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How to increase average order value with product bundling

by 
 
Jul 3, 2019

Product bundling - how to do it right? Dynamic customer segmentation, explaining the product value, flash sales, flexible offer bundles.

There is a need for flexibility coming from consumers seeking personal approach. Derdenger & Kumar, who have examined the psychology behind bundling, still sound up-to-date. Their findings are clear - there won’t be sales growth without flexible and dynamic set up of your bundles. In this post, we'd like to show you how to uncover untapped buying potential of your customers with product bundling. Let’s dwell into some use cases and learn how to tailor bundling to modern savings-savvy consumers.

What science has to say

In 2011, Derdenger & Kumar examined the impact of bundling on Nintendo sales results. They offered a bundle with a video game and the Nintendo console. In addition to offering the bundle, both components were also sold separately. After long months of testing different configurations, they came to the final conclusions:
- Bundling works best with dynamic customer segmentation as it enables retailers to invoke some purchases earlier in time.
- Pure bundling performs significantly worse than both mixed bundling and selling pure components. Pure bundling caused a 20% decrease in sales.

When customers couldn’t buy single components, the overall sales of both were diminishing. Savings coming from the price of the bundle which was lower than the price of both components were not convincing enough. Why is that? Looking at the way today market operates, there is more than one reason to explain that.

Monopolies are gone. There is very little chance that your customer can't find similar items by turning to your competition. If one of the bundle components is not attractive enough to buy the whole set, a consumer can look for the desired item somewhere else. Maybe there will be a better bundle?

To key thing to understand is that the product value for a customer decides if he/she purchases the bundle or not. Knowing how much a customer is ready to pay for bundle components is critical to evaluate future sales of your sets.

For example, I make a set of two items at a regular price of $10 for each and want to sell it for $17.
My potential buyer is ready to pay $10 for one of the products but only $5 for the second one.
Result - no purchase. For the customer, the value of the bundle is $15, not $17.

Product price ≠ Product value for a customer

Subjective product value is the main reason why pure bundling devoid of flexibility never ends well for your sales. Let’s go back again to fast food restaurants and McDonald’s to see this better.

When I visit fast food restaurants, like McDonald’s, I always buy a sandwich only. If I could only choose from multiple sets of products, even at very special prices, I’d probably end up hungry, and for sure, I’d never come back again to make another order.

This also happened in Kumar’s research when the lack of components sold separately cost them lots of purchases.

source: The Dynamic Effects of Bundling as a Product Strategy by Derdenger, Timothy, and Vineet Kumar (page 42)

Of course, it couldn’t be as simple as offering a bundle + offering its components separately. You can give your customers more than a choice 'save with a bundle or buy at a regular price'. You can predict their needs and let them choose how they want to save. The picture below is probably familiar to you, right?

Say hello to flexible and personalized bundling

Coupons from McDonald’s show how to make bundling consumer-friendly. Coupons define categories of products that need to be in the set but the final look of the bundles is up to customers.

Coupons and discounts based on order structure perfectly meet the requirements of flexibility and personalization. According to Kumar’s research, bundling performs best when combined with dynamic customer segmentation. Coupons make it easy. You can seamlessly sync bundling promotions with your customer segmentation and trigger coupon delivery based on real-time segments’ updates. Let’s use one more example to show you how it works.

  1. It always starts with analyzing sales data. For example, 20% of customers who have ever bought a printer, have made another purchase to get reams, and 11% have also bought toners.
  2. A dynamic segment of all customers who have bought a printer is our target group for the bundles. ‘Dynamic’ means that if someone buys a printer after the segment is created, he/she also enters this segment right away.
  3. The bundles will be offered to printer owners:
  • toner + 2 reams,
  • toner + 4 reams,
  • toner black + toner color
  1. After estimating the value of bundles, we need to define a discount for each set.
  2. Discounts from bundling campaigns will be active only if all components of the set are in the customer’s cart.
  3. The coupon for the bundle is delivered automatically to every customer who’s entered the segment of printer owners.

In the case of coupon codes sent in emails, you have a chance to additionally personalize the message and build a 1:1 interaction with a customer. Moreover, if you use unique coupon codes, they will track users and deliver detailed redemption data.

Learn how coupons and discounts can increase your business growth with our library of promotion examples >>>

What about the users that you can’t reach with an email? Modern coupon engines give you a variety of options to cover every touchpoint. You can use cart-level promotions, which automatically add a discount if all products from the bundle are in the cart, no promo code is needed. You can also use a public code displayed at the promotion banner that a customer types at the checkout.

Promotions with bundles enable you to predict some purchases and invoke them faster. Defining correlations between the items in your inventory gives you plenty of possibilities to upsell. For example, besides our bundles with toners and reams, we could offer a configurable bundle and target all customers who want to buy a printer:

Choose printer + add ream + choose any toner and get 10% discount for your set

Bundling which defines only categories or types of products without pointing out which of them exactly a customer needs to buy increase the chances to meet their expectations. Ultimately, both sides are happy - customers get more for less, and your bundles perform well.

An example of a bundle with discounts from Amazon

Product bundling in a nutshell

  • Keep the product value in mind - the package must be worth more than the sum of its parts for the consumer (start with the most popular items and segment your audience based on their favorite products/categories).
  • Strive for simplicity - the bundle must be easy to understand at first glance (always emphasize profits for a customer coming from bundling).
  • Your bundle gets extra power if it solves a problem for the consumer or facilitates the process. It can be a combination of a product and a correlated service (a smartphone + system configuration).
  • The bundle should be one of the options, consumers can always buy products separately.
  • Bundling needs to be dynamic and awake interest. Consider flash-sales, promotions of the week, or special holiday bundles.

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