Bundling is not a novel concept. In fact, many economists and investors have long noted that business cycles can be explained by bundling and unbundling.
Here’s a summary of how bundling and unbundling works:
The benefit of making your offers small and modular is that it allows you to take advantage of a strategy called bundling. Bundling allows you to repurpose value that you have already created to create even more value.
Bundling occurs when you combine multiple smaller offers into a single large offer. An example of bundling is the mobile phone industry, where a mobile phone (a physical product) is bundled with a monthly service plan (a subscription) for a single price. Similarly, buy-one-get-one-free offers at the grocery store are a form of bundling.
Typically, the more offers contained in the bundle, the higher the Perceived Value of the offer, and the more the business can charge. That’s why mobile phone providers add things like more minutes, unlimited text messaging, and Internet service onto the basic service plan. The more benefits provided, the more a customer is typically willing to pay on a monthly basis for the entire package.
Unbundling is the opposite of bundling: it’s taking one offer and splitting it up into multiple offers. A good example of unbundling is selling MP3 downloads of a single album instead of the CD. Customers may not be willing to pay $10 for an entire album, but they may be willing to pay a dollar or two for the songs they particularly like. Unbundling the album into individual units opens the way to sales that wouldn’t otherwise happen.
Bundling and unbundling can help you create value for different types of customers without requiring the creation of something new. By combining offers and forms in various configurations, you can offer your customers exactly what they want.
https://personalmba.com/bundling-unbundling/#:~:text=The%20more%20offers%20contained%20in,having%20to%20create%20something%20new.
To summarize, some people want, and can afford, best-of-breed products and prefer to pick and choose what they use.
Others either prefer getting everything from one vendor, or can’t afford best-of-breed solutions (either because they don’t have the resources to successfully utilize best-of-breeds appropriately or don’t have a large enough budget to acquire them) and they want solutions bundled.
In general terms, larger and more sophisticated customers usually opt for best-of-breed solutions, but we suspect this model will be really under pressure over the next five years in retail.
Here’s why.
Capital is expensive. Interest rates have gone from near zero to over 5%. Inflation aside, it means Joe Investor can earn 5% parking their money in a (nearly) risk-free investment vehicle like a CD or US Treasury.
Investors already hate retailers as customers. If you thought funding in retail tech was hard when money was free, imagine how hard it will be when money has a cost.
We expect very few retail tech startups to attract new funding, or find follow-on capital.
To add insult to injury retailers are juggling serious cost concerns. Commodity costs are still up nearly 60% from pre-COVID levels, putting serious pressure on COGS.
Labor costs are also outrageously high, as hourly workers – the type the work in retail industries – saw the greatest salary increases over the past three years.
Retail is also seeing – finally! – the consumer headwinds from inflation as demand wanes.
NRF expects US holiday sales to grow 3.5% from last year, but after accounting for inflation this is starting to look more like a wash.
What does this mean?
Enter bundling.
Retailers already struggle with choosing best-of-breeds because they don’t employ people smart enough to wring ROI from the best-of-breed solution.
Don’t matter if the ROI is 1,000,000% if it’s reliant on a person with a sub-80 IQ to use the tool properly.
So if a retailer wants a new tool or feature or value, they’re likely going to get it from an existing vendor. And to offer such a feature a vendor will need to be large enough to have built the solution, acquire the solution, or bring in a partner.
But since the retailer will only pay about 0.01% of the value the solution creates (not hyperbole), this eliminates the third option of the partner approach since the partner would need to be large enough to lose lots of money to serve retail, thus implying that the third party partner would be the anchor vendor themselves
This leaves very few vendors that can actually bundle solutions.
Right now the private markets are forcing companies to reach EBITDA while still pumping out high top line growth. Do more with less is a good way to summarize the state of venture investing.
Pretty hard to reach EBITDA if your customer is paying 0.01% for the value you create, or the other way to think of this is that they demand a 1000x ROI.
Imagine putting a dollar into Google Adwords and getting $1,000 back.
It’s impossible, or course, and it would put Google out of business. It’s why they – and Facebook – manage expectations to a 3-4x return.
But hey, retail is special.
So a lot of private companies that serve retailers will cut back on expenses and hope to be acquired by a bigger vendor that can fold them in for pennies on the dollar. These retail tech companies raised money at absurd valuations and are so capital inefficient that the founders are just now realizing that they’re not going to make any money.
But that’s what you get for deciding to serve customers who actively root for their vendors to go bankrupt (no, they’re not smart enough to understand the implications a vendor’s bankruptcy would have on their business: they just believe they should get everything for free).
Bundling is back in style and will be the only viable path for the next five years, or until interest rates are negative and some investors can be deluded into believing that retailers might behave rationally and invest in new retail tech companies.
Until IQ points in retail management teams rise by 50 points, we don’t believe it.
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