Bundling ft. Amazon Prime and My Personal Monopoly; Conjuring Scenius #40
Suthen's newsletter on the future of work, building businesses and financial independence
Happy Monday!
I really enjoyed writing this week’s newsletter. I give my thoughts on Shishir Mehrotra’s essay on the 4 Myths of Bundling and make my own connection with the idea of creating a personal monopoly.
I also launched my podcast with Packy McCormick on the idea of conjuring scenius. It’s a mind-altering topic and I’d highly recommend giving this one a listen. Check it out on Spotify or this direct link here.
My quick take on the killing of George Floyd. I think it’s great that people are raising awareness on social media (tweets, IG stories and etc). I particularly enjoyed this post by Niroja Arul. With that said, it would be far more meaningful if we took a serious look at ourselves and understand the deep-rooted nature of this problem.
An area that I’m particularly annoyed about is the way we recount history. The stories and lessons we pass along are centered around the caucasian race. Most of us have missed out on entire generations of lessons, stories, and heroes simply because most history books omit non-caucasian people (amongst other marginalized communities).
What happened to George Floyd and countless other people is the product of a deep, societal, and cultural imbalance that will require the effort of everyone to correct.
🧩 Bundling ft. Amazon Prime and My Personal Monopoly
Every once in awhile, I come across an essay that really captures my attention. You need to read through it a few times to understand it. Status as a Service by Eugene Wei is one example.
A more recent example is this essay by Shishir Mehrotra - founder of Coda, who also previously led the YouTube team at Google and sits on the board for Spotify.
If there's one person who understands product bundles, it's him.
Here's the high-level summary of his post. I've added my own take to his ideas by applying it to the Happy Meal, Amazon Prime, and My Personal Monopoly.
We all think of bundles as a telecom play, which in most of our minds, leads to a rip-off. We are forced to pay for things we didn't necessarily ask for/want.
With available cash at an all-time high, many industries are due for a consolidation. Unlike generations in the past, we'll see new levels of micro-consolidation as well. We'll see large tech companies buying out smaller ones and combining different offerings. We'll also see influencers combining audiences and products, Shopify stores merge and newsletters bundled together (imagine if you can get three of your favorite newsletters for the price of 2).
It's rather myopic to view bundling as just a product feature. You can bundle audiences, users/customers, employees and etc. I expect to see entire businesses and marketplaces being built to enable the bundling of audiences, influencers, products, and businesses.
Now let's explore the four myths.
Myth #1: Bundling is bad for consumers and providers
Shishir makes an important distinction in how we should view users.
SuperFan: This is someone who fits two criteria:
They would pay the a-la-carte price for the channel. This means that they are fairly far along the price elasticity curve for the good (perhaps to the inelastic point)
They have the activation energy to seek out the good and purchase it.
CasualFan: Someone who would value the good if they had access to it, but lack one of the two SuperFan criteria ー either they aren’t willing to pay the a-la-carte price for the good or don’t have the activation energy to seek it out, or both.
NonFan: Someone who will ascribe zero (or perhaps negative) value to having access to the good.
The biggest misconception is that bundles should provide the most value for the SuperFan. At the surface level, this feels right. When you're building a product, you're taught to focus on a small number of 'super-users' and not get distracted with the casual users. This is still true.
When you're at the bundling stage, you've moved past the idea of building a product that works. You're trying to cross the next chasm of getting mass adoption. Bundling is theoretically a tool that can accelerate that process.
However, when it comes to bundling, your super users become a smaller subset of the overall audience. Most of your value is derived from casual fans. For example, sports leagues wouldn't be able to survive if it decided to focus on monetizing the SuperFan. You have to be able to attract and give access to the casual fan. The person who might only just watch the Super Bowl or come through for the occasional basketball game.
The real challenge is continuing to evolve the product using the feedback/ideas from the SuperFan DESPITE getting most of your revenue/value from casual fans. Your SuperFans will be the ones who push you to meaningfully change the product. Many decision-makers make the mistake of listening to the 'average user' thinking that they'll have the vision to point you in the right direction.
When done well, bundling produces value for both consumers and providers by giving access for (and revenue from) CasualFans.
Myth 2: Revenue from bundles should be allocated based on usage
The idea of allocating a bundle's value based on usage is really an accounting phenomenon. It's simple, relatively easy to explain as it shows a linear relationship between the consumer and the bundle component.
It does not address the economic value of the bundle components.
TV: Despite having comparable stats, why is ESPN so much more valuable than the History CHannel?
