Four Myths of Bundling

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FOUR MYTHS OF BUNDLING

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Shishir Mehrotra⁠

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Background: Isn't bundling a bad thing?

Over the past decade, my opinions on paid subscriptions and bundling have changed 180 degrees. And I’ve come to realize that some of my previous misconceptions are fairly commonplace. This doc is a discussion of 4 myths that I’ve heard regularly... and the 4 theses I would replace them with.

But first, a bit of background on my journey. Before founding Coda, I spent a number of years as a Google executive responsible for the YouTube products. When I joined YouTube in 2008, it was fairly clear that our primary monetization model would be advertising ー but even still, there was always an item on our backlog to try different forms of user-paid offerings. We tried many experiments, but in those first few years, most were not very successful. As we reflected on why, I noticed a common pattern. Every idea we tried started with a similar premise ー we wanted paid offerings, but we didn't want to repeat what we saw as a "mistake" in the industry. Often it wasn't even stated, but every discussion started with an implicit view that "Bundling is Bad". And to be very clear, I was one of the most avid proponents of this view.

Recognizing this pattern, I became a student of bundling. I read everything I could on the topic. Chris Dixon has an

inspiring writeup⁠

that sparked the initial ideas. There's of course the

famous quote from Jim Barksdale⁠

, "Gentlemen, there’s only two ways I know of to make money: bundling and unbundling." I also reached out to many smart people to learn more ー starting with strategists and executives at media companies but gradually broadening. Eventually, I arrived at the conclusion that I had it backwards, and that many of my previous conclusions were incorrect. Per the title of this doc, I started developing a set of "Myths of Bundling".

When I left YouTube in 2014 to start Coda, this topic continued as a bit of a secondary hobby for me and my thoughts on the "myths of bundling" continued to expand. I started investing and advising a few companies in related spaces, including joining the board of Spotify (after realizing that Daniel Ek shared a lot of my views). Over the years, my framework for bundling has developed into a useful set of new principles. I've found these principles to have a profound effect on many business situations, and have shaped my views on broader topics as well.

Introducing the Four Myths

This doc represents a new framework for thinking about bundling. It is presented as a series of four "myths", each one followed by a new "thesis" statement. I have a background in mathematics and so tend towards understanding concepts with mathematical language ー but each one is also paired with a narrative that explains the myth and the new thesis.

The narrative is told as a discussion with a fictitious "Myth Maker". As you read it, you can picture many people you may know who share some of these views (perhaps yourself), but as I wrote it, I was mostly using it as a label for "old me" ー i.e. my own personal views from a decade ago.

Here’s the high level summary of the 4 Myths. We’ll work through these one-by-one in a moment.

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Myth 1. Bundling is bad for consumers (as well as providers)

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Thesis 1: When done well, bundling produces value for both consumers and providers by giving access for (and revenue from) CasualFans.

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Myth 2. Revenue from bundles should be allocated based on usage

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Thesis 2: The most fair way to distribute revenue to providers in a bundle is by Marginal Churn Contribution, not Usage.

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Myth 3. Bundles will always feel like a rip-off to consumers since they represent a lack of choice

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Thesis 3: For a Consumer to properly value a bundle, there must be a transparent (and reasonable) a-la-carte price for each of the products in the bundle

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Myth 4. The best bundles are narrow and have very similar products so they make sense to consumers.

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Thesis 4: The best bundle is one that minimizes SuperFan overlap and maximizes CasualFan overlap

There are no rows in this table

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Why does this matter?

For a while, my thinking on bundling was just a fun hobby for me. Over time, I recognized that this set of principles was somewhat fundamental and has reshaped my views in a number of ways.

I've included a set of discussions on predictions and implications in the

Future⁠

section of this doc. But here's a bit of a teaser of where this discussion may lead you:

Bundling is a natural evolution for many industries: Many of the examples in this doc focus on the media industry (both because of my background and because they tend to be relatable). But the patterns shown here are applied in everything from airlines to shopping to health care.

The concepts of bundling can be applied to more general product development: Though most bundle examples are “multi product”, they apply within a single product as well. Think of your product as broken up into a set of constituent parts ー which audiences are SuperFans vs CasualFans of each part?

