To Unbundle or Offer Multiple Bundles?

If you are looking at pricing your new cloud based service, there are two Airline pricing stories in recent news that I want to call your attention to. These are relevant to X-as-a-service businesses that struggle with value maximization. The two stories are similar in their goals of maximizing their value capture while not taking away customer choices. But they go about that in two different ways.

FlySafair ExtrasFully Unbundled Pricing – South African airlines FlySafair completely unbundled its ticket. The base price you pay for the ticket gets you just that – a seat with assured safe travel. Everything else is extra – inducing selecting your seat or getting TXT alerts on status. Their business policy is recognizing there are many different customer types that value different features differently. But a vast majority they want to serve select based on base price. Instead of bundling features and set a higher base price they practice fully unbundled pricing.

investor-day-2014-32-638Option of Multiple Bundles – Delta Airlines reported its latest quarterly numbers and in that stated it made $75 million in profits from its “Branded Fare Initiative”.  Branded Fare offers customers five different versions at different price points and features mix and letting customers self-select. Each version is a bundle of features and targeted at specific segment. For instance,  the lowest priced version does not include the option of seat selection while it includes Wifi.

Delta calls this strategy as better customer segmentation. That is correct and likely they did extensive marketing research to find what is relevant to which segment and define the right number of versions. You can see a similar segmentation research on the airline preference I did a few years ago. FlySafair is practicing segmentation too – it allows for many different segments, not just five we see with Delta.

I have written at depth about Unbundling as pricing strategy and about price bundling based on customer segmentation. Which approach is better for your cloud service?

Should you take FlySafair approach of offering a base product at lowest possible price and make everything else extra? For example a APM SaaS may offer simple data collection at base price and offer advanced analytics, monitoring, alerts,  replay etc as extras. Or should it offer 3 to 5 versions?

I recommend Unbundling as experimental approach rather than a long term pricing strategy for your MVP.  A big advantage of complete unbundling is it drains the water in the pond and exposes all rocks and deep ends. When you are starting with a X-as-a-Service it makes sense to start with fully unbundled pricing. This is your marketing research unlike established businesses.

However it does have the ill-effect of being seen as nickel and diming. Even if that is not the case every time customer has to make a buy or no buy decision on an extra they incur significant cognitive cost. Paying for multiple extras causes more pain than paying once for a prepackaged bundle (Prospect theory).

Use unbundling to find the value distribution among customer segments. Then use the customer preference data to define specific and limited product versions like Delta did. That offers better customer experience and value maximization.

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