Chris Burry, one of our investors and mentors once told me that there are only two ways to sell things: bundling and unbundling.
With bundling, the idea is to combine products, features, or services and give the customer an all-in-one “bundled” solution. In unbundling, the idea is to let user decide what features he is going to pay for. If that concept seems simple, that’s because it is. People will pay for simplicity or they will pay for specificity. As an example from the non-technical world think of going to a restaurant. At some fast food restaurants people will get a discounted price for a Meal that includes a hamburger, french fries and a drink only if you buy the entire set. That’s a bundled solution. But go to a high-end steakhouse and people will order a specific cut of meat and have it cooked a certain way to their liking. That’s an unbundled – specific – solution.
The hosting industry is no exception to this concept. Customers are given the option of a bundled solution or unbundled solution. An example of a bundled solution might be managed WordPress hosting, wherein there is website hosting AND security AND backups AND caching…you get the picture. An unbundled solution might be buying bare hosting with the possibility of adding different features without necessarily paying for the entire set . But why are these two models so prevalent in the hosting world? As with many things, the popularity of bundled and unbundled solutions in hosting comes down to Pros and Cons that can be understood by even the least technically advanced customer.
And when it comes to the hosting providers themselves, choosing which pricing model works best for their business also comes down to a straightforward list of pros and cons.
Pros and Cons of Bundled Solutions
- Crystal clear pricing – Offering customers easy to understand pricing means that their buying decision is easier. And making it easy for customers to buy is always a great idea!
- Technical complexity is reduced – From the view of the hosting provider, bundled solutions make it easier to offer – and manage – a solution or product that fits the needs of a lot of customers. Having to customize things creates friction and technical debt.
- Easy revenue forecasting – When building a hosting company, proper financial tracking and forecasting can be the difference between strong growth and going out of business. By offering bundled solutions, hosting providers can more accurately evaluate customer acquisition costs, lifetime value, and expected monthly recurring revenue.
- Margin efficiency and exploitation – Some clients won’t need everything that comes in the bundles you offer. In fact, MOST clients won’t use near the resources allocated to them in a bundled solution. This means that they are technically paying for something they aren’t using and that means more margin for the hosting provider. This also means that hosting providers can over-provision servers and support resources, squeezing every last dollar out of the infrastructure they possess.
- Requires figuring out a proper cap on the resources available in each package to limit risk & maintain profitability – If overprovisioning is present in your hosting business than it is important to recognize that bundled solutions can go the wrong way in a hurry. A sudden uptick in customer usage or new client adoption can create technical issues for your entire client base if you aren’t able to stay ahead of the curve.
- Requires setting the right packages in terms of prices and resources included – There are thousands of books and blog posts focused on pricing models for businesses, including hosting providers. Finding a price for your bundled solutions that appeals to the market but also maximizes revenue can feel like as much art as science.
- Revenue will not grow until package price change or until a website owner switches to a higher package – Bundled solutions also mean that most clients are set in how much they pay their provider. Unless the client’s needs change or you offer additional products (like Perfect Dashboard Auto-Updater) it can be difficult to increase individual ARPU.
Billing Based on Unbundled offerings
- Revenue increases automatically with increased usage – With unbundled pricing, anytime a customer needs more resources or adds a service, revenue increases. As a result, the unbundled model is a great way to link cost-of-goods to revenue. No, your margin variance isn’t likely to grow as customers under-utilize resources, but it does protect you from technical ills that can happen when bundled customers take advantage of all the resources included in their purchased solution.
- No need to cap resources – Similarly, because users in an unbundled world pay for all the resources they use, their ability to spend more money is virtually limitless. If they need more servers or email addresses then you can (and should) charge for that.
- No need to