Product bundles – watch your discounts!

I have worked with several companies to help them streamline their pricing and packaging as a part of my product marketing consulting work.  One issue that I constantly see is that very few companies have caps on sales discounts for bundles.  This is especially important when one of the products in the bundle has a fixed cost.  This occurs when that product is a Professional Services or managed services SKU, a third-party software product you are reselling, or a Microsoft Azure/AWS/GCP product (in a managed cloud scenario, where your margins are even thinner).

Consider the scenario below, where you have two products – Product A, your software product, and Product B, a third-party product you resell.  The only incremental hard cost for Product A is your sales commissions.  For product B, in addition to commissions to your sales team for selling that product, you must pay a $50 royalty to the vendor for each unit sale.

Assuming your products are each priced at $110 on your price book and the bundle is at $200 on your price book (i.e., at a 10% discount).  Assume your sales reps offer no discount to the customer when they sell the bundle, your effective margin on the bundle is 65%. Reason is you are carrying a fixed price for product B in your bundle sale.  65% not great, but it’s a good enough margin. But if your sales reps offer a 50% discount to your customers for the bundle, your effective margin on the bundle drops to 40%. You are probably losing money on this bundle at these discounts – its not even covering your total cost of sales, marketing, development and overhead.

My recommendation would be that you place a limit on the maximum possible discount you offer on such bundles.  I have seen sales discounts as a more significant issue when a bundle includes internal professional or managed services rather than a third-party product. The fixed cost may still be the same, but because it is an internal cost, there is less discipline about discounting the bundle to win the deal. 

If you need help streamlining your pricing and packaging, please contact me via LinkedIn.