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Like every week in the JCNews, you’ll find my latest and most interesting readings, including a must-read!
👉 Shishir Mehrotra - The Art and Science of the Bundle (Colossus)
The bundle is one of the most powerful ideas in business.
Super-fan, casual-fan, non-fan is a way to describe three audiences for each product. So super-fans hold two characteristics. Number one, they would pay retail for the product. They think that’s a fair price. And number two, they have the activation energy to go find it. Casual-fans lack one of those two criteria (they might not pay that retail price). And non-fans ascribe either zero or sometimes negative value to a product.
Casual-fan businesses sit in the middle. They are businesses that provide access to their products to a variety of users, some of whom are super-fans and some of whom are not. And those tend to be subscription businesses.
What Spotify offered was a way to pay for all the music you might want to listen to, even if you’re going to get access to some things that you might not have gone out and bought individually. It allowed for every consumer to all of a sudden get access to goods that they were a casual-fan of.
Defining super-fans for your industry is super interesting. In healthcare you have many use cases (and we see Alan Baby as a way to get in contact with our super-fans). Casual fans are the whole population in healthcare, as “everybody” has needs.
For providers, I give them access to casual-fans and for consumers, I give them access to products they might be casual-fans of. A very large portion of what people spend time consuming are things that they value, but they would not have met that super-fan test for.
The myth is revenue from bundles should be allocated based on usage. (...) We started using the term marginal churn contribution (MCC): “if I were to remove this one product from the bundle, what percentage of my audience would churn”. The reason why ESPN is paid 20 times more than History Channel is if you were to pull ESPN from the bundle, 20 times as many people would churn as if you were to remove History Channel. You can formulaically arrive at what a fair price would be. What we call wholesale prices. This is how much you pay out to each provider. And it is correlated mostly to this term: the MCC.
What is the MCC of your services?
What is health insurance? Is the bundle between sick and healthy people. At sort of a level, if you think about usage versus anchor value, health insurance is the perfect example. The reason health insurance works is the cost for the super-fan is ridiculously exorbitantly high. People need to contribute, even though they’re not using it, or the whole system doesn’t work.
We have a more ambitious vision about it. It is not about just the cost. It is about the very different personas you have depending on the primary condition (pregnancy, mental health, parenting, sport-addict, menopause, diabete…)
For a consumer to properly value a bundle, there must be a transparent and reasonable à la carte price for every product in the bundle.
So now you go back to that consumer and say, great. You’re paying $50 a month for Comcast, what would you like to pay for? Well, I guess I’d like to pay for ESPN. Great, you can pay $50 for ESPN. Now, all of a sudden cable looks like an amazing deal.
Now you pay $50 for ESPN and I get 299 other channels for free? This is a really good deal. But because we don’t have transparency on each of these components, where it lands is that people think they’re getting ripped off.
People’s ability to understand a bundle starts from their ability to understand the components of the bundle.
How can you show you are a super good deal?
And the myth is the best bundles are narrow and have very similar products so that they make sense to consumers. But the thesis is that the best bundle is one that minimizes super-fan overlap and maximizes casual-fan overlap.
The incentive of the bundler is to minimize super-fan overlap. The key is, you want to be building a product that minimizes the cases where I’m paying twice for the same person. I want to pay as close as possible to the marginal churn contribution of this product inside this bundle.
You want to keep increasing the scope of your bundle in particular into new areas of super-fans.
Reed Hastings made a choice very early on, and is very public about it. “I’m not moving price. People saw it as a consumer forward message. It was $8 a month for a very, very long time. You build a product and then you add to that product and you increase the price as your value to your base increases.“
So what did Netflix do by holding price constant, they forced themselves to think about their own path to growth was subscriber growth And what that meant was every incentive of the business was creating more subscribers.
When people say I am going to raise prices, generally that’s a sign that you’ve run out of ways to think about the next frontier of super-fans and casual-fans for your business.
Amazon prime has done that. Didn’t raise prices for years and years and years and managed to add so much value to that bundle. Then they add music and they add books and they add all different things to it. And the thing I think that is not easy to see about that is what they were really doing was expanding the base.
When you start seeing a subscription service increase prices, people look at it as a willingness to pay indicator. I look at as I’ve saturated my ability to continue growing my base. It’s not a positive indicator as the ability to continue expanding at the same price.
Do you need to keep your price constant for a long time and be just focused on growing the business?
How to both feed their core as well as grow their next audience. The Spotify student bundle was one of the most fun ones to work on. Because I think most people’s perception was that it was a discounting program. In that process, what we were doing by giving the original version was Spotify plus Hulu for $5 a month for students. That was an immensely profitable effort for both companies. The super-fan overlap between those two products in the student space was quite small. The number of students who paid for both parts is very small. So everybody who signed up and a lot of people signed up for this combined product, everyone who signed up was new ti thus offering.
What’s a similar play for you? A good question to be asked.
The ability to do bundles is much simpler. You can pass back referral code, you can do OAuth to be able to get people to sign into multiple things.
An eigenquestion is find the most discriminating question and answer that question first. And you can think about if I have 10 questions, for which question if I answered it first, would it answer the other nine questions?
I love it :)
In addition to selected articles, I share one of Alan's leadership principles every week - the same one that I share internally and with our investors every Wednesday.
👉 At Alan, we don’t need everyone to be convinced of our decision (Healthy Business)
👉An excellent guide on how to write well (First Round)
👉Skateboard, Bike, Car: how to build a product (Andrew Wilkinson)
👉Tobi Lütke (Founder & CEO, Shopify) about being a platform (Masters of Scale)
👉Why is it so important to speak with simple words in the world of healthcare? (The Atlantic)