Malls: Let's compare a mall with a Walmart in it vs. one that may have a 'mom and pop' grocery store. The one with Walmart is A LOT more valuable. (Yes, you can think of shopping malls as one massive real estate bundle).
Shishir proposes an alternative valuation method.
Marginal Churn Contribution: The best way to distribute money to provider X within a bundle is to ask “if I were to remove X from the bundle, how many people would churn?”. Similarly, you could ask the same question from a subscriber acquisition perspective (“If I were to add X to the bundle, how many new subscribers would I earn?”) ー also known as Marginal Subscriber Acquisition Cost Contribution (aka MSacC).
Based on the definition above, the value of a product in a bundle would be:
Basically, you can value a product in a bundle based on how many customers will leave (on a percentage basis).
While this formula is useful, it doesn't really help create new bundles. To help solve for that, Shishir proposes the following framework.
So what does this mean exactly?
The wholesale value of a product (the value it contributes to the bundle) is largely dependent on the overlap in SuperFans. You'll also notice that:
"Product X" people have a bias toward bundling with products that have a large overlap in SuperFans.
Bundlers have a bias toward attracting products that have a distinct audience.
Shishir proposes that the optimal price is when formula 1 and 2 are equal to each other. Again, I'd focus less on the actual math and more on the forces determining the value of the bundle/product.
A couple of caveats to note:
Determining the right retail price and SuperFan value is tough and impractical.
SuperFan % can change. The value of ESPN during COVID-19 is a lot different vs. 'normal' times.
Substantial differences in pricing require a bit more nuance.
Myth #3: Bundles will always feel like a rip-off to consumers since they represent a lack of choice
McDonald’s meals feel like a deal, yet any standard telco bundle feels like a ripoff. Why is that?
The first issue is the lack of transparency in a-la-carte prices. We know exactly how much a burger, fries, and drink would cost separately. Therefore, it's easy to understand the value of an entire meal. On the other hand, we don't understand the value of individual channels or offerings from our local telco provider. This makes it tough for us to appreciate the true value of the bundle.
For example, very few of us understand the costs of running a national wireless/wireline network across a population that's fairly concentrated in specific regions. When we look at the economics, there's a massive capital outlay required to build a network that can support the Canadian population wherever they go.
We also need to account for:
Casual Fan Value: The value that a CasualFan would place on the products in the bundle.
Negative Value goods: Goods that are undesirable to have access to or might be suboptimal to their alternatives. For example, I might not want the fries in a meal because it is unhealthy and the drink isn't that valuable if I can just get a drink at home. At that point, the McDonalds meal isn't as valuable anymore.
Integration Value: The value a particular consumer ascribes to the integration of the sets of products in BundleY that the consumer sees as being part of the bundle. This is a big one as many of us place a high value on convenience. For example, the browsing and recommendation experience in Netflix or Spotify is a big reason why we pay for the subscription despite seeing cheaper alternatives.
Invisible Products: The value of a bundle is based on the products that the consumer sees and uses. This is an incredibly important point. For example, the value of Amazon Prime (when accounting for all the features that the membership provides) is a lot greater than the value that different customer groups see. If bundle pricing decisions were made purely based on total product value, Amazon Prime would likely be a lot more expensive vs. what it is today.
Let's take a look at all the benefits that Amazon Prime provides (all 28 of them).
FREE Two-Day Shipping
FREE Same-Day Delivery
Prime Now
FREE Release-Date Delivery
FREE No-Rush Shipping
Amazon Day
Prime Video
Amazon Channels
Prime Music
Amazon Music Unlimited
Twitch Prime
Whole Foods Market
Amazon 4-star and Amazon Books Stores
Amazon Prime Rewards Visa Signature Card
Amazon Prime Store Card
Amazon Dash for Prime
Amazon Fresh
Prime Wardrobe
Prime Pantry
Personal Shopper by Prime Wardrobe
Deals and Discounts, Compliments of Amazon Family
Prime Early Access
Amazon Elements
Prime Reading
Amazon First Reads
Membership Sharing
Amazon Photos
Amazon Channels
Guess where I found all this information?
It's relatively hidden on a random Amazon help page. You'll never find all of this information presented to every single user. Each person sees a combination of the features above and places a value based on that.
When accounting for all the factors mentioned above. The consumer value of a bundle is seen as:
Myth 4: The best bundles are narrow and have very similar products so they make sense to consumers.
Shishir uses math to prove the opposite: The best bundle is one that minimizes SuperFan overlap and maximizes CasualFan overlap.
