Bundling products and services: The new super solution that gives companies an edge
by Dawn Milne
Marketing |
Email Share on Twitter Post to Facebook Share on LinkedIn Save to Delicious Save to Instapaper

Imagine how difficult it would be to get your meals if there were no supermarkets or restaurants to offer multiple products and services all in one place. If you had to source your meat from one supplier, your potatoes from another, and so on. It would take you a long time to purchase all the food you need in your household. Supermarkets and restaurants offer an integrated solution for customers by bundling the products and services needed for a meal in a manner that is easily accessible. This concept of product/service bundles has been implemented by leading companies such as IBM, General Electric and Magna with great success. Doing so has differentiated them from competitors or even eliminated competitors all together. So why isn’t every company doing it? IBJ discusses this approach with Roger More, whose new book, Marketing High Product/Service Solutions, addresses product/service bundling as a strategic marketing opportunity.

 

“A product/service super-bundle is created when your integrated solution creates your customers’ most differentiated and desired choice/rejection/experience process. You become the mirror image of the customer’s solution process and life cycle. Looking at your solution, your customers see themselves.”

 – Roger More

IBJ: Why did you write the book?

Roger More: More and more companies are getting interested in providing bundled solutions to customers’ problems rather than the laundry lists of products and services they provide. This is an ongoing trend. Leading companies have been doing this for the last five or 10 years and longer. In fact, I went through these processes with IBM and General Electric (GE), which are two of the examples used in the book. And there are many more. The book is an exemplification of my ongoing experience in my management consulting and research. I wrote it to pursue a topic that is of enormous strategic importance in the world today. It’s a very broad topic and significant to many companies.

How did you research this topic?

The research was done experientially. It’s grounded research. It’s based on years of experience that I have had consulting with these companies – with senior management – and actually grinding through specific examples of product/service bundling and making decisions as to whether they are worthwhile to fund and whether they could be successful. I also discuss what some companies learned from failure. The book is experiential and based on real-world situations faced by real-world managers over many years. When you do something like that, you feel like you’d like to pull some things together to make it useful to other managers faced with the same problem.

Why is product/service bundling so well-received in many cases?

We are used to solution bundles as consumers. When you buy a notebook as a consumer, the product is the notebook, but it is bundled with all the software and the service and everything else that you need. And, of course, notebooks crash and they quit and you need service to get them started again. Bundling of solutions is a naturally occurring thing.

A good example is what has happened at hospitals. Before GE came along with its product/service solution bundling, hospitals bought all of their equipment as individual products and, to some degree, they still do. Of course, the solution from a hospital point of view is what happens on the hospital floor when patients go through the place when they get treated. Patients don’t want to see individual products, they want to see a solution.

So GE went from being a supplier of X-ray, CAT scan, MRI and other imaging equipment to providing integrated radiological floors where they spec all of the equipment and services. GE manages them all and bills for them in one bill. The benefits to the hospital are absolutely staggering. Instead of having to manage hundreds of suppliers, there is one supplier. That one supplier is GE and it bundles a solution. The efficiencies involved are enormous. That’s one example. There are many other examples. The Magna example is a spectacular one because Magna went from being the supplier of individual components of cars to managing and doing the entire manufacturing process for the car itself. Magna actually produces and assembles cars for automakers, which is a huge solution bundle. You can just imagine the efficiencies when you don’t have these hundreds of outside suppliers and you can replace them with one company like Magna that manages the entire solution process for you. You can see examples small and large. It’s almost as if you can pick any industry or company and talk about how they bundled solutions.

With such advantages, why isn’t every company doing this?

There are a lot of products and services that people want to buy individually. They don’t want them to be part of the solution. Most people, when they buy their clothes, don’t go to a clothing store and say, “Empty closet – fill it with clothes that fit me and that I like.” Most people buy clothes one product at a time – a pair of shoes, a pair of socks, a suit, a shirt, a tie, etc.  We want to assemble our own solution. We don’t want somebody else bundling the solution for us.

Another interesting example is home building.  I have some friends in the custom home building business. Like contractors, they build homes. A lot of sub-contractors, electricians and so on, decide they want to become contractors because that is where the money is. Instead of just providing electrical services or drywall, they want to start building houses. The number of people who have gone bankrupt doing this is legendary. So managing a bundle isn’t the same as managing pieces of a bundle. It’s much more difficult and takes a much higher level of professional management. That’s what my book is about. It’s about what is necessary to get into more bundling or bundled solutions. What are the critical questions you have to ask in order to make it a success.

Why is bundling such an important strategic marketing opportunity?

