Multi-product strategy to build a powerful competitive moat
Companies with more than one product can leverage the economic concept of bundling to build a powerful competitive moat. Bundling is the process of selling more than one product at a price lower than the sum of the individual product prices. A product bundle that is thoughtfully designed can make your competition ineffective because:
Competitors can compete with one of the products in your bundle but not all of them
To replicate your bundle, competitors need to expand their product strategy & make significant investments
Product Bundle example
Take Adobe Creative Cloud's All Apps bundle as an example. For $60 per month, customers gain access to over 20 products. While Adobe faces strong competition for many of these individual products, the bundled offering delivers significant value for users who rely on multiple products. The bundling strategy creates a competitive advantage, primarily by lowering the effective cost per product. For instance, if a customer regularly uses four of the apps, the per-product cost drops to $15 ($60/4). Even if a competitor offers one of these products for $10, they struggle to compete, as the customer would have to pay $70 ($10 for the competitor’s product plus $60 for Adobe’s bundle) or would need to replace all four Adobe apps—introducing both financial costs and a steep learning curve. This high switching cost reinforces the value of Adobe’s bundling strategy and strengthens customer retention.
Economics of Bundling
Consider two products and two different customers. For simplicity, let’s consider Microsoft Word and Microsoft Powerpoint. Let’s consider two customers:
Customer A loves Powerpoint and has only occasional use for Microsoft Word. She is willing to pay $12 per month for Powerpoint and only $6 per month for Word.
Customer B loves Microsoft Word and has only occasional use for Microsoft Powerpoint. She’s willing to pay up to $10 per month for Word and only $4 per month for Powerpoint
These are represented in the table below.
Product Bundling - 2 product example
The table also shows the Bundle price each customer is willing to pay for both products (in the last column) by simply adding the willingness to pay for each separate product.
To maximize revenue, the company will have to price Powerpoint at $12 (to capture one customer) and Word at $6 (to capture both customers). But, for the bundle, the company can charge up to $14. Note that the company has offered a discount of $4 on the bundle price as compared to purchasing each product separately. If each product is purchased individually, customer will have to pay $18 ($12+$6). Bundled price is only $14.
What’s interesting to note is that selling the two products separately yields a revenue of $24 from both customers ($12+$12 in the last row of the table) in this example whereas bundling increases the company’s revenue to $28. This means that the bundling discount actually benefits the company! Not just that, bundling benefits the customers as well. It is a win-win for both the company as well as for the customers. This is explained below.
Win-Win: Bundling benefits both the company & end customers
To understand how bundling benefits both the company as well as the customers, let’s dive into the economic model that depicts product demand at different price points.
If we plot the product pricing options on the Y-axis, and the amount of demand (histogram of the number of customers) at each price point on the X-axis, we get a curve as shown below. Economists call this a “Demand Curve” as it represents the demand at each price point. For your own product, you can perform pricing experiments to check the demand or sign-ups at each price point to plot the curve.
Demand Curve - Microsoft Powerpoint
The graph above shows the same price points (each customer’s willingness to pay) from the table above for Microsoft PowerPoint.
Note that to maximize revenue for PowerPoint (with the 2 customers example), Microsoft is charging $12. The revenue captured is represented by the shaded rectangle. This is $12 multiplied by all the customers within this rectangle (on the X-axis). The area above the rectangle shows the revenue lost from customers who were willing to pay more than $12. The area to the right of the shaded rectangle represents the revenue lost from customers who find the product too expensive. Mathematically, once you plot your demand curve (based on pricing experiments), your single product’s optimal price is the largest rectangle you can draw below the curve.
The same concept is used to plot the price points and revenue captured for Microsoft Word below
Demand Curve - Microsoft Word
Note that in this case, with a lower price of $6, revenue considering both customers is maximized.
So the bigger question now is how do we maximize revenue capture (shaded rectangle)? One way is to make the demand curve less steep. This is exactly what bundling does! When you plot the willingness to pay for each and every customer along the X-axis for the bundle (simply add willingness to pay for Word + willingness to pay for Powerpoint for each and every customer), the curve moves up and flattens as shown below.
Demand Curve flattens with a bundle allowing more revenue capture
Note that this only happens when customers have at least 1 favorite product (i.e. they are willing to pay a higher price for one of the products). This means for all customers, the curve moves higher due to the sum of willingness to pay for each product.
Important conditions for bundled pricing to work
If you have more than one product, for sure you should consider bundled pricing due to the benefits to both customers and the company. In addition, bundling reduces the ability of competitors to compete as they have more than one product to compete against. However, it is import to ensure the following conditions are met, otherwise, bundling won’t work:
Need for both products Sizable number of customers must need both products to some extent. If none of the customers need both products, then bundling won’t work.
Negatively correlated preferences Some customers should have a higher willingness to pay for one product, whereas other customers should have a higher willingness to pay for the other product. Without this, the curve won’t flatten.
Prices of each product should be close, not way-off. i.e. Max willingness to pay must be pretty similar for both products for different customers. For example, we can’t bundle Enterprise and utility software which have vastly different price points.
Implications for Multi-product Strategy
The conditions outlined above should serve as guidelines when a company is exploring expansion into multiple products. Ensure that the next product the company decides to build meets all three of the conditions. By doing so, the company can begin to establish a durable competitive advantage, as competitors often find it difficult to replicate all the products in a bundle. Additionally, the company will gain a significant pricing advantage by increasing revenue while reducing costs for customers with varying demand across products
If you like this blog, subscribe to get articles delivered for free to your inbox as soon as they are published!
About
Teja Vepakomma has two decades of experience in startups as well as Fortune 500 companies in product leadership roles. He now consults full-time. Get in touch with Teja using the contact form or via LinkedIn.
