How Product Bundling Drives Revenue & How To Do It Right

How Product Bundling Drives Revenue & How To Do It Right

Product bundling is deceivingly complex. So, let’s walk through how top brands build bundles, market them, and manage them operationally.

All kinds of things can be sold as a product bundle. For example, Adobe sells its full line of software as a bundled suite. Professional sports teams bundle season tickets. And Hello Fresh puts every grocery item needed for a specific recipe in one convenient box.

But what exactly is product bundling? Why is this strategy so effective? And how can you create bundles to boost sales?

Let’s walk through those answers one by one.

What is product bundling?

Product bundling is a strategy where complementary products are sold together for a lower price. It’s a popular way for ecommerce retailers to sell more and increase revenue.

Perhaps the most recognizable example of product bundling is value meals at fast-food restaurants like McDonald’s. With it, customers get an entree such as a sandwich, fries, and a drink for less money than buying each item a la carte.

Source: McDonald's

As a result, most customers will opt for the meal over buying a sandwich with just fries or just a drink, even if they don’t necessarily want all three components. Why? For the perceived value of the set.

How product bundling works

A successful product bundling strategy comes down to the perceived value of the individual component products. In other words: is buying these products as a package deal “worth it” compared to purchasing each product separately?

Pure product bundling

In an industry like video games, where the value of hardware depreciates over time, a pure bundle might not be worth it to the cost-conscious consumer. Without price stickers for each component part, consumers classify each item as “expensive” or “cheap.” Then, they justify the deal from those calculations.

However, these perceived values are not based on manufacturing costs or anything tangible. Because of this, consumers tend to undervalue component products that are sold exclusively as a bundle.

This customer undervaluation is reinforced when the bundle’s value naturally depreciates before the subsequent model releases, like in the video game market. As a result, consumers who didn’t like the first offer will postpone their purchase, knowing a better deal will come along. This leaves monopolists like Nintendo competing against itself.

However, if the products are more similar (say Nintendo bundled two games, rather than a game and console), pure bundles see more success. That’s because it hits that feeling of “worth it” compared to buying two comparable products at full price.

Mixed product bundling

On the other hand, when Nintendo offered the mixed bundle, they owned the perceived value of each component product. Suddenly, the cost-conscious consumer understands that the console is worth $72 because that’s how much it would cost them to buy the unit separately. So, a bundle where they could save $8 is suddenly “worth it”–even if the bundled game isn’t great.

As a result, the bundle introduces a sense of urgency, even if waiting would ultimately be better for the consumer.

Meanwhile, the high-end consumer (those willing to spend more to get precisely what they want) will find more value in the flexibility mixed bundles offer. For them, it’s worth spending more to buy the console separately if it means adding on the exact games they want to play.

As a result, by preserving consumer autonomy (bundle or buy separate, now or late), Nintendo empowered various market segments to find the best solution. And as a result, mixed bundles notably boosted sales–regardless of whether a consumer chose to take advantage of the offer.

Not to mention that bundles encouraged some consumer segments to purchase products earlier and, in some cases, enter a market they would not have otherwise.

5 benefits of product bundling

Product bundling allows brands to sell multiple products at once, increasing the average order value while decreasing inventory and shipping costs. It also simplifies your customer experience and offers them a better price.

Let’s walk through the five biggest benefits in more detail.

1. Increase average order value (AOV)

Every customer has a price they’re willing to pay for a product. However, what they’re willing to pay doesn’t always equal what they actually pay. The difference is referred to as the consumer surplus.

And the goal of product bundling is to maximize this surplus. When done right, customers spend a bit more on a product to get the related gadgets and gizmos that increase the product’s utility. That way, customers walk away feeling like they got a steal and you get a chance to get rid of dead stock and any excess inventory.

However, this “steal” requires spending more in a single transaction. As a result, it increases your average order value (AOV), or how much your average customer pays each visit. And in turn, it bumps up how much revenue your brand makes.

