The Argument Against Traditional Software Bundling

August 11, 2017

In the early days of the software revolution, well before Salesforce was even an idea, Microsoft brought the ultimate bundle to the market: Microsoft Office. It was a box(ed) office smash (please excuse the pun) and software startups have tried to rip off the Office bundling playbook ever since. But let’s face it – the sequel is never as good as the original.

It’s hard to remember a time when Microsoft wasn’t the leader in all things desktop software, but as recently as the early 1990s they played second fiddle to WordPerfect (word processing) and Lotus 1-2-3 (spreadsheets).

The integrated, bundled Microsoft Office suite – along with product advantages and competitor missteps – helped propel Microsoft to dominate the entire category and become the ‘de facto’ standard. While Microsoft might not have been the market leader across every aspect of desktop software, they had a full suite of good enough products that all worked well together and gave customers a ‘one stop shop’ solution. Who wants to pay for another word processing software when they’re already getting it ‘for free’ with their purchase of Office?

The economic rationale against bundling like Microsoft Office

It’s common for startup software companies to launch with a single bundled package. That’s fine when you’re starting out because you’re still trying to establish product-market fit and don’t have enough customers yet to finely segment your audience. You still need to collect data on which features get used the most, which never get used and who your power users are.

But this doesn’t scale. Your customers don’t all look the same, and they shouldn’t be offered the same thing at the same price. This essential insight has become ingrained in nearly everything we buy, whether that’s airline tickets (there isn’t just one ticket anymore) or even a Netflix subscription (there isn’t just one Netflix streaming plan, either).

The simplest way to demonstrate why is by brushing up on economics. In the graphic below, I’ve included a typical demand curve where the demand increases as price goes down. (Note that not every demand curve looks like this, and there may even be cases when demand increases as the price goes up).

When a company offers only one package at one price, as shown in Scenario 1, they limit their sales volume to the demand at that single price. A skilled salesperson may capture some of this extra demand through strategic discounting, but that would be, at best, a band-aid solution. What’s more is that they leave money on the table among folks who would pay far more since they’ve set a ceiling on the price.

Now let’s compare Scenario 1 with Scenario 2 where a company slots in a premium price point and a value price point. Companies that employ this type of pricing capture 50% higher MRR and a 50% increase in sales volume.

Let me underscore this. Your pricing strategy could be costing you a 50% increase in revenue and customers!

Microsoft has ditched the classic Office bundling strategy, too

While Microsoft’s bundling strategy served the business for a period, they’ve innovated over the years. In fact, their current pricing strategy looks a lot more like Salesforce than the Microsoft Office of yesteryear.

Today Microsoft starts by asking whether a prospective customer plans to use Office for home or business use. Depending on your selection, Microsoft then presents you with three packages to choose from.

Their business plans for instance are delineated into a classic Good/Better/Best structure with plans at $5/user/month, $8.25/user/month and $12.50/user/month with an annual commitment (see screenshot below). What separates the different packages are the specific Office applications and services included. Business Essentials – a fighter product against G Suite – includes email services, file storage, collaboration and communication tools. Their mid-level Business plan has the core applications associated with Microsoft Office, namely word processing, spreadsheets, presentations and so on. Finally, their top-tier Business Premium plan has everything you could want from Microsoft at a 50% price premium.

By the way, those aren’t all of Microsoft’s offerings. They also have enterprise plans, which go up to $35/user/month and include security, compliance and legal tools. Plus they have micro-segmented offerings for education, government, nonprofit and first-line workers.

Microsoft has effectively segmented its market in order to offer price points (and tailored solutions) across as many places on the demand curve as they possibly can. In the process, they’ve maximized both revenue and customer acquisition for their productivity suite. Microsoft has created an upsell path, too, allowing them to frictionlessly land and then expand new customers.

Now that’s something worth copying.

Kyle Poyar

Partner at OpenView

Kyle helps OpenView’s portfolio companies accelerate top-line growth through segmentation, value proposition, packaging & pricing, customer insights, channel partner programs, new market entry and go-to-market strategy.