Six years ago, I went off the cable TV grid. Despite 70+ channels, we were watching just three or four channels and overall, spending less time watching TV. At some point, given my consumption pattern, I felt it was not worth spending nearly $50 per month on cable TV. I recall calling my cable operator to see if they could offer me a la carte pricing on the channels I liked and was pretty much laughed off. No surprise, I dropped cable subscription altogether. The cable TV industry is still largely driven by bundled offerings – such as Comcast‘s Starter, Preferred and Premier bundles – and has still not caught on to the iTunes concept of a la carte offers of songs, TV shows, movies, apps and more. Like cable operators, software producers have to strategize between bundled products or a la carte offerings – in this blog, I explore software entitlement management tradeoffs and best practices that will help you pick a course.
Before you read on, take a look at Microsoft’s Office bundles which package Word, PowerPoint, Excel, Visio and other apps in different combinations. Microsoft also offers these apps a la carte, as standalone programs. Bundles can include distinct products (e.g. the Office suite). But, even a single app could be sold as bundles with different levels of features: for example, Microsoft sells Visio as Visio Standard and Visio Professional and Intuit’s Quicken is offered as Deluxe, Premier and Home & Business.
So, why sell bundles in the first place? A well-known tradeoff is that product bundles are advantageous for producers while a la carte offers are advantageous for consumers. As an example: suppose you produce an app with feature A and feature B. Customer 1 is willing to pay $10 for feature A and $5 for feature B. Customer 2 is willing to pay $5 for feature A and $10 for feature B (see Table below).
|Willingness to pay||Customer 1||Customer 2|
If the producer:
- Bundles feature A + feature B for $15, they would make $30 (2 customers x $15)
- Offers feature A for $10 and feature B for $10 a la carte, they would make $20 (because Customer 1 buys only feature A for $10, Customer 2 buys only feature B for $10). They could also offer feature A and B for $5 each and get 2 customers for each feature but would still make only $20.
In this example, the a la carte model is advantageous for customers as they pay only for what they value. But, the producer makes more money with bundles. Of course, the example assumes that customers are willing to spend $15 in total for a bundle and will not walk away or postpone purchases due to “sticker shock” if the bundle is the only way to purchase. This is a big assumption driving the advantage for bundles – it works well in markets where the software producer is a monopolist and customers have no choice but to buy from them.
What about software entitlement management tradeoffs for bundles versus a la carte offers? I will explore that in Part 2.