For example, say you historically close 1,000 sales in a year, and your AOV is $50. That means you pull in $50,000 annually.

But let’s say you start offering product bundles this year that feature your best sellers. This bumps your AOV to $100 because buying multiple items costs more than a single product (even with an added discount in effect). Suddenly, you’re pulling in $100,000 annually–assuming you close the same 1,000 sales this year.

Sure, you could alternatively increase your prices to boost sales. But with today’s competitive landscape, customers will likely end up feeling ripped off and going elsewhere.

2. Reduce inventory waste

The average ecommerce brand has upwards of 33% deadstock in its active inventory. This costs a shocking 30% more than the products are worth on holding costs alone. And the longer these items sit in storage, the more it costs the company.

As a result, it’s in their best interest to turn inventory over as quickly as possible. That’s where a product bundling strategy can help.

For example, you can piggyback a stagnant SKU onto relevant, popular products and slap on bundle pricing to drive up the duo’s appeal. This bundling strategy accelerates how fast both products sell and lowers inventory holding costs when done right.

Likewise, you can also bundle dead stock at a clearance price. That way, you get it out of your warehouse, so you can sunset the SKU and hopefully make some profit off it in the process.

However, there’s a risk to simply throwing dead stock products in with other products–especially if the dead stock item is unappealing or cheap in comparison. That’s because it forces buyers to use categorical reasoning to determine if the bundle is still “worth it.”

Categorical reasoning is a phenomenon where consumers subconsciously categorize component parts as either “expensive” or “cheap.” And when grouped, such as in a bundle, the cheaper component parts make the expensive ones look inexpensive by association.

That’s because consumers use the average of all component parts, rather than the total sum, to rationalize if the deal is “worth it.” This phenomenon, as a result, can lower consumers’ willingness to pay for the bundled whole.

With this in mind, dead stock runs a higher risk of being categorized as “cheap,” regardless of the price point. So, as tempting as it is to bundle dead stock in with best-sellers, bundling two dead stock items together at a clearance price will likely be effective, even if that means eating some of your margins.

3. Increase product margins

Many brands only focus on top-of-line growth (increasing gross sales or revenue). But the savviest business owners know that sometimes the easiest way to grow your brand is by focusing on the bottom line, specifically by optimizing margins.

And by focusing on individual SKU profitability, product bundles can do that.

SKU profitability looks at how individual products perform compared to other inventory items by separating the overhead costs. This way, brands can know which items have the largest margin and drive the biggest profits and identify potential risks in their pricing strategy.

For example, Casper famously ignored SKU profitability and, as a result, lost money on every mattress sold. But had this been their focus, they could have pivoted their strategy to increase their ecommerce profit margins before going public.

What does this have to do with product bundling? When creating a bundle, use SKU profitability to pair a high-margin product with a low-margin one. This strategy is especially beneficial if the lower-margin item sells faster. That way, the two units will return a higher-than-average margin when bought together.

Plus, when items are marketed together, restocking and inventory management become more straightforward. Think about it like when a coffee shop orders 300 single-use cups and 300 lids.

They’ll hand out one of each with every to-go coffee and need to restock both at about the same time. Minimum order quantities and supply chain issues aside, product bundling can have a similar effect once turnover increases.

4. Decrease marketing costs

Customer acquisition cost (CAC) has increased by 60% for direct-to-consumer (DTC) brands in the past five years. And for many, paid acquisition has become unsustainable. Luckily, product bundling can offer some relief around your marketing and distribution costs.

Say you have four all-time best-selling products, for example. Historically, you marketed these items on their own using unique ad campaigns for each one. Chances are good that many of these campaigns targeted overlapping audience segments. This means you spent a lot more to reach the same audience over and over again, possibly annoying them in the process.

By bundling these best-sellers together, you can cut CAC by simplifying your current marketing campaigns. That’s because instead of marketing the separate SKUs, you can market one complete bundle.

Is a customer only interested in one of the component parts? No worries–you can use the organic product page to link to the individual products rather than use a paid campaign to do this work. And the people who click through to learn more about a single item in the larger bundle will have more intent to actually complete the transaction.

