Bundle Savvy

Effective bundles result from a systematic approach to evaluating bundling opportunities and then assembling bundles that best exploit those opportunities. The approach entails balancing market appeal and acceptance factors with organizational, financial and regulatory constraints. It includes an explicit identification of the bundle's purpose and a systematic approach to evaluating prospective component combinations and incentives.

Services often are a key part of product bundles because they can create ongoing customer relationships that allow an extended time to recoup potential front-end incentives. Bundle purchase incentives usually are structured around convenience, discounts and/or retention awards. For example, in the case of AT&T's Personal Network Plan service bundle, unified billing is a key convenience feature.

DESIGNING BUNDLESSelecting among bundling options, making tradeoffs and analyzing the expected results is no easytask. Markets are evolving rapidly, and new competitors, products and bundled offerings are a near-daily occurrence. Getting bundles right on a consistent basis requires a formal process for engineering the bundle's economic and strategic value.

The bundle-design process begins with a statement of strategic intent, which defines the bundle's goals in terms of both 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 product's life-cycle stage may determine how it is bundled. To help a new product gain market penetration, a company might bundle it with a couple of products that already are well established in the target market.

Market research provides the raw information with which to define the bundle's market focus and composition. Ground rules define what is possible to achieve with a bundle within a realistic time frame and within existing constraints.

Constraints may include legal and regulatory restrictions, channel limitations (a bundle element may be incompatible with what a distribution channel is set up to handle) and the abilities of internal systems to support the bundle operationally.

Once the inputs have been assembled, a team of product, market and channel managers can begin the systematic process of determining which components to bundle. This process involves identifying target-market segments, evaluating 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. Another vital activity at this stage is reviewing the bundled offerings of competitors with an eye toward understanding both their key drivers and their performance.

The primary output of the design process is a bundle concept: a concise statement that captures the essence of the bundle. The goal here 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 outputs of the design process.

EVALUATING BUNDLESOnce you have designed a candidate bundle, you must evaluate its performance potential. Projecting a bundle's performance is more difficult than projecting the performance of an individual product or service because of the exponential increase in the variables involved. 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, multi- business bundles typically require careful analysis of a variety of considerations, ranging from transfer pricing to channel balancing.

Using a bundle-evaluation model is helpful. Although the initial development of a good bundle-evaluation 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.

It is important to be clear about what a bundle-evaluation model does and what it does not do. A bundle-evaluation model will:

* Support business decision-making during the bundle-design process by assessing the bundle's financial viability

* Allow business units to evaluate the bundle's effect on their financial bottom lines through a common methodology and set of assumptions

* Identify the key drivers of bundle economics (churn-rate reduction and incremental sales)

* Link market assumptions (such as forecasted penetration rates) with financial results (such as aggregate revenue), providing a tool for refining and modifying bundle strategies and targets.

A bundle evaluation model will not:

* Calculate market penetration, growth or churn rates

* Include built-in ground rules.

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 (NPV) 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 of all of those perspectives is critical, given the transfer pricing and risk/reward issues that often arise with complex bundles. Although 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.

Consider, for example, a situation in which bundle components are obtained from two relatively autonomous business units of a company. Assume that one business unit takes the lead in marketing a successful bundle, resulting in an increase in overall corporate NPV.

The second business unit may be worse off under the bundle. If this unit prices the component it contributes to the bundle at cost, the unit's revenues will decline due to the bundle's cannibalization of la carte sales of the component. In such instances, revenue-neutral transfer pricing typically is used to make the second business unit financially indifferent to the bundled sale of its product.

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 among separate companies, the rewards and corresponding risks generally are split as well.

A well-structured model is essential to evaluate these risk-reward tradeoffs quickly under a variety of assumptions.

Strong bundles are difficult for competitors to imitate, they reinforce strong brands, and expand sales of goods and services by combining and simplifying purchase decisions. However, guesswork cannot substitute for a disciplined and repeatable process that consistently delivers real results in the marketplace.