Bundle Magic

How to make 1 + 1 = 3

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Usually in business things go worse than expected. But every once in a while, if you’re lucky, an experiment goes 800% better than you hoped. And when it does, you’d better understand it.

Sooooo... this week I’m writing about bundle economics 🙃

...

Four months ago my friend Dan and I decided to start paid newsletters together. They’re independent businesses, but we operate like a team. We edit each other’s pieces, share all our data, and brainstorm growth ideas together.

One idea we came up with recently was to offer a bundled version of our newsletters. The theory was based on an idea called “bundle economics” that I thought might apply in our case. So, this past Monday, we launched the bundle.

The night before launch we talked on the phone to guess how many subscribers this bundle experiment might bring in. To put it in context: in the past, we might get 5-10 new subscribers on a good day, and 15-20 new subscribers on a great day. On the night before we launched the bundle, we had 648 total subscribers between the two of us. 

Dan and I were both really excited about it, and thought it might be one of our best days, so we predicted we’d get 20 new subscribers from the bundle. In retrospect, it’s kind of embarrassing how wrong we were 😆

In the three days since we launched the bundle, we added 180 new subscribers, bringing our collective total to 828. That’s exactly 800% better than the 20 we had hoped for. Overall, we had 28% subscriber growth in just a few days!

One other cool thing — 274 (40%) of our existing subscribers opted in to the bundle, so we each increased the audience for our paid posts by quite a bit.

...

It’s not obvious why bundling is good. And in fact, bundles are often bad! Sometimes you should unbundle. It entirely depends on the circumstances.

The unbundler says, “Right now your only option is to buy ABCD, but you really just want B. So I’m going to sell B to you as a standalone, for a lower price.”

Substack exemplifies this. They enable writers to say, “Hey, I think you really just want my work, instead of some newsletter I could be a part of. So here’s a way to subscribe to me directly.” Another great example was iTunes, which let you buy individual songs, back when people had to buy CDs.

On the flip side, the bundler says, “Hey, right now you have to buy A, B, C, and D separately, but you’d like them all. So how about I sell you ABCD in one convenient package, for a lower price?”

Spotify exemplifies this. They enable listeners to get access to almost every song ever recorded for $9.99 per month. This is an amazing deal compared to when we had to pay $12 or more for a single album. Another great example was cable TV, back when people did that.

You’d think that this would be bad for the music industry as a whole, right? They used to charge $10 per album and now they charge $10 per month. They must make less money?

Wrong. They’re actually on track to make more money now that they’re bundling. Just look at this graph:

(source)

How does that work, though? How can they make more money by bundling a bunch of products together and selling them for less than the sum of the parts? (Sometimes — as in the case of Spotify — for far less!)

Unbundling is kind of obvious (you want less stuff, so you pay less money), but there is a sort of dark magic inherent in bundling, which allows it to benefit both buyers and sellers in wonderful ways.

Dear reader, I am here to explain the dark magic to you 😈 

...

It goes something like this:

Imagine a group of five friends.

They’re all different, but they have a lot in common. They all work in tech, they’re ambitious, and they love to read.

Now, imagine these friends are presented with five email newsletters:

Because they’re different people, they all have different willingness to pay for each of the newsletters.

Given this data, we can make a graph showing how many people would pay at any given price for each newsletter.

In other words, a demand curve:

The demand curves slope down, just like they do in Econ 101, because the higher the price, the fewer people will buy it. For example, if The Wedge charged $9, only Mia Product would pay for it, but if it charged $3 or less everyone would buy.

From this, we can find the price each newsletter should charge in order to make the most money:

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Comments

@jaspercurry over 4 years ago

Really enjoyed this post - thank you! One question though. You say "if people have zero demand for most things in your bundle, it’s a bad idea to try and force a bundle on them". While Spotify and Netflix provide one type of good, their users arguably have zero demand for most things in the bundle. How do you square this with the earlier statement?