Bundle of joy

It may be one of the hottest service trends, but it's not so easy to do service bundling correctly. A well-designed development process can keep carriers on track to success

Nearly every telecommunications carrier is offering or at least considering offering bundled services. Press releases, announcements and advertising campaigns are replete with examples:

- AT&T is selling customized Personal Network Plans that combine long-distance, calling card, wireless and Internet service.

- BellSouth offers a Complete Choice package that blends local phone service, voice messaging and up to 20 calling features for a flat rate.

- MCI WorldCom is offering packages of long-distance and Internet access.

- Sprint is bundling long-distance with PCS service.

The intent is straightforward: Increase revenue, lower churn and improve margins. However, realizing these goals presents huge challenges. Creating a successful bundle - one that provides real value - requires deftly balancing market acceptance with organizational, financial and regulatory constraints. It requires a systematic approach to bundle selection, evaluation and development.

Design: In search of a master plan

Selecting from bundling's many options, making trade-offs and analyzing the expected results is no easy task. Because the market is evolving so rapidly, new competitors, products and bundled offerings emerge almost daily. Getting bundling right - on a consistent basis - requires a formal process to structure the economics and the strategic value of the bundle and to systematically deliver it to market.

The bundle design process begins with a statement of strategic intent, which defines the bundle's goals in terms of market and product strategy. A bundle aimed at acquiring new customers will be designed differently from one aimed at retaining current customers. By the same token, a service's life-cycle stage may determine how it is bundled. To help a new service gain market penetration, a company might bundle it with a few offerings that already are well-established in the target market. Figure 1 depicts the bundle-design process.

Market research provides the raw information with which to define the bundle's market focus and composition. Ground rules define what the carrier can achieve with a bundle within a realistic time frame and within existing constraints - legal and regulatory restrictions, channel limitations and the abilities of internal systems to support the bundle operationally.

Once the potential inputs have been assembled, a team of product, market and channel managers can begin determining which components to bundle. This process involves identifying target market segments, their needs and determining the bundle components that will satisfy those needs. The team then analyzes the target market segments' buying behavior, an essential prerequisite to structuring bundle incentives and determining the most appropriate marketing and sales approaches. A vital activity at this stage is reviewing the bundled offerings of competitors to understand their key drivers and performance.

Segments that carriers already serve typically are good targets for bundles because information regarding product use and spending levels is available and the customers are readily accessible through existing billing and customer care relationships. Segments with higher-than-average spending on telecom services are also good candidates because they are more receptive to purchasing bundles and generally more valuable to retain.

Service providers should select bundle components that are linked directly to the needs identified for the target segments. Complementary services, including custom calling features and voice mail, are natural matches and allow bundles to be formed around themes such as "busy family" and "home office." Products with significant switching barriers, high margins and high per-subscriber revenue streams also form good bundles.

The result of the design process is a bundle concept: a concise statement that captures the essence of the bundle. The goal is not an exhaustive analysis but a quick distillation of the key facts required to evaluate the bundle from all perspectives. A summary of the bundle's objectives and a list of potential partners also are output.

Evaluation: What works, what doesn't

Once a candidate bundle has been designed, the service provider must evaluate its performance potential. Projecting a bundle's performance is more difficult than projecting the performance of an individual offering because of the increase in variables. Although it is tempting to simplify the assumptions on which a bundle evaluation is based, oversimplified assumptions can be costly if they turn out to be incorrect, which they often are. It might be expedient, for example, not to factor in the cannibalization of non-bundled sales of a product, which can skew the financial evaluation. Multiproduct, multibusiness bundles typically require significant trade-offs and tuning.

A bundle evaluation model is essential for conducting this analysis. Although the initial development of a good model takes time, it will more than pay for itself in the long run by providing a rigorous and repeatable framework for getting successful bundles to market faster (Table 1).

At a high level, a bundle-evaluation model compares the financial performance of the prospective bundle to the financial performance of its individual parts. Evaluation model outputs generally take the form of pro forma income statements and net present value analysis. Figures 2 and 3 present the components of a bundle-evaluation model and a sample analysis.

