In an age when the Internet is commoditizing everything, there are few viable paths for profit-focused entrepreneurs. This is especially true for those who choose to sell products online.
In this post, I'll explain how a "bundling" strategy can add value to the supply chain and hedge against dwindling profits.
A time-tested strategy.
For as long as money and goods have exchanged hands, product mix has been a key element to any successful retail endeavor.
For illustrative purposes, let's dial back our time machine by 25 years to 1991. The Internet was still in its infancy and Jeff Bezos had not yet founded Amazon.com, Inc. For consumers, shopping certainly involved much more effort. Product discovery was limited to in-store experiences, word of mouth referrals and traditional media (such as catalogs). Merchants experienced competitors primarily within their own geographic footprints. While price wars have always existed, innovative merchants relied on creativity to stand out. By delivering unique product combinations, retailers could increase sales and mitigate competitive forces.
Grocers, for example, are well-known for creating blended product mixes. To get people into its deli, one store might promote a free loaf of bread with any meat purchase. A competing store could try bundling chips, hot dogs, buns and a home-made pie for one low price. Both grocers are creating value to customers through a unique offer, while simultaneously turning over more product and increasing profits.
Bundling is more important than ever.
The Internet has only magnified the importance of an effective product mix. Instead of competing on a local level with a handful of vendors, Web retailers are thrust into the most ruthless commerce ecosystem the world has ever known. Sure, there are millions of customers to reach. The only problem is that countless other sellers are vying for the same market share.
Gurus have often advocated a heavy focus on pricing and re-pricing automation. While a solid pricing plan is of course important, too much emphasis could quickly lead to a high volume, low profitability model. Winning the Amazon buy box is certainly a boost to a seller's ego. However, at the wrong price, each new sale could be leading to an ultimate demise.
To preserve profitability, savvy Internet retailers are now turning to the age-old strategy of product bundling. Much like their predecessors in traditional brick-and-mortars, online merchants are creating bundles (or also known as kits) to create a competitive advantage for their businesses.
In addition to differentiation, kits present a number of additional benefits -- especially to those selling on the Amazon marketplace:
- Reduced operating expenses, including FBA fulfillment fees
- Exclusive ownership of the buy box through the creation of a fresh ASIN
- Fewer risks than manufacturing an entirely new product
- Greater marketing flexibility, particularly when selling items with Minimum Advertised Pricing (MAP) rules set by the manufacturer
These benefits, along with others, are causing a rapid increase in the adoption of bundling. The question is truly how (not why) to build kits.
How to develop the right mix.
Creating an effective bundle can at first seem overwhelming. Not only must the merchant understand customers' wants and needs, but he must also be willing to assume more responsibility in the supply chain. Managing multiple vendors, preparing complex FBA shipments, knowing when to re-order goods and determining which kits to phase out are all common barriers.
Before getting too discouraged, the merchant must focus on establishing kit viability. Do customers seem to purchase certain items at the same time? Does Amazon routinely recommend complementary items during the check-out process? By asking these questions in the context of an existing product catalog, most sellers will be able to quickly identify several bundling opportunities. Such opportunities should be then evaluated based on a number of criteria, including:
- Projected demand and profitability
- Tangible costs to properly market the kit
- Vendor relations
- Competitive forces
- Return and product liability risk
- Supply chain management plan
- Compliance with Amazon bundling rules
The kits which score well are obviously worth prioritizing. It may also be wise to only launch one or two bundles at first, as to test the waters and learn a few lessons. Keep in mind that bundling is not always a fit for every niche, so testing different strategies can yield the highest dividends.
Related: What's Next for Ecommerce in 2016?
Gain a competitive advantage through bundling.
Customers buy online to achieve the most convenient shopping experience possible. Through the creation of kits, merchants help consumers find more of what they want (with less effort). The net result yields happier customers and more successful eCommerce entrepreneurs.