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To Bundle or Not to Bundle

Sigma Investment Counselors

August 19, 2015

The question of bundled or unbundled products or services is becoming an increasingly important issue across a wide range of industries.

Bundling is buying a total package that includes a fairly substantial menu of services, compared to unbundled, in which you buy just the specific product or service that interests you.  In the world of television this would be a choice between paying one price for multiple channels and/or movies, some of which you would probably never watch, or buying just the channels and/or movies that you do want to watch.

The airline industry has clearly moved to an unbundled business model in response to the success of low cost carriers such as Ryanair and Spirit.  These carriers pride themselves on offering the cheapest basic fares and then charging extra for everything else.  Consumers, who have responded to this approach by seeking out the lowest fares, often find that, after adding up the fees for all the extras, such as an assigned seat, checked and/or carry on luggage, telephone reservations, food and beverages, the total cost is sometimes as much as a first class ticket.

Giving consumers a choice between bundled and unbundled can work well for both provider and customer.

Informed customers, with limited requirements, can potentially save money by carefully assessing their real needs.  For the consumer that wants a broader selection, bundled pricing generally comes in below the cost of the sum of the parts.  For example, it is generally cost effective to buy your cable, telephone and internet services from the same vendor, if you want all three.

Well run businesses can also benefit from offering both bundled and unbundled options.  While the bundled service may result in lower revenues than if the services were sold separately, by bundling, the vendor can generate greater revenues per account, with attendant savings in customer retention and acquisition costs.

Consumers would be well served by carefully assessing what they want and what it costs, and purchasing accordingly.  Investors should familiarize themselves with management’s strategy and understand what furthers the company’s long term goals.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA®

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