This drastically reduces the number of unique campaigns you need to run. Not to mention, many of these leads will end up purchasing the bundle when they’re ready.

This means they’re spending more than if they only bought a single item, and they’re paying the lump sum upfront. So, you’re left with a higher return on your acquisition costs.

These returns should alleviate some pressure around acquiring new customers at any cost. And instead, you can use this space to nurture existing customers (who are much easier and cheaper to engage) until they’re ready to buy again.

5. Simplify the customer experience

Customers want options when they’re buying a solution. But too many choices can leave them feeling overwhelmed and lead to cart abandonment.

Offering product bundles can simplify this experience by grouping related products with the customer’s needs in mind.  And mixed bundles, in particular, can be executed without removing the customer’s autonomy. They can add on additional products they need, recreate the curated solution without a component part, and so on.

This radically cuts down the initial research consumers need to conduct. As a result, customers will typically do deeper research on the items included in the bundle instead. This means by the time they buy your products, they’re better educated on your solutions, will derive more value from the products, and are more likely to return.

Bundles also alleviate some pressure to find “the perfect price.” For example, guests feel ripped off when a hotel charges $5 for bottled water on top of a $350 hotel room. But when that same bottle is bundled into the room’s price, and the hotel charges $355, it’s a good deal.

Why? Because the pricing is more opaque.

A similar thing happens when people invest in bigger ticket items. For example, people will buy the $1k iPhone but not a $15 case to protect it. That’s because, for whatever reason, this minor product (although it increases the value derived from the primary product) creates friction.

But bundling this item’s cost into the price of the main item can reduce the friction. All while setting customers up for success and increasing your own AOV (making it a win-win).

Nintendo product bundling case study

From 2001 to 2005, Harvard Business School professor Vineet Kumar analyzed how Nintendo used product bundles in the handheld video game market (a market the conglomerate held a monopoly over at the time). Specifically, he looked at two types of product bundles: mixed and pure bundles.

Mixed bundling refers to the practice of selling products as a bundle that can otherwise be bought on its own. Whereas pure bundling refers to selling two or more individual items as part of a complete bundle.

Over the five years, Nintendo saw great success with mixed bundling. The company marketed its video game console and games together at a reduced price than if bought separately. And as a result, the company’s console sales increased by 100k+ units and video games by 1M+ units.

However, when the company experimented with pure bundling, they didn’t succeed. Instead, this product bundling strategy led to a 20% decrease in revenue. Console sales, in particular, dropped by 1M+ units and video games by 10M+ units.

In other words, Kumar found that product bundles only succeed if customers also get the option to buy each item separately. Nintendo, for example, sold the most units when it offered a bundle option, coupled with the opportunity to purchase each piece separately. This conclusion also holds true when comparing these sales to pre-2001, before Nintendo introduced any bundles.

Looking at the larger picture, all ecommerce markets experience these trends as long as the bundled products have similar consumer valuations, Kumar concludes.

But why does mixed bundling work so well? And why was pure bundling a total flop in this scenario? Well, it all comes down to perceived value.

Which products should be bundled?

Product bundles have to make sense (both for your customer and your business). So, the rule of thumb is to pair together complementary products. This might mean SKUs from the same product line (like several pairs of socks), ones that are often sold together (like a console and game), or ones that could work together well in a gift set or gift bundle..

To quickly check that products complement each other, ask: if I sold one of these items, would I cross-sell the other? If yes, it probably makes sense for your customers, and you need to check that it makes sense for your business.

This typically means that if the products were bundled, that bundle would meet one of the following criteria:

  1. Pairs a best-selling SKU and a slow-moving SKU.
  2. Combines a high-margin SKU and a low-margin SKU.

Admittedly, figuring out which of your product offerings does this isn’t always easy, especially if you sell many different products. That’s why retail giants like Amazon have spent an eye-watering amount building an algorithm that does this work for them. Once the algorithm identifies complementary SKUs, it bundles those items at a discount or recommends them as potential add ons.

