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Four Myths of Bundling


Myth 4. The best bundles are narrow and have very similar products so they make sense to consumers.

Our Myth-maker is reeling a bit. Bundling can be good, money can be distributed fairly, AND consumers will sometimes see them as valuable. Fine fine, but intuitively, the best bundles must be narrow right? Bundles of similar products that “feel” like they go together?
Ah but the math says the opposite:
Thesis 4: The best bundle is one that minimizes SuperFan overlap and maximizes CasualFan overlap
This is especially counter-intuitive.
Let’s start with an example.
Let’s ask our Myth-maker: “Please choose something to bundle with UFC.”
Our Myth-maker naturally says “how about a similar sport - perhaps boxing or football?”
“Hmm, makes some sense, but why?”
Myth-maker says, “well those are things that a UFC fan is likely to be interested in!”.
But our thesis says the opposite! It suggests that the best bundle for the UFC is something like knitting, not boxing. Philosophically, this is because bundles are really about providing goods for CasualFans.

Why? A mathematical explanation...

We can come at this a couple ways.
Let’s start by returning to Myth #2. We saw that the “optimal” WholesalePrice was established when there was a completely distinct SuperFan base. This is when:
RetailPrice (BundleY) * MarginalChurnContribution (ProductX in Population of BundleY)
= RetailPrice (ProductX) * SuperFan% (ProductX in Population of BundleY)
In this case, the SuperFan base ProductX is being used to its maximum value by adding new customers to BundleY - in other words, MarginalChurnContribution is approaching SuperFan%.
Similarly, we can see this in Myth #3. We know that a consumer will see value in a bundle if:
Price(BundleY) < Sum(RetailPrice(X))
for all Products X in BundleY for which C is a SuperFan
Now if the Bundle is already valuable to C, then this trigger has already been achieved, so adding another product for which C is a SuperFan would be a waste of value. You are better off adding a product that someone else (ideally a current non-subscriber) would be a SuperFan of.

Why? A visual explanation...

This diagram may help visualize. For example, it shows from the bundlers perspective that Product C is likely adding new customers to BundleY. From a consumer’s perspective, if you are a SuperFan of A or B or C, the bundle is likely a good deal - e.g. if you’re a SuperFan of A, then you “pay for A and get B and C for free”.

To take this to a natural extreme, I believe the absolute best world-wide bundle would be to design 7 billion unique perfect products for each of the 7 billion people on the planet, and then set it up in one big bundle. So everyone gets their perfect product, and also gets access to everyone else’s perfect product for free. If there are no CasualFans (i.e. no one else’s products are any good for me), then this is no worse than everyone just paying for their own product. But any amount of CasualFan overlap will justify the bundling exercise. Fun!

Wait, what? Is this practical? What about marketing?

Over the years, I’ve found that of the 4 myths described in this document, is inevitably the most controversial. It is certainly counter-intuitive and, in practice, difficult to implement.
Typically, the question posed is: even if the “minimize SuperFans logic” is sound, isn’t it still too hard to explain such diverse bundles to consumers?
The short answer is: yes it is hard to market diverse bundles... but it is not impossible, and when done well, is the key element to producing great bundles.
As an observation, consider the example above ー would you really bundle UFC with knitting? How would you explain that? Or another example: by this logic, you should bundle a left-leaning outlet (like MSNBC) with a right-leaning outlet (like Fox News), but how would you explain that? Note that in both of these examples, the existence proof is already there. The existing cable bundle already produces these types of seemingly conflicting pairs. Imagine explaining to the Fox News fan that the only way for them to get access to Fox News is to also pay for MSNBC. Seems unfathomable, and yet that is the basis of the cable industry.
I would pose that this Myth offers a marketing challenge but a surmountable one. Here’s a quick checklist of what the bundle marketer needs to achieve:
Assemble a bundle of goods with low SuperFan overlap and high CasualFan overlap
Ensure the components of the bundle have clear a-la carte value
Show you only the components of the bundle that you are likely to be a SuperFan of
Make the set of products shown to you feel like they are part of a coherent good worth purchasing

Often what is required is a subtle shift in positioning. McDonald’s does it with friendly labels like Value Meal and Happy Meal ー why else would it make sense to require toy customers to purchase a hamburger with their toy? Cable providers have shifted to terminology like Triple Play and Quadruple Play. ESPN found a way to intermix gymnastics with football by calling it a “sports network”. At Spotify, the Student bundle provide a natural anchor for a number of packages by emphasizing the “essential goods for students”. Scribd bundled together documents with ebooks, then audiobooks, and more recently with a . And Amazon keeps stretching our definition of the “Everything Store” by continuously adding new benefits (free shipping, books, movies, shows, etc) to the Prime bundle.
Marketing diverse bundles is not an easy task. But it is possible and valuable.

Before we go on...

We’ll switch gears to thoughts in a moment, but it can be helpful to recap our Four Myths first:
In , we discovered that bundling creates value through CasualFans
In , we defined “MCC” as a better way to distribute money in a bundle
In , we saw that exposing a-la-carte prices is a key step to ensuring consumers see value in a bundle
In , we found that the best bundles minimize SuperFan overlap and maximize CasualFan overlap

Now we’ll step forward to some predictions and implications of these principles.

Next Section: for some predictions and implications

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