Cutting-edge eCommerce brands know that the key to long-term revenue generation is boosting average order value (AOV). One method of achieving this is product bundling or selling multiple products together for a single price. By bundling products together, you add perceived value to the products as a unit, as opposed to them individually. When customers see added value from products, they’re more likely to make purchases—and ultimately, be more satisfied with their purchases.
In this post, we’ll examine why product bundles are successful, look at the different types of product bundles, and review some best practices for assembling and pricing product bundles. Read on to learn more about how bundling products can help set your eCommerce brand up for long-term success.
WHAT IS PRODUCT BUNDLING AND WHY IS IT EFFECTIVE?
Product bundling is not a new concept, but it has taken on new life with eCommerce businesses looking to gain a competitive edge. Bundling entails selling multiple different products together at a combined price. With bundle pricing, eCommerce retailers package several different products together, then sell that package to customers for less than it would cost to buy the individual items separately. This approach enables eCommerce retailers to sell large amounts of items at higher margins while offering customers a discount at the same time.
The idea of product bundling is based on the economic concept of consumer surplus. This occurs when the price that customers pay for a product—or in this case, a bundle of products—is less than the price they’re willing to pay. Consumer surplus measures the additional benefit that a person gets from paying less than they were willing to.
Product bundling is a creative way of increasing the consumer surplus, making customers feel like they’re getting a bargain—and getting a superior buying experience at the same time. Although each item in a bundle is sold at a discount, bundle pricing strategies generate revenue by creating larger-volume purchases. The success of product bundling hinges on consumers perceiving the value of a bundle as greater than its component products.
TWO TYPES OF PRODUCT BUNDLES
Pure bundles contain products that are sold exclusively in that bundle. Customers can purchase the bundle as-is or not at all. Its component items cannot be split up.
- EXAMPLE: Meal-kit companies like HelloFresh and Blue Apron bundle ingredients for customers to cook meals at home. They don’t permit customers to choose the ingredients individually and purchase them separately.
Products in mixed bundles can be purchased individually, but are priced higher when not sold as part of the bundle.
- EXAMPLE: The Microsoft 365 software suite, which includes Word, Excel, PowerPoint, Outlook, and OneDrive. These component software solutions can be purchased individually, but customers get a better value when they purchase them together.
CREATING COMPELLING PRODUCT BUNDLES
Creating product bundles that will generate increased revenue is not an exact science. The processes for creating compelling bundles vary greatly, but there are a few key standards for all retailers to consider when choosing what products to group together—and how to price them.
UTILIZE PURCHASE DATA
Bundles are most enticing to consumers when they include complementary products—products that are designed to be used together. Refer to your eCommerce purchase data to determine what items customers frequently purchase together, then create bundles for these complementary products.
CLOSELY EXAMINE YOUR INVENTORY
Got a large stock of a specific item sitting dormant in your warehouse? Consider assembling a quantity discount bundle to move multiples of the same product quickly. Or, create a quantity discount bundle of multiples of a product you frequently replenish to increase your average order value (AOV). The possibilities are numerous, but you’ll need to have a firm understanding of your inventory in order to assemble enticing bundles.
BUNDLE POPULAR AND UNPOPULAR PRODUCTS TOGETHER
Another option is to package your less popular items together with better-selling products to increase the perceived value of the bundle. Shoppers that may be on the fence may feel more inclined to make a purchase with the extra item tacked on, and you can get rid of excess stock taking up space in your warehouse.
CALCULATING BUNDLE PRICING
The first step towards pricing a product bundle is to figure out the gross margin of each item in the bundle. To calculate this, subtract the cost of goods sold (COGS) from the sale price of each item. This gives you your cost baseline, which will help you determine the ideal bundle discount.
For brands with average margins of 50% or higher, Shopify recommends discounting the total cost of the bundle by 10-20%. For retailers with average margins of 50% or less, taking 5-10% off is usually the way to go.
Bundle pricing is not a “set it and forget it” proposition, however. Experiment with different prices to determine what is most enticing to your customers while still being profitable.
TAKING ADVANTAGE OF PRODUCT BUNDLING FOR THE HOLIDAY SEASON
With Black Friday/Cyber Monday right around the corner, the time is now for brands to get their holiday strategies in order. The holiday season is incredibly competitive for eCommerce merchants, and effective product bundling could be your opportunity to separate your brand from the competition.
For online retailers, product bundles can help:
- Increase average order value (AOV)
- Make it harder for customers to comparison shop
- Move less popular products that might be taking up valuable space in warehouses or fulfillment centers
Connect with Codal today to learn more about creating product bundles to boost revenue and customer satisfaction.