And Amazon specifically has seen great success with this approach to product bundling.

In fact, a Forrester study estimates that ecommerce giant’s recommendations have a 60% success rate. And as a result, McKinsey suggests roughly 35% of the company’s sales stem from these recommendations (some of which classify as bundles).

However, rather than investing hours to determine your bundle offerings or money to create a similar algorithm, Cogsy can do this heavy-lifting for you.

That’s because Cogsy’s proprietary prioritization matrix identifies the velocity and margins of all your SKUs. That way, you can see potential bundle combinations that meet the above criteria at a glance.

As a result, you can quickly piggyback overstocked slow-moving inventory onto best-sellers to accelerate turnover. Or, pair low-margin products with high-margin ones to increase your average margin return. And start reaping the benefits of bundling faster.

Finding the perfect bundle price

Finding the perfect bundle price usually involves a bit of trial and error. If you’re bundling two products, you know what a customer would pay for both those products. But that not all customers will pay for both those products in the same transaction. That’s where the bundle discount comes in.

In our experience, bundling two high price SKUs in the same bundle isn’t as successful as having one higher-priced item and one lower-priced item.

That’s because the former option, for most customers, feels like doubling the price point, completely blowing past the number they’re willing to pay. However, the latter option provides a gentle upsell. If a customer was ready to spend $50 for a single unit, what’s $60 to get two?

When you know which products you’re bundling, feel free to test a few price points and see what resonates with customers before landing on the final price. That way, you can see how far you can push the consumer surplus.

To get data on bundle pricing faster, home goods designer W&P created a page on their website with the whole purpose of highlighting its bundles.

Source: W&P

This page features roughly 30 bundled packages. And the brand makes a huge deal about how much customers can save with each one.

On their Porter Commuter Bundle, specifically, they stamped “20% off” on the featured product image. Then, doubled down by showcasing the sum of all the bundle’s component parts crossed out, with the bundled price next to it. This is then repeated in the bundle’s in-depth product page.

How to implement a product bundling strategy

Implementing a product bundling strategy is deceivingly complex. Sure, you can pick a few SKUs, pack them together to sell at a discounted price, and call it a bundle on the marketing side.

But on the operations side, this can quickly turn into a logistical nightmare. So, let’s walk through how you can easily manage these bundles from an inventory perspective.

Before we jump in, you’ll need to answer one question: is the bundle pre-kitted or virtual? Your answer determines how to go about it.

What is a pre-kitted bundle?

Pre-kitted bundles refer to two or more products that are predetermined and pre-packed into a set–and, therefore, cannot be customized. (Both Nintendo bundles in Kumar’s study were pre-kitted.)

Today, many brands see success with this bundling strategy. For example, coffee accessory company Fellow offers three best-sellers (the travel mug, coffee bean canister, and kettle) in a pre-kitted bundle. And the anti-hair loss treatment Keeps offers pre-kitted bundles (like thinning shampoo and conditioner) to address specific balding patterns.

Source: Keeps

However, despite this success, pre-kitted bundles tend to be operationally costly. They require teams to consider how they’ll purchase the individual SKUs and pack them into the kit.

Are they ordered as a pre-assembled kit from the manufacturer? Or are you ordering each SKU and packing them in-house? If the latter, when do you have to order each SKU to ensure part of the bundle isn’t sitting in the warehouse, collecting holding costs?

How to offer pre-kitted bundles?

Most of this work to pull this off happens in the back-end inventory management system (IMS). To minimize headaches, make the bundle its own unique SKU. If you sell the component parts independently, mark those products as child SKUs underneath.

This empowers you to track the bundle’s performance and justify the operational costs. But it also allows for more accurate inventory forecasts and purchase orders.

For example, say you offer Bundle X (which includes a single unit of Product A and Product B), and you’re packing it in-house. An ops optimization tool like Cogsy will separately forecast Product A, Product B, and Bundle X sales.

