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Why do companies bundle products and services? A case study on Apple

13 Jan, 2021 | 6 min read

I’ve been a long-time subscriber of Apple Music, paying the usual ₹120 (now ₹99) /month. Although, full disclosure - I’m a music aficionado and music listening is a large part of my daily routine. Given the 70 million+ songs Apple has in its library the price justifies the offering for a user like me. However, I never quite felt the need to subscribe to any of Apple’s other services viz. Apple TV+, iCloud and Apple Arcade because I have a Netflix account for my entertainment needs, sufficient on-device storage and I’m not big on mobile gaming, maybe a casual game once in a while. Thus, none of the other services by Apple seemed lucrative enough at their monthly subscription prices.

However, recently Apple made headlines by announcing the Apple One subscription bundle - a one-price bundle that includes access to Apple Music, Apple TV+, Apple Arcade and iCloud at ₹195/month - a price that is far lesser than sum of all the services if purchased individually or on a À la carte basis which by the way works out to ₹372/month. Suddenly, getting the whole bundle seemed like a much better deal than subscribing to just Apple Music, even though I don’t quite need the other services. Eventually, I succumbed and I am now an Apple One subscriber. This process however, raised a series of questions in my head such as why do companies such as Apple bundle services and offer discounts on such bundles? Why not chase higher revenue by directing marketing efforts towards selling individual services than bundles? And why not bundle services of similar nature together than to offer services with little to no overlap in their offerings?

Upon doing some research on the above questions, I came across Chris Dixon’s post on how bundling benefits buyers and sellers and Shishir Mehortra’s theory of SuperFans and CasualFans. In this article I try to answer the above questions using these two theories and stating a third advantage most internet companies leverage while offering bundled products. While the theories are applicable to multitudes of companies and their offerings, I would be using Apple as a case study and try to unravel the advantages Apple and other companies of similar nature (internet businesses) experience with bundling.

Note: The words ‘products’, ‘goods’ and ‘services’ are used interchangeably in this article.

Chris Dixon’s Economic Perspective

Chris Dixon in his post How bundling benefits sellers and buyers has taken a micro-economic perspective for explaining why bundling is beneficial for both parties to a transaction. In economics, the willingness to pay (WTP) is the maximum price a consumer is willing to pay for a commodity or service. The demand curve for any commodity is thus the price set by the company and the quantity demanded by consumers whose WTP is at or above the selling price. However, Chris argues that when goods are bundled together, it increases the consumers’ WTP and flattens the demand curve thus resulting in a greater quantity demanded and consequently greater revenue to the company.

In Apple’s scenario, let’s assume the following simple model wherein there are 2 sets of customers - Music lovers and Game Lovers. For Music lovers, let the WTP for Apple Music be ₹120 and for Apple Arcade be ₹30. Conversely, for Game lovers let the WTP for Apple Arcade be ₹120 and for Apple Music be ₹30, since enthusiasts in each of their respective categories will have a greater willingness to pay for their respective categories and a lower WTP for the other category.

The below table captures the above information:

Thus, the demand curve of these products when sold individually at their retail selling price of ₹99 each would be as follows:

Demand curve for Apple Music
Demand curve for Apple Arcade

The shaded portion on the X-Axis represents users whose WTP is equal to or exceeds the selling price of ₹99. Now, when Apple decides to bundle the products together, the users’ WTP would increase to ₹150 (120 + 30) for the combined offering. Thus, any selling price of the bundle below ₹150 would generate a horizontal overlap in the demand curves of music lovers and game lovers by targeting a larger user base and generating greater revenue as shown in the figure below.

Demand curve for Apple One

SuperFans vs CasualFans

Shishir Mehrotra in his article Four Myths of Bundling has proposed an interesting perspective of bifurcating subscribers into two broad categories: SuperFans and CasualFans.

A SuperFan is someone who:

  • would pay the full price for a single unbundled subscription service

AND

  • actively seek out such a subscription

If either or both of the above conditions are not met, then the user can be called a CasualFan.

By nature, SuperFans are the highly motivated target group who have no problem paying the full price for a product / service. Thus, a music fanatic like me would classify as a SuperFan for Apple Music but a CasualFan for Apple Arcade since I have little to no interest in mobile gaming. Now if all things remained the same and Apple only sold its services individually (by not bundling), it would by definition, only be targeting the SuperFans in each of their service categories because only SuperFans would pay the full price. However, Apple can reach a much wider audience by bundling products together and trying to target CasualFans by maximising their overlap across categories.

Shishir states that in order for a bundle to be effective, it must reduce SuperFan overlap and increase CasualFan overlap. Returning back to my first example of being an Apple Music SuperFan. Now if Apple were to launch an on-demand concert streaming service, and bundle it Apple Music, of course I would subscribe to it. However, from Apple’s point of view, it would again only be targeting it’s music SuperFan base and leaving out the rest of the audience. However, by bundling together diverse offerings such as cloud storage and games, Apple can reach a much wider audience than bundling services of similar nature together. In other words, the more diverse the offerings of a bundle, the larger is the audience that a company can target with its casual fan overlap.

Shishir has also explained the above point visually using the below diagram

Gluing Users in the Ecosystem

So clearly, both theories seem to converge on the principle that when done right, bundling can seem to offer a higher value to the customers and in turn generate higher revenues for companies. But that’s not all, companies selling digital products like Apple further leverage bundling by building a digital ecosystem.

In today’s times where a variety of products and services are available for a single problem, user retention has become more important than ever. According to a McKinsey report, 7 out of the 12 largest companies leverage some form of digital ecosystem. Digital ecosystems are a great way to increase customer lifetime value and ensure user retention. Bundling is a great way of building and attracting users into an ecosystem because of its nature of offering multiple services at a fixed price.

For instance, I have used the free tier of Google Drive for my cloud requirements up until now. However, after signing up for Apple One I get 50GB of iCloud storage as a part of the package. I have switched to iCloud ever since and have even opted for automatic photo backup onto iCloud. The switching costs for me are now incredibly high since moving to a competing service would either involve switching an entire ecosystem of 4 services (music, video, games and cloud) or purchasing an additional cloud service at its retail price on À la carte basis. Bundling is thus a great way of building ecosystems and retaining users.

Conclusion

Bundling as a marketing and distribution strategy has been around since quite some time but the inception of internet based subscription businesses has accelerated its spread. While this article only talks about Apple’s bundling strategy, there are numerous other internet businesses that offer bundled products and services such as Amazon with it’s Amazon Prime, Reliance Jio with certain Jio Fiber plans, Times Internet with Times Prime and the list goes on.That is not to say that bundled goods and services are going to replace all of individual product offerings. But when done right, bundling can:

  • Provide greater value to consumers
  • Help companies target larger audiences and generate greater revenue
  • Build digital ecosystems and increase user retention

Combine this with the zero marginal costs of software and internet companies are subject to and bundling as a strategy seems even more lucrative than ever before.

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