Why Unbundling Works

Why Unbundling Works

To unbundle is to “market or charge for items or services separately rather than as part of a package.” It’s no secret that startups are unbundling everything.

Fintech companies unbundle traditional bank services. Proptech unbundles real estate. Travel tech unbundles the hospitality industry. Edtech is unbundling the university. D2C is unbundling CPG. Streaming services have unbundled cable. We’ve written about how work tech is unbundling the company.

Understanding why unbundling has been so successful helps us understand how late-stage startups will evolve and where new early-stage opportunities might exist.

Why do we bundle and unbundle?

When considering bundling and unbundling products and services, we have to look at it from the perspective of both the company and the customer.

Companies bundle to try to drive incremental revenue from their customers by providing them additional value. The easiest customer to win is always a current one by selling them something new or additive. Therefore, bundled offerings are the domain of larger, established companies with customer bases interested in receiving incremental value.

Companies usually unbundle when they’re trying to win customers against a larger competitor. Offering an unbundled product is the natural state of the startup. When a startup focuses on doing one thing really well, they can generate an initial excited user base that’s most dissatisfied with their current offering. If the startup does that one thing really well and keeps improving, they can go mainstream and win an even bigger customer base. I would argue that a startup cannot begin life as a bundled offering — it would be an unnatural state.

Customers like bundles because they save money. Companies tend to offer better pricing on bundles vs piecemeal, so customers get more for less. Bundles are also convenient for customers. Buying multiple services at once from a single provider with a single bill is easier to manage than multiple providers and multiple bills.

Customers like unbundling for two main reasons. First, best exemplified by the unbundling of cable, customers don’t actually use the entire bundle, so they feel like they’re overpaying for what they get. Second, unbundled products, as noted above, are usually the singular focus for the company offering the product, so they tend to provide a better experience.

Components of a good unbundling

Opportunity to unbundle exists generally when a customer is displeased by the value a current bundle provides, but the company thinks it’s providing tremendous value. The disconnect between the two sides may be on the quality of product or service, price, or both, and it creates a willingness for the customer to buy something new amid stagnation. Bonus points if the customer dislikes the company he or she is purchasing the current bundle from.

We’ve written that every startup solves a cost, convenience (time), or moral problem for its customer. More often than not, unbundling startups should lead with the elements of a cost-focused strategy: we’ll offer you more and better for less.

Netflix offers a huge library of streaming content, more and more of it proprietary, for $8.99 per month. That looks pretty attractive compared to $50+ per month for cable. Bonus points since few people like their cable company. Robinhood unbundled stock trading from traditional brokerages, made it mobile-first to cater to millennials, and offered it for free.

When you can’t compete on cost (price), you need to compete on convenience (time) or moral grounds. Google unbundled search from directories and did it 10x better, saving the consumer time. Dropbox unbundled cloud storage from large incumbents and did it 10x better, saving the consumer time. We’ll leave the moral examples for now since they get more abstract.

The inevitability of rebundling

If startups are unbundling everything, does that mean there will be nothing left to unbundle in the future?

No.

Bundling and unbundling is a natural state of flow for any product or service category. Small companies unbundle one piece of the existing offering, do it really well, and gain customers. Then small companies that want to become really large companies add more services and ultimately create new bundles, which creates an opportunity for disruption by new small companies. In this sense, there’s a sort of fractality to unbundling.

Source: Wikimedia Commons

Airbnb is moving into a bundling phase with its purchase of HotelTonight. We can expect more types of accommodation offered on Airbnb’s platform. Uber is bundling bikes, scooters, and other forms of transport to its core rideshare offering. Tesla is bundling batteries and solar panels to provide a total clean energy solution. At some point, new companies may emerge to pick away at pieces of these bundles.

Fundamentally the unbundling-rebundling cycle forces innovation. When a startup unbundles something, they have to do it better than incumbent bundles to survive, which raises the bar for current and future players. Uber and Airbnb are far more innovative than the companies they initially unbundled, and the companies that ultimately unbundle them, even if it takes decades, will be more innovative still.

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Startup, Technology