The bundles of the future will be larger and more diverse than we have today: I believe the economies of scale of bundles (esp when combined with

Myth 4⁠

) will lead to significantly broader bundles than we are used to.

A third business model for the internet: The

Future⁠

includes a discussion on how this framework can not only result in new partnerships, but also in entirely new businesses that only make sense in a bundled environment.

But before we get to those conjectures, let's establish a common framework through the 4 myths.

A few extras before you start

Short on time? Here's a presentation format

I've given a number talks on this topic, and have developed a slide deck that I use regularly. For faster reading, feel free to start with this:

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Prefer to listen instead? Here’s a great podcast interview on this topic

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Shishir Mehrotra – The Art and Science of the Bundle – [Invest Like the Best, EP.175]⁠

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Definitions of key terms: There are a few new terms that are used throughout the doc

Myth-maker = our personified adversary for this discussion - an individual who will vehemently argue that all of these 4 myths are true (I mostly pictured myself from a decade earlier)

Bundle participants

Consumer = purchaser of the bundle (though in some cases, a consumer could be a business, we’ll simplify terminology to consumer for now)

Provider = provider of a good within a bundle

Bundler = the organization that bundles goods together and sells them to consumers

Note: It is quite possible for an organization to be both a bundler and a provider (in fact, in the media industry, this is common place ー a show is a bundle of episodes, a channel is a bundle of shows, a channel group is an ownership group for multiple channels, your cable plan is a bundle of channels, and your provider likely bundles together phone, internet, and security into your plan)

Bundle = something a consumer purchases that includes access to multiple goods generally (though not always) from multiple providers. For shorthand purposes, we will assume all bundles in this doc are billed on a monthly subscription basis.

Types of Fans: Defined in

Myth 1⁠

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SuperFans: Consumers who would (a) pay retail for a good and (b) have the activation energy to find it

CasualFans: Consumers who lack one of the 2 SuperFan tests

NonFans: Consumers who ascribe zero (or perhaps negative) value to having access to the good

Marginal rates: Defined in

Myth 2⁠

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MCC aka Marginal Churn Contribution: Defined in

Myth 2⁠

, this refers to the percentage of people (and associated revenue) who would churn from a bundle if a particular product were removed.

MSacC aka Marginal Subscribed Acquisition Cost Contribution: Also introduced in

Myth 2⁠

and closely related to MCC, this refers to the percentage increase in a subscription base when a product is added to the bundle.

Useful reading, historical context, and other extras in the

Extras⁠

section

Useful reading: A number of links, including

Chris Dixon’s helpful primer⁠

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Historical context / Original doc: This doc was originally a google doc (

link⁠

) that also has a lot of the early comments / conversations. Feel free to read those to learn more history.

A huge round of thanks to the following folks for reviewing and contributing to this doc. Their comments have made it immensely better (and any remaining shortfall is entirely my fault!): Trip Adler, Gene Alston, Sean Atkins, Prabhu Balasubramanian, Nikhil Chandhok, Rachel Colson, Ben Davis, John Donham, Shreyas Doshi, Daniel Ek, Phil Farhi, Wade Foster, Julius Genachowski, Kristin George, Daniel Graf, Manik Gupta, Jeff Holden, Brad Hoover, Matt Hudson, Sujay Jaswa, Sethu Kalavakur, Sriram Krishnan, Zachary Lloyd, Mike Mignano, Kavin Mittal, Sreejit Mohan, Alex Norström, Will Page, Tom Pickett, Rich Pierson, Shiva Rajaraman, Vishwa Ranjan, Peeyush Ranjan, Jay Richman, Jonathan Rochelle, Sam Rogoway, Richard Sarnoff, Aaron Schildkrout, Lane Shackleton, Hiten Shah, Ben Silbermann, Tom Staggs, Kevin Thompson, Eugene Wei, Ev Williams, Larry Zhong

Also, to see other docs from Shishir, check out

https://coda.io/@shishir⁠

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Next Section: Get started with
`Myth 1`⁠
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FOUR MYTHS OF BUNDLING

Background: Isn't bundling a bad thing?

Introducing the Four Myths

Why does this matter?

A few extras before you start

Next Section: Get started with Myth 1⁠⁠

A few of the 25,000+ teams that 🏃‍♀️ on Coda.

Next Section: Get started with
`Myth 1`⁠
⁠