Innovation By The Bundle
Consumers have caught on. They know that if they wait around long enough, the hot new product or service they want will come down in price. And so they wait for the bargain, making it tougher and tougher for even the most innovative companies to reap sizable profits for long. What can these companies do?
Bundle products and services in a way that creates a lifestyle solution for the consumer. A lifestyle solution is a combination of products and services that is more valuable than the simple sum of its parts, because it serves the customer from the customers perspective. It can be designed to solve a problem, getting the consumer through a bottleneck caused by a scarce resource like time. Or it can dramatically enhance a consumers enjoyment by elevating the experience of travel or entertainment, for example. Research shows that consumers will pay a premium for such lifestyle solutions and will remain highly loyal once they experience one. Lifestyle solutions also create new opportunities for growth, allowing companies with struggling brands to build new ones based on different value propositions.
The idea is not revolutionary. Simple lifestyle solutions have been around, although not known by that name, since at least 1919, when General Motors came up with an ingenious way of breaking a consumption bottleneck in the auto industry. The eager customer in the showroom often needed more than just a car. He needed the money to buy the car. So GM took a leap out of its traditional line of work and landed in the lending business, with the creation of General Motors Acceptance Corporation. Competitors soon followed. Over time, financing automobile purchases has become more profitable than making them (the average profit margin for GMAC over the last decade was 7.57 percent, while the carmakers was 2.55 percent). Of course, the phenomenon didnt end with lending. GMs in-vehicle communication system OnStar is the latest example of its ability to focus on creating lifestyle solutions. Introduced in 1996, OnStar has reached profitability and is predicted to be the next great source of earnings in the industry.
New Research
What is new about todays lifestyle solutions is the ability to design them more effectively by taking advantage of recent stunning advances in consumer research. In the past, surveying consumers was expensive, clumsy and slow often so plodding that the results were out of date by the time they were gathered and analyzed. In the six-month gap between the start of a traditional survey and the resulting research report, technology, prices and sometimes even consumer attitudes could mutate so dramatically that the results were no longer relevant.
Now its possible to get the results of a complex survey overnight and far less expensively. A decade ago, a telephone and direct mail survey that tested two or three potential product bundles might cost hundreds of thousands of dollars. Today, thanks to new technologies such as email and auto-dialed telephone calls, companies can survey consumers quickly and with minimal intrusion.
Moreover, new software, which even the smallest business can afford, can analyze the data with astounding speed on a desktop computer using complex statistical methods to deliver detailed answers to companies most vexing lifestyle challenges. The result is that the same money buys a survey that can query consumers on scores of combinations, with results delivered in days, not weeks or months.
These advances enable manufacturers and service companies to determine far more rapidly, much more accurately, and at considerably less cost what bundles consumers want most, and what they will pay for them. The emergence of these capabilities offers companies of all kinds extraordinary new opportunities to win with lifestyle solutions.
Evolution Of A Solution
Although a lifestyle solution sounds like an exotic and perhaps dreamy concept, it is, in fact, both practical and concrete. Indeed, it is the third stage of an evolution that many companies are already going through (see Figure 1).
The first evolutionary stage is price bundling, a technique that works across an array of industries, from consumer electronics to hospitality. Hewlett-Packard, for example, once leveraged the connection between digital cameras and photo printers by offering consumers a $75 rebate for buying both together during the holiday season. Thats basically a variant of what restaurants have been doing for many years with prix fixe menus. If you buy a package of three or four courses, you get them for less than if you bought them separately. Not every diner will like its limited choices, but others will appreciate the chefs help in deciding what goes well together and will often be encouraged to have a dessert they might otherwise pass over at the end of the meal.
The second stage is product bundling. In the early days of sending data from your PC across phone lines to someone elses PC, you had to buy an external, dial-up modem for as much as $300. These days, tiny modems are inserted into PCs so routinely that consumers take the bundling for granted. To be sure, product bundling does not always work. Certain cellular phone makers found this out in their early attempts to build in PDAs.
Finally, bundling evolved into its third stage, lifestyle solutions. But the lifestyle solution is not simply an incremental improvement. The thought process to reach it is different. Lifestyle solution bundling requires the manufacturer or service provider to imagine the consumer not as a target with a particular demographic profile, but as an individual with stresses, problems, needs and desires, some of which he might not even be aware of.
To understand lifestyle solutions that solve deep consumer needs or bottlenecks, consider some emerging offerings such as Verizons. Verizon knows that many customers value cell phones most for their potential usefulness in an emergency. So the telco has fashioned a roadside assistance program and tied it to cellular service. For a few extra dollars a month, the Verizon customer is able to press a button or two on the cell phone and summon a nearby towing service (the first three miles of towing are free). The plan also includes the services of a locksmith, a mechanic to jump-start the battery, and a truck with a winch (the customer pays charges over $100).
