Bundling vs. Add-Ons
Stewart Rogers (@StewartRogers), a Pragmatic Institute Certified product manager, tweeted the following question to me:
“Question about #pricing: Any opinion or insight on best practice for bundling vs. add-ons #prodmgmt @MarkStiving”
This is an insightful question with quite a bit of nuance. Also, without specifics, it is impossible to make a solid recommendation. Here are some things to consider:
Add-ons – When we create a new capability for our product and we choose to sell it as an option to one of our other products, we are creating an add-on. One HUGE advantage to add-ons is they are often “Will I?” type products, meaning there is no direct competition for them because they are options to OUR product. This implies we can usually charge more money for add-ons.
Another advantage of add-ons is we are really segmenting the market. Those that want the new capability will pay more for it and those that don’t want it won’t pay for it.
Sometimes we have customers purchasing our product on a subscription basis and they expect new capabilities built into the quarterly or annual upgrades. Creating the product as an add-on allows us to get more revenue from some of our current customers.
Bundling – The big advantage of bundling is that it simplifies our product offerings. Confused minds don’t purchase and when we have too many options, buyers become confused. They don’t know what they really need and they are afraid of making a mistake. It’s easier to not make a decision and just not purchase. That is why I typically recommend creating a good, better, and best product to keep the buyers decisions simple.
Another reason you may need to bundle is competition. If your competition includes that capability and you don’t, that could put you at a competitive disadvantage, at least for those buyers who want the new feature.
If you have a single product today and are creating a new capability, consider a hybrid of the two techniques. Instead of selling the new capability as an add-on, consider creating two versions of your product, one with the new feature and one without. Consider the one without to be your “Good” product, the one with to be your “Better” product with the unannounced intention of one day creating a “Best” product.
Alternatively, if you have a product or even a product line in which only a small number of customers will want the new capability but those customers find it very valuable, it probably makes more sense to sell it as an add-on. However, if quite a few customers want the new capability (but not all) you could create another version of the overall product targeted specifically at that market segment with the higher willingness to pay.
There are many other characteristics that could help drive this decision as well. How different is the new capability? How big is the segment that will want it? What is the distribution of willingness to pay for the option? And many more. Here we’ve discussed some of the big drivers of this decision. It’s not an easy one, but make it conscientiously.
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