Great products alone don’t always make a great platform company. Chances are you’ll need great packaging.
The best platform companies have deep moats, evidenced in part by strong expansion driven by cross-sells and upsells. One of the best ways to encourage cross- and upsells is product bundling, or offering a discounted suite of products to encourage customers to purchase multiple products together instead of one-by-one.
Product bundling helps you increase customer stickiness and switching costs, as well as leverage your existing product distribution, to drive adoption of new or existing products. But overindexing on bundling when you don’t need to can cannibalize your revenue and margins. So when is it worth it?
While every company is different, you can generally look at attach rate, margins, and competitive landscape to ascertain if it’s worthwhile to explore bundling, then look at customer feedback and attach rate to determine how to bundle. What follows is by no means a comprehensive exploration of how each of these dynamics plays into your pricing strategy, but rather a series of gut-checks that can help orient your discussions about bundling.
When does it make sense to bundle your products?
Before you jump into this exercise, it’s important to have several mature product offerings under your belt so you don’t muddy your messaging. If you don’t have a robust product suite, bundling will probably just complicate the buying journey for your customers.
Attach rates and margins
Attach rates measure how many customers buy an additional product on top of their original product purchase. As a rule of thumb, the lower your pre-bundle attach rate for a given product, the less risky it is to put that product into a bundle.
If your current attach rate is low, grouping a secondary product into a discounted bundle isn’t likely to cut too deeply into your revenue and margins, since relatively few customers have paid full price for it. In this case, bundling can be a smart way to drive adoption of that second product. If your attach rate is high, however, it means customers are willingly buying multiple products at full price, so bundling your products can cannibalize the revenue you’re already earning.
(If you’re launching new generative AI features and not products, however, this gut check is a little different. Check out our framework for pricing and packaging those features here.)
Competitive landscape
If you’re operating in a highly competitive environment or offer a relatively commoditized product, product bundling can be a good choice. As we mentioned above, bundled products create stickiness and higher switching costs, and the goal when operating in a competitive market is to make it as difficult as possible for your customers to leave your platform. That’s usually why large companies like Microsoft and Adobe use bundling in the first place: keep customers in and competition out.
That said, it’s still important to consider your competitive ecosystem in the context of your own business—and specifically, the attach rate and margins we mentioned above. Larger companies have very strong distribution power, so just because you operate in a competitive market doesn’t mean that you can afford to cannibalize your business.
How should you bundle your products?
If you don’t have solid attach rates and are operating in a highly competitive environment, take a look at your customer feedback and attach rates to ascertain which products to bundle together, and how much of a discount to offer, for different segments.
Customer feedback
There’s no shortcut to understanding how your customers use your products and want to buy them—you have to ask. To keep things simple, go through your entire product suite, product by product, and ask each customer segment or persona whether each of your products is a need, a nice-to-have, or a pass. Within a given segment, if customers view a product in your suite as…
- Mostly a “need,” then you can include it in a bundle and don’t need to discount it as heavily. The higher the perceived value of a product, the more you can charge.
- Mostly a “nice-to-have,” then you can include this product in the bundle, but you will need to offer a bigger discount to drive more adoption.
- A split between needs/nice-to-haves and not needed, don’t include the contested product in a bundle. Instead, offer it as a stand-alone (or an add-on). That way, you don’t add friction to the buying process for that segment or persona.
As you’re figuring out which products to bundle for different segments, it’s helpful to bear in mind the buying tendencies of different segments.
- Generally speaking, enterprises and the midmarket prefer flexibility. They like to pick and choose a few products initially, then eventually build up to an enterprise license agreement (ELA) that bundles all your products together at a flat(ish) price. If you want to serve the enterprise, prepare to mix and match a lot of your product suite in the beginning.
- On the other hand, SMBs are more price-sensitive and prefer a pared-back, budget-friendly bundle. Oftentimes, they’ll look to the vendor to guide them to the best fit. If you were looking to create an SMB-friendly version of an enterprise SaaS tool, for instance, you could remove a set of enterprise-grade features and offer the remaining bundle at a lower price.
Attach and discount rates
Once you’ve settled on the product assortment for each bundle, your attach rate can help you find the break-even discount for those bundles, since it shows how many customers currently buy multiple products and helps predict how many might upgrade if given an incentive.
As you increase your discount rate for your bundles, you’re cutting more deeply into the existing and potential revenue from customers who have purchased or might purchase products a la carte. To compensate for that lost revenue, you’ll need to get more of your existing customers to buy multiple products, thereby upping your attach rate.
Let’s make this more concrete. Say Product A is your core product and Product B is your secondary product. For the sake of simplicity, they’re both priced at $100 and your current attach rate is 10%.
- If you bundle them together and offer a 10% discount, you will need to increase your attach rate by a quarter, to 12.5%.
- If you bundle them together and offer a 20% discount, you will need to increase your attach rate by two-thirds, to 16.7%.
- If you bundle them together and offer a 30% discount, you will need to increase your attach rate by 1.5x, to 25%.
So, small discounts require only a modest boost in attach rates to break even, while larger discounts demand dramatically higher attach rates to offset your revenue loss.
Of course, you’ll want to check to see if you have enough demand for your products to increase your attach rate above the break-even point. (If you don’t know what your demand curve is, you can check out our article on the topic here.) We mention this because we’ve seen many companies heavily discount their bundles, only to later find that the increase in adoption didn’t translate to an increase in customer lifetime value (LTV).
Test, iterate, then test again
Remember: this is a gut check, and you’ll obviously need some insight into the demand for your products to thoroughly understand the impact of bundling on your business. In that light, it’s important to track bundles’ performance. Monitor attach rate, average revenue per customer, net expansion rate, and churn among bundled vs. single-product customers over three months and then reassess. Don’t be afraid to tweak or roll back the bundles if they’re not working—great platform companies do this all the time.
While we’ve seen very successful platform companies leverage product bundling to deepen their moats and own more of their customers’ workflows, bundling isn’t the be-all-end-all of becoming a platform. As always, pricing and packaging should align with your company’s strategy, and the general guidance above should give you a framework to gut-check whether bundling might work for your business. For more pricing and packaging frameworks, benchmarks, and best practices, check out our pricing and packaging hub.
Many thanks to Ryan Allen for his contributions to this post.