Then, it will break down the demand for Bundle X into demand for each component product, adding that data to the forecasts for Product A and Product B.

That way, you can optimize purchase orders to consider manufacturer requirements (like minimum order quantity) and lead time, which might differ for the component products.

What is a virtual bundle?

Compared to pre-kitted bundles, virtual bundles tend to be more straightforward operationally. These consist of two or more products that the brand will market and sell together (indefinitely or for a limited time).

And with the rise of ecommerce, retailers are seeing growing success with this bundling strategy.

This success is due, in part, to the sense of control it provides customers while still simplifying the experience. Depending on the offer, they can change, remove, or add items to the bundle. This customization lets consumer preferences decide what items are included, making the bundle more relevant.

For example, intimates brand Parade offers five pairs of underwear for $40, where customers mix and match styles and colors. Meanwhile, pet brand Wild One offers several customizable bundles that include everything dog owners need for a walk or playtime. Customers can then customize each item’s size, color, flavor, or scent at checkout.

Source: Wild One

How to offer virtual bundles?

Virtual bundles are much easier and cheaper operationally. That’s because most of it happens on the customer-facing interface via your inventory management system or a bundling plug-in (like Product Bundles for WooCommerce or Bundles for Shopify).

Unlike pre-kitted bundles, companies don’t need to get all the component products to the same storage space before shipping them to the customer.

Instead, if the products customers want are in different warehouses, brands can ship them from where they are.

To manage the incoming orders, make the bundle its own unique SKU in your IMS. Then, mark the component products included in this bundle as child SKUs underneath.

Like with pre-kitted bundles, this allows an operations optimization tool like Cogsy to forecast customer demand for each SKU variant and optimize the corresponding purchase orders. That way, you always have enough products in stock to sell.

But if you run out for any reason, you can continue selling on backorder with Cogsy. The tool will track who’s waiting to receive part of their bundle and help your CX team set expectations around when customers will receive these remaining items.

How Caraway handles the operations of product bundling

We know we just covered a lot of information. And at this point, you might be wondering what all this looks like in practice.

Fast-growing DTC brands like Caraway make it look effortless, often offering bundles on bundles. And these product bundles have been one of the main drivers of their insanely fast growth.

Source: Caraway

So, we invited Mark Riskowitz, Head of Operations at Caraway, onto The Checkout to share their hyper-successful bundling playbook with you!

In case you don’t have 30 minutes to spare, here are the 3 bundling strategies Mark shares that you can’t afford to miss:

  1. Start with the complicated, then simplify. Meaning, launch products as a bundle first (if possible). Then, start offering its component parts as individual products.
  2. If you can’t do that, use virtual bundles to test bundles for profitability. If the offering performs well, pre-kit it to save on operational costs.
  3. Manage pre-kitted bundles under a single SKU. This will make planning way easier than separating out demand for when an item is bundled with other products or sold on its own.

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Product bundling FAQs

  • Is product bundling an effective sales strategy?

    Yes, product bundling is an effective sales strategy that increases sales and overall profit if done right. Furthermore, product bundling aids businesses in reducing distribution and marketing costs.

  • Does product bundling increase or decrease customer satisfaction?

    Product bundling has been shown to increase customer satisfaction. Not only do customers appreciate the chance to purchase multiple related products in a single purchase, but they also see product bundles as a chance to save money.

  • What are the benefits of product bundling for the seller?

    Product bundling can have multiple benefits for the seller who implements this pricing strategy into their business plan:

    • Increased sales efficiency
    • Higher profits on individual sales
    • Lower cost of customer acquisition
    • Higher return on investment
    • Reduced distribution cost
    • Greater exposure to new customer segments
  • What are the disadvantages of product bundling?

    Businesses who implement a product bundling strategy can face several challenges:

    • Reduced sales of individual items as customers only look for product bundles
    • Reduced bundle sales as customers don’t want to be burdened with additional products
    • Reduced bundle sales due to poor product combination
    • Reduced sales of popular products