Not all lifestyle solutions are designed to solve problems. Some are created to enhance experience. For example, in 2001 Apple Computer introduced the iPod, a digital music player about the size of a deck of cards, selling for as much $500. A music lover can store as many as 7,500 songs on an iPod and play them for up to 10 hours without a battery recharge. Then Apple added another component, an online service called iTunes Music Store. A customer can download music from the Internet through any PC and into an iPod for 99 cents per song. So from the consumers point of view, Apple has put itself and its brand at the center of the music business through an adroit mix of hardware, software, and content.
Better By Design
Ideally, lifestyle solutions are broad and flexible in scope, allowing the consumer to bring together only desired components. More important, the solution can evolve over time. For example, the consumer who buys a digital camera today may not want, and should not need to buy, a scanner at the same time. But the lifestyle solution should provide incentive to do so later.
This doesnt mean sellers have forever to attract customers. Research indicates that some related components are almost always bought within a set time period. For example, a consumer who doesnt buy a scanner within four months of buying a digital camera will probably never buy one. The message for the scanner manufacturer: Target that consumer heavily within the four-month window then forget about him.
Lifestyle solution design should also have enough flexibility for the consumer to mix expensive components with low-cost ones. A home theater solution, for example, might include a $2,000 big-screen television as well as a $100 DVD player. The key is not high prices, but profitable combinations.
One cross-industry combination that has proven extremely profitable has been the intersection of insurance with consumer electronics. The extended warranties now available on most electronics sell for only a fraction of the covered goods cost, but can be far more profitable than the electronics themselves. Introduced in the early 1980s, extended warranties provided 75 percent of operating profit for a leading electronics retail chain by 1994.
Once a company accepts these underlying principles, it must determine how to apply them to its particular situation. There are many questions to address, but three are critical: What components will go into the solution? How should the solution be priced to maximize profits? How should the solution be branded?
Missing Links
The only way to get the answers, short of expensive experimentation in the marketplace, is to explore consumer thinking. Our research into these questions for the consumer electronics industry yielded insights every executive should consider in creating a lifestyle solution of their own.
What To Include
Manufacturers tend to focus on creating bundles of existing products, particularly their own, resulting in bundles with mass appeal, not bundles designed for specific demographics. Our research suggests that might be a mistake. For example, in assessing components in a hypothetical home theater solution, men place much greater emphasis than women on manufacturer and retailer brands. Women are far more interested in bundles of goods and services that would put content, such as movies on DVD, in their hands early. That could be an opportunity for a less wellknown electronics manufacturer to woo female shoppers through a partnership with a formidable content provider. It could ally itself with a major media company and guarantee customers early access to that companys movie releases on home video and DVD.
What To Charge
Perhaps the most welcome news for manufacturers that have suffered through price wars is that although consumers continue to focus on the price tag when buying individual TVs, DVDs and such, they are willing to pay premiums for bundles. For the same home theater solution, they are far more concerned about whether a component will become obsolete than how much it costs.
Indeed, our analysis revealed that consumers are willing to pay an additional $400 on a $2,000 bundle of components to be assured that the components are not going to be rapidly outdated by new formats and standards. When asked directly what would keep them from purchasing a solution, price ranked fourth among their concerns, trailing fears of obsolescence, installation difficulty and poor performance quality.
The Role Of Brand
Not surprisingly, consumers will pay a premium for lifestyle solutions produced by certain manufacturers or sold by certain retailers. Less predictable is the impact of particular combinations of brands on consumer preferences. For example, in our home theater solution, consumers saw increased value in combining the top-ranked manufacturer with the top-rated retailer. But they saw no such additional value in the other solutions tested. And combining certain mid-ranked manufacturers with certain retailers can cause consumers to value the solution far less than the combination of their separate valuations. The lesson is that these interactions are not easily predicted and must be tested.
Get A Lifestyle Solution
The same technology and methods just described can be practically exploited to drive lifestyle solutions across a range of industries. Think of elder care. Independent living communities grew up in the 70s and constitute a huge and complex industry. But there is still much to learn about how the components of this industry could be bundled in ways that are even more appealing to an aging population. Testing could uncover consumer feelings about multiple combinations of apartment complexes, recreation activities, transportation options, health care regimens, and the like. Which partnerships should they rely on most? Which rental car company should provide the transportation options, for example, in partnership with which hotel chain for property management?
The ultimate goal, still distant and elusive, is to deconstruct human experience and see it as dozens, perhaps hundreds, of clusters of lifestyle needs. The task of effective consumer testing is to define and understand those needs. And then the imagination must fulfill them. Companies that master the principles of creating and marketing lifestyle solutions will be victorious, with or without the next breakaway product.
Over the long term, the strategy that will reward companies, as well as gratify consumers, will not be the frenzied search for an endless series of hot, new items. It will be the thoughtful assembly of products and services into lifestyle solutions. The bundles will change over time with technology and tastes, not for the sake of novelty, but out of deep understanding of what consumers desire.
