"There are only two ways to make money in business: One is to bundle; the other is to unbundle." - Jim Barksdale, ex-CEO of Netscape.
Today, we’re going to discuss bundling and unbundling of software. We’ll start by looking at these dynamics in the B2C segment, and ask how this might play out in B2B.
The economics of bundling
With information based businesses, bundling can benefit buyers and sellers. I recommend Chris Dixon’s essay on bundling and unbundling — it was written in 2012 but like most good pieces, holds true to this day.
The table below shows a customer’s willingness to pay for different channels. Let’s assume that the cable company charges a price that is 10% below what customers are willing to pay. Here’s the math for bundling and unbundling:
- Bundling: 90% x $13 = $11.7 x 2 customers = $23.4
- Without bundling: 90% x $10 + 90% x $3 = $11.70
A trivial example but one that illustrates why bundling can be great. For this to the be the case, the company needs access to large distribution. In addition, users must be able to get their second and third choices (e.g. history channel for sports lover) for less. With cable TV, your television was the distribution mechanism and there weren’t a tonne of alternatives.
Ben Thompson followed up with an excellent piece in 2017 talking about how television was unbundled:
- For people seeking information, Google became the answer.
- For anyone who wants to learn, YouTube became the go-to.
- Netflix because the go-to for story telling.
- If you’re bored and didn’t know what you wanted, you scroll on Instagram, Facebook or Snapchat.
- ESPN / sports is the only piece of content that truly remains on TV. This is because of decade long deals that give them rights over content. This is now changing with companies like Amazon Prime offering sports content.
The mental model for bundling and unbundling goes something like this. Large incumbents who have distribution always have an incentive to bundle. Once you’ve built a large enough customer base, the only way to increase revenue is by offering more products.
New entrants enter the market by finding a critically underserved need and win by serving this need. They grow easily at first because they’re acquiring customers. At some point, they exhaust most the customers in their target market and start launching new products. In other words, they start bundling.
If you zoom out enough, bundling and unbundling is like evolution.
Bundling in the B2B context
The Battery Ventures 2022 Cloud Software Spending Survey, surveyed buyers who control roughly $29 billion in annual technology spend. 45% reported consolidating vendors as a top priority.
Large incumbents in the B2B space (Google, Amazon, Microsoft, Salesforce etc) have distribution. Most people own a Google or Microsoft work account. Your server might run on AWS. You either use Microsoft Teams (I apologise) or Slack which is owned by Salesforce to remain connected with your team.
All of these incumbents view the current environment as an opportunity. So how does one build in an environment?
Build a mini-bundle
Think of building for the enterprise customer as a mini-bundle. You find 1-2 customers to build with and spend the next 2 years building a product suite for them alone. You are obviously not going to have a bundle that is as complete as the big cloud companies, but you have a bundle that competes for something. For example, you offer an end-to-end solution for financial operations or payroll.
Focus on a segment
If you are the go-to CRM for a specific segment like the medical industry, there’s a clear value add. Customers will choose you because you are serving a specific need for their niche.
Delivery incredible customer experience
The most common reason for bad reviews on B2B products is poor customer service. Nail your customer service, and customers will return.
Build moats for your B2B business with intent. Moats in B2B deserves to be covered in a standalone essay. Here are a few you can consider: long-term contracts, integrations, partner ecosystem (e.g. Shopify marketplace) and network effects (e.g. Slack). My favourite quote about moats is that if its takes very little time for you to build a moat, it probably isn’t a moat.
Bundle when the time is right
Be prepared to bundle at a later stage. There are only two ways to make money in B2B: sign new accounts or upsell existing accounts. At some point, you need to consider expanding into new areas and offering a bundle. Canva is moving beyond graphic design to launch a visual worksuite.
Do not compete on price
If your only value proposition, it’s unlikely to work. Large incumbents are well capitalised and undercut you at any point. In fact, you should expect them to offer their competing product for a discounted price or on a free trial.
Bundling and bundling of software is here to say. It will to and fro as technology evolves and it becomes easier to do things. So, I don't think the question is: is the future going to be bundled or unbundled?
The question is how are you going to take on bundled products to start with, and compete with unbundled products once you grow.