In developing an evaluation model, it is important to maintain a corporate view, a business unit view and a partner view. Viewing bundles from all perspectives is critical, given the transfer-pricing and risk/reward issues that often arise with complex bundles. While it is evident that a successful bundle should result in a positive outcome for each independent corporate entity that participates in it, the situation is not as clear-cut at the business unit level.

For example, consider a situation in which bundled components are obtained from two relatively autonomous service provider business units. Assume that one business unit takes the lead in marketing a successful bundle, resulting in an increase in overall corporate net present value. The second business unit, however, may not be as successful offering the bundle. If this unit prices the component it contributes to the bundle at cost, the unit's revenues will decline because the bundle cannibalizes a la carte sales of the component. In such instances, revenue-neutral transfer pricing typically is used to make the second business unit financially impervious to the bundled sale of its product. Such an arrangement also can serve to minimize regulated product pricing concerns. Because the leading unit reaps the full reward from the bundle sales, it correspondingly bears the full risk of marketing the bundle.

In a bundling partnership between carriers, the rewards and corresponding risks generally are split. A well-structured model is essential to quickly evaluate these risk-reward trade-offs under various assumptions.

In applying an evaluation model, several areas present challenges and merit careful attention:

- Assessing the "without bundle" scenario for a combination of products or services can be difficult because competitors may abruptly enter the fray with their own bundles, aimed at the same high-value customers and containing the products or services in question. Market research may provide market trend insights that can help companies avoid such pre-emption by competitors.

- Ascertaining the true marginal cost of a bundled service is problematic and depends on the relationship between expected bundle volume and available capacity. To develop accurate analysis, this relationship must be determined over both time and geographical area.

- Determining the impact of the bundle on churn rates can be hard to predict without some experience on which to base an estimate. In addition, churn is difficult to measure in a test market because its effect is observed over a long period. Providing the capability to model different churn rates for each service in the bundle and carrying out sensitivity analysis to understand the potential impact of inaccurate estimates are the best ways to temper this uncertainty.

There are other pitfalls to developing successful bundles. Many bundles fail to produce value. Common reasons include inappropriate combinations of services aimed at incorrect market segments and bundle purchase incentives that cost more than they earn. Companies sometimes bundle so many services, with the hope of wowing customers, that the potential market for the resulting bundle is too small to be worthwhile. They sometimes bundle costly incentives such as premium customer care, which may not generate enough incremental sales to justify the incremental cost. Another common misstep is providing upfront customer incentives whose payoffs depend on their ability to increase customer retention. The costs of such incentives are felt immediately, while the benefits of retention may not be realized for years - if at all.

Development: Now the fun begins

After a bundle has been designed and fine-tuned to offer the best possible performance, it must be developed. Although the individual components of the bundle already may be available, as indicated in Table 2, the bundle itself usually requires development work to support unified billing statements, new sales channels and integrated customer support centers.

In fact, because bundles often involve components from multiple business units or companies, development challenges can be greater than those of stand-alone products. So, an integrated, systematic approach to development is essential to ensure coordination and quick progress, and good bundle development practices follow good product development practices:

- A structured bundle development process provides a road map for development and for clearly establishing interfunctional linkages.

- Small, empowered, cross-functional teams execute the process and ensure effective communication and coordination between groups.

- Phase reviews provide event-driven, business evaluations of development progress.

- A cross-functional, senior management team manages the development "pipeline" from a business perspective.

These four interlinked components reduce development cycle time and improve quality, allowing glitch-free bundles to be brought to market faster.

The future's so bundled...

The passage of the 1996 Telecom Act has caused competition in the telecom industry to intensify. Customer retention, revenue growth and differentiation have become business imperatives. With good reason, bundles have become the preferred means of achieving these goals. Properly implemented, bundles leverage a company's unique capabilities to lower churn or facilitate growth. They are difficult to copy, and they reinforce strong brands. Good bundles also simplify customer choices while expanding purchased services.

However, it is not easy to create good bundled offerings. Making trade-offs is an integral part of designing a bundle, and intuition often fails with complex, multicomponent bundles. Getting to market quickly, profitably and consis tently requires a structured approach to design, evaluation and development. A disciplined process that ensures the collection of essential information is a key aspect of successful design, and an evaluation model that measures bundles against concrete financial standards is a critical tool for measuring value creation. In addition, a structured development process that ensures fluid coordination among involved parties is essential to efficiently develop the bundle. Together, these components provide a framework for successful bundle generation and a means to prosper.