Intuition would suggest that bundles should include similar products (include all the sports content together). Based on the information above, this couldn't be farther from the truth.
We already proved that bundlers have a bias toward attracting people with entirely different audiences (see Myth #2). Even from a consumer perspective, you are better off adding a product that someone else (ideally a current non-subscriber) would be a SuperFan of (vs. adding something that would be redundant to the existing SuperFans).
To see this practice, let's circle back to two examples.
The Happy Meal
Why else would it make sense to require toy customers to purchase a hamburger with their toy? The toy gives a unique fun experience for the child while the parent gets to buy relatively cheap, tasty food.
Amazon Prime
Let's summarize the categories of benefits that the Prime membership targets:
Free shipping
Streaming of music, movies and TV shows
Access to exclusive game content
Exclusive discounts/perks at Whole Foods
Exclusive products (food, pantry, clothes, pretty much anything)
Access to books/magazines
Option to subscribe to popular TV channels (HBO, Showtime)
The toy equivalent in Amazon Prime's bundle is the opportunity stream TV shows/movies and gaming content. Amazon literally built/acquired two powerhouses (Prime Movies/Music and Twitch), with completely different SuperFan audiences and latched it on to the Prime Membership.
The Future
Bundles are everywhere. The older the industry, the more likely you're consuming their products via a bundle (banks, insurance, TV, music, food and etc).
Bundles aren't limited to products. There are massive implications when you start applying the frameworks above to pretty much anything including:
Cities
Revenue Streams
Audiences
Product Features
Content (Newsletters, Podcasts, Essays)
Time (past vs. present)
With the internet, I believe we will see bundles between more disparate parts. For example, imagine an entertainment bundle that features the greatest hits across different genres and generations powered by Epic Games.
Even the way Shishir presented this essay was a bundle in and of itself. To present his idea on bundles, Shishir targeted channels that have different SuperFans and CasualFans:
Created a podcast with Patrick O’Shaughnessy (Invest like the Best Podcast).
Built a presentation format for people who are visual learners
Mocked up a summary table (at the beginning of the post) for people who want to get a quick overview of social media
My Personal Bundle
From an individual perspective, creating bundles requires an extremely open mind. You need to remove yourself from conventional thinking and think bigger when it comes to exploring what you like and don't like.
David Perell calls this the personal monopoly.
Another way of thinking about the personal monopoly is to think about yourself as a bundle.
Schools taught to keep our personal bundle as narrow as possible. In fact, the more narrow your bundle is the better off you'd be.
The internet changed that. The more abstract you are, the more likely you'll thrive as a digital citizen.
My advice: Do what excites you. Don't overthink it. Some questions to ask: What fires me up these days? What's the most interesting idea I'm thinking about right now? What's an intellectual puzzle I can't stop trying to solve? It doesn't matter if it doesn't fit together.
Your personal bundle will be better off.
🔮 Conjuring Scenius
Throughout history, there are moments in time where we witness remarkable accomplishments from a group of individuals.
A little known example: The Eagle and Child pub in Oxford, England.
“Patrons of The Eagle and Child wrote three of the five best-selling fantasy series of all-time within an eighteen year period - The Lord of the Rings, The Hobbit, and The Chronicles of Narnia. It is here, on Tuesday mornings, that C.S. Lewis, J.R.R. Tolkien, and the other members of The Inklings of Oxford met to read, discuss, and critique each other's work.
Tolkien read drafts of The Lord of the Rings to the group, and they provided both criticism and encouragement in turn. The Inklings were so impactful on Tolkien’s writing that he dedicated the first edition of The Lord of the Rings to them, writing, “What I owe to them all is incalculable,” and singled out Lewis in particular by saying, “only by his support and friendship did I ever struggle to the end.”
The Eagle and Child played host to a Scenius, the major driving force behind much of the world’s progress.”
If you don’t want to read the full 10,000-word essay, Packy and I did a podcast to explore this idea.
We talk about three important topics:
What are the ingredients of a Scenius?
Why do Michael Jordan’s Bulls qualify as a Scenius?
How do we create a Scenius? What does it look like in the age of the internet?
Highly recommend giving this a listen!
For those of you who want to follow Packy’s work, I’d recommend checking out his newsletter called Not Boring. He makes some incredible connections between pop culture and today’s topics. He also features guest writers across different fields/interests every Thursday.
Thanks again for reading this week’s newsletter. If you can just comment on what you think is interesting, what you find confusing, and what you think is boring or irrelevant, that would be really helpful.
Until next week,
Suthen