offer a 10% discount.  This would mean that we can offer a price of $18,000 ($20,000 less $2,000 discount).  Remembering our implementation cost is $10,000 for the first product, we have an $8,000 profit.  Extending that to our second product, that profit is $18,000 when sold independently ($8,000 implementation).  If we bundle, we can offer a price of $34,000 (vs. $36,000).  Because our implementation costs are $12,000 when done together, our profit is $22,000.  Our ASP is now $34,000 vs. $18,000, and margins are also increased as a result.

But what if there is not a benefit in our implementation costs?  These same principles apply when we review things such as our CAC or average production costs.   Like our implementation example, this marginal increase to our CAC creates flexibility in our pricing strategy.

The Power of a Marketing Strategy to Maximize Penetration

With the product value and pricing analysis in place, its time to go to market.  We could always try a “but wait, there’s more” infomercial.  But instead, a more effective option is to use the power of your market intelligence.

Like the product team, this group understands the market through extensive market intelligence work.  They have insights around personas and product purchasing patterns that when leveraged can accelerate market penetration.  For more detail about product purchasing patterns, click here.  In coordination with the product team, understanding the route to markets helps compress selling cycles.  The reduction in selling cycle created by marketing then provides another option for the pricing strategy.

The Bundling Impact on Customer Lifetime Value

The CLTV has been statistically proven to be impacted by a customer purchasing multiple products.  For example, when a single software product is purchased, an average customer  retention rate is 85%.  This number grows as products are added, and when at 5 products, retention is around 95%.  This “stickiness factor” is related to the value products provide as discussed with the product strategy.  Bundling is a strategy that naturally accelerates this stickiness.

When done right, there are many benefits that can be realized from bundling.  This should not be mistaken for a discounting strategy.  It should also not be done in isolation.  The right product strategy, product portfolio and its alignment to the market is the foundation.  The pricing strategy then becomes easier due to cost and margin options to increase ASP.  Identifying where we have cost savings and determining customer benefits creates win-win situations.  Finally, an aligned marketing strategy targets the right personas through their market intelligence.

So yes, there is more for both you and your customers.  Having a well thought out bundling strategy is key.  And it goes beyond a simple two for one sale.

Download the Bundling Planning Tool to work through a step by step process to evaluate exactly what the impact of bundling will be on your company, identify a problem that you want to solve via your bundling strategy, and utilize thinking points on creating your bundling strategy most effectively.

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