- It supports business decision-making during the bundle design process by assessing the bundle's financial viability at the corporate level

- It allows business units to evaluate the bundle's impact on their financial bottom lines with a common set of assumptions and methodology

- It can identify key drivers of bundle economics (churn-rate reduction, incremental sales, etc.)

- It links market assumptions with financial results and can be useful as a tool to refine and modify bundle strategies and targets

- It does not calculate market penetration, growth or churn rates. Those parameters need to be estimated by the bundle design team as inputs to the model

- It does not produce the total financial results for the business unit or for corporate. Rather, it only analyzes the financial impact of the products within the bundle package

- It does not include built-in regulation factors. Regulatory constraints should be considered as part of the bundle concept design process

Functional area Impact and objectives

Channels - What are the primary and secondary sales channel(s)?

- How will customer service support be modified for the proposed distribution/support channel?

- What new methods and procedures or changes to existing methods and procedures will be required?

- What sales force training is required to sell the product?

Marketing - What marketing collateral will the bundle require?

- What is the impact on other bundles or products?

- Is a market trial required?

Systems - What are the primary systems required to order, provision, bill, support and track performance of the bundle?

- Which other systems will be affected by the bundle and to what extent?

- What systems, integration and end-to-end testing will be required for the bundle?

- What demands will product tracking and performance reporting place on data services?

Billing - What is the approach for tracking usage, billing and collecting?

- What optional pricing plans or discounts will be offered?

- Can these discounting plans be supported with existing billing capabilities?

- What new methods and procedures or change to existing methods and procedures will the product require?

Network - What impact will the bundle have on network capacity?

- What is the scope of the network deployment?

- What is required to provision and maintain the product?

- What new methods and procedures or change to existing methods and procedures will the bundle require?

Source: PRTM

In the new telecom environment, national branding, product differentiation and a product strategy that targets individual segments rather than a homogeneous mass market increasingly are important. Bundling is one way to meet these challenges, but is it suitable for both incumbent service providers and new entrants?

To answer that question, the strategies and capabilities of each type of player must be analyzed. Each has different aims in preparing for competition, as the table shows.

Incumbents stress customer retention. For them, the switching barriers that bundles can provide are of paramount importance. New entrants, on the other hand, focus more on customer acquisition. For these companies, bundles are a tool to create an offering that entices a customer to switch. Therefore, bundles can help both groups achieve their goals.

However, does one type of company have an advantage in creating a bundle? The truth is, each has distinct advantages.

Incumbents typically have established customer relationships, a broad array of services available to bundle, and strong brand names that help identify good target segments, build desirable bundles and ease market acceptance. New entrants, conversely, usually have more advanced networks and systems that allow a broader variety of bundles to be created more easily. Often, these capabilities can be leveraged to provide usage- or loyalty-based incentives that would be difficult to recreate in the older systems of an incumbent provider.

In effect, bundles are flexible enough to help new and existing players achieve their goals.

Bundles are designed by using two levers: components and incentives. As the examples indicate, telecom bundle components can span a broad range. Typical offerings consist of a combination of basic telecom derivatives:

- Local exchange - fixed or wireless

- Long-distance - domestic and international

- Mobile - cellular, PCS, specialized mobile radio

- Paging - narrowband or wideband

- Cable - terrestrial or satellite

- Internet

Few companies span the full range of these services, and it is not necessary to have every component available internally to bundle. Missing pieces generally are obtainable through partnerships and resale agreements.

Incentives - the means of inducing a customer to purchase the bundle - usually are structured around convenience, retention awards or discounts. Convenience is manifested in simplified ordering, either through a reduction in the complexity of options or through one-stop shopping, unified billing and integrated customer service. Retention awards - back-end discounts to reduce churn - typically are structured as bonuses achieved after a certain subscription period. Discounts generally take the form of reductions in the price of equipment and setup charges or decreases in fixed and usage-based fees, including volume discounts and free services.

Telecom services are particularly suitable for bundling because they create ongoing customer relationships, allowing an extended period to recoup potential front-end incentives.