@andrewchen

The happy meal is the quintessential version of great product bundling

How offers add value
There have been a lot of conversations about the evils of offers in social gaming, and one thing that’s getting lost in the conversation is the potential for offers to actually generate value overall.

Ultimately, offers are about “product bundling” and it adds value to the economy the same way that any product bundling adds value – by giving people more of what they want, often for less. And naturally, some configurations of different bundles are more effective than others, as we’ll see below.

This post will touch on a couple topics:

• Amazon and “relevant” bundling
• How to define good product bundles
• What’s actually happening with offers and bundling
• Solving the 1% ecommerce problem at the Point of Sale

Let’s get started:

Amazon.com and product bundling
When you are shopping at Amazon.com, and you’re in the process of buying a book, and different book is recommended, how do you feel about that? And even more, if you happen to decide you like both books and want to buy them, and Amazon is willing to give you an aggregate discount, how do you feel?

I think that intuitively, the cross-sell and bundling that happens on Amazon is great for the customer experience, and exemplifies the good side of product bundling.

Here’s some additional information about it from Wikipedia:

Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor, a spreadsheet, and a database into a single office suite), in the cable television industry (for example, basic cable in the United States generally offers many channels at one price), and in the fast food industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology.

The article goes on to say that the strategy is most successful when:

• there are economies of scale in production,
• there are economies of scope in distribution,
• marginal costs of bundling are low.
• production set-up costs are high,
• customer acquisition costs are high.
• consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.

Note also there’s a darker cousin to the above, called Product Tying, in which the consumer is forced to buy the whole set and not just one. This can lead to crappier products becoming more successful, and is the kind of thing you can read about in DOJ monopoly cases.

When bundling is helpful
As mentioned in the list form Wikipedia, there are many situations when bundling is helpful to both the consumer and the business. The bundling is extra helpful when:

• The product being bundled “makes sense” to the consumer
  • “Makes sense” often means a complementary good (drink+burger)
  • Or, it might share the same context (2 of product X are better than 1)
  • Clearly targets the same audience (people who like A also like B)
  • etc.
• Also it can be a great bundle if it was something you were going to buy anyway – like if you put two items in your cart, hesitated and took one out, but were then offered the bundle together

Just as in advertising, you need to “target” your bundles and make sure they are as relevant as possible. If the industry continues to deliver irrelevant offers to consumers, then it’s no surprise that ultimately the whole thing will be written off.

I’m sure I am missing many other examples from above – please write in the comments if you have additional thoughts.

Product bundling in the offers and leadgen world
With the above points in mind, you can imagine what is happening behind the scenes in the leadgen/offers world for social gaming.

The product bundle ends up:

• X dollars worth of virtual currency
• Y dollars worth of bundled product (plus Z dollars of built-in marketing expense)

We can look at this from a couple points of view.

For the product seller, if you’re selling a product for $20, and it costs you $5 to make the item, then you have $15 worth of margin to spend on marketing and still break even. Thus as the product creator, you would be excited about buying up to $15 of virtual currency for the user, if it gets them to buy your product. And if you can buy even less currency for them, that generates profit for you and the leadgen networks and publishers between you and the user.

From the user’s perspective, the above deal can work well if the bundled product “makes sense.” If you were already going to buy a Netflix subscription, and you are being offered the same price and you get some virtual currency to your favorite social game, then that’s great.

So when Michael Arrington of Techcrunch writes that it’s bad for users to pay more for in-game currency than if they paid cash, I think that’s just misunderstanding how offers actually work in the aggregate economy:

In short, these games try to get people to pay cash for in game currency so they can level up faster and have a better overall experience. Which is fine. But for users who won’t pay cash, a wide variety of “offers” are available where they can get in-game currency in exchange for lead gen-type offers. Most of these offers are bad for consumers because it confusingly gets them to pay far more for in-game currency than if they just paid cash (there are notable exceptions, but the scammy stuff tends to crowd out the legitimate offers). And it’s also bad for legitimate advertisers.

How offers solve the 1% problem at Point of Sale
Ultimately, the biggest problem that offers solve for advertisers is the 1% problem of e-commerce. That is, at any given time, the number of people “in market” for anything is actually quite small, and the percentage chance that they will actually purchase something is also very small. As a result, if you are at a “Point of Sale” and they have their credit card out, you might as well try to cross-sell and bundle as much related stuff as possible.

The real skill and value created in all of this, of course, is in actually creating useful product bundles rather than the asinine ones I keep seeing. Social gaming and life insurance don’t mix, the same way that Free iPods and life insurance didn’t mix for incentivized leadgen.

This doesn’t mean that offers companies aren’t totally slimy and the industry isn’t broken
I want to make it clear that all of the above isn’t a judgement on whether the offers industry is working or not working. Frankly, it’s probably pretty broken (I’ll leave that discussion for another post). But I do believe that there is some fundamental value being generated, in the long-run, and someone will build a great company around dynamically creating and targeting product bundles at Point of Sale, wherever you are across the internet.

Whoever does figure that out will make a lot of money, and we’ll forget about all of this social gaming stuff.

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