Let’s go back to the GE example. GE created a huge competitive advantage compared to Siemens and Toshiba and some of the other suppliers in the medical business, by bundling products and services. They basically shut other suppliers out of the bundle. The bundle becomes GE’s bag of goodies and it’s all in one. This means there are cost efficiencies. GE can price the entire bundle rather than pricing pieces of the bundle. Competitively, it’s a huge advantage if you can do it well. It’s not an advantage if you can’t do it well. It’s not necessarily good for everyone. One of the six major questions that is asked of managers about bundling is: Can you create long-term net cash flow? Or, more simply, can you make money? One of the problems with bundling products and services is the costs. If you’re not right on top of it with your accounting and finance controls, the costs can spiral out of control very quickly. Manufacturing products has a very well-defined way of cost accounting – figuring out whether products are making money or not. Services are really difficult to manage. Services are people doing things for people. For example, when GE got into bundling medical solutions, it greatly underestimated the costs.

You give examples from three leading companies – Magna International, GE and IBM. Did their successful track record give them an edge or can any company duplicate their results?

Magna is a great example of a relatively small auto component company that just kept putting together bigger and bigger bundles of modules for cars and manufacturing facilities and outsourcing until finally it grew into this manufacturer and outsourcer for entire vehicles. It would be very difficult for many auto parts suppliers, who just supply products, to do what Magna did. There are so many companies that just provide products to the auto industry and it’s very difficult to all of a sudden say, “Let’s be like Magna.” Once Magna has done it, it provides huge competitive differentiation and Magna’s productivity speaks to that. It’s the same with GE. GE’s position in the medical industry is to go into hospitals to the radiological and imaging floors. Everybody knows GE. Customers know GE and they revere GE. They know that GE provides great solutions.

Your book introduces new concepts and tools for managers to provide bundled products – how did you develop these concepts and tools?

I developed the concepts while working with managers. It’s not an academic book. It’s for managers. It’s meant to be used in the teaching of managers and for consulting with managers. The concepts and tools in the book are successful with managers in the real world. For every one that I have in the book, there are two or three that I discarded because they were too complex or the managers couldn’t use them in all the situations. There are a lot of tools and concepts in the book. Each one of them is designed to ask a question that managers need to ask and let them map product/service opportunities in such a way that they’ll start getting an idea of whether they could be successful or whether it’s highly likely they will not be successful.

What is your advice to companies that are considering bundling?

Do it incrementally. You don’t dive in to the deep end of the pool.  Start adding services. Then start bundling products together. Then start bundling services with them. And keep your eye like a hawk on what’s happening with your cash flows. GE didn’t do that. GE jumped right into it and found out the hard way that it had very good cost information on the products side, but it didn’t have good concepts and financial tools to look at the costs of services.  Offering services is a much different scenario from products. So it took GE a while for its services cost methodology to catch up.  GE lost some serious money.

Another good example is Business Process Outsourcing (BPO) from IBM. BPO is one of the biggest product/service bundles the world has ever seen, where IBM will literally do all of the IT globally for large corporations. IBM does all the hardware, software, staffing, connectivity, the Internet – everything. It’s a huge bundle. However, even just the cost of putting together a bid and assessing the customer’s existing IT infrastructures can run into the tens of millions of dollars. And if you bid on the deal and lose, you don’t get any money back. It’s extremely hard to control the costs because IT is rapidly changing, very complex and so forth. The result is that IBM has had a very difficult time being profitable with BPO and IBM admits this.

Your previous book, Transforming New Technologies into Cash Flow, dealt with bundling high technology. Is it a good complement to this book?

It was on transforming new technologies and putting new technologies together, as opposed to products and services. They are kind of distant cousins. The other book focuses strictly on choice of technology, whereas this book talks about choice of products and services in solutions. Obviously, product service bundling involves bundling technologies, but I didn’t want to talk about all of those issues in one book. Technology is a separate issue because it’s such a large issue. To the extent that product/service bundling is difficult, it is much more difficult in the presence of complex, expensive, fast-changing technologies. Take the IBM BPO example again. Samsung has just announced that it has a fifth generation platform, or 5G, smartphone.  Let’s say IBM has a BPO solution in place for a company and all of a sudden along comes 5G. The company wants 5G and IBM just put in 4G. So IBM might say, “If the company wants 5G, that will cost another $100,000,000.” So the company says, “We’re not going to spend $100,000,000 on that – we’re going to go talk to somebody else.” When you bring in a technology aspect, it is an enormously difficult thing to manage.

Are there other books on this topic and, if so, what sets your book apart?

If there are other books, I’d like to know. There have been articles written on bundling, but they tend to be theoretical research, narrow, data-based and not particularly useful to managers. This book contains thought leadership. It is for senior managers in all functional areas, primarily marketing strategy, supply chain management, technology engineering and new product development in a business-to-business (B2B) market. This is not a consumer marketing book; it’s a B2B marketing book.

Where do you go from here?

I want to turn some of the material into articles. And there is obviously a lot of research that people might be interested in doing on this subject.

The Author:

Dawn Milne

Dawn Milne is a Senior Communications Specialist at Ivey Business School.



Enter your email address to subscribe to our mailing list.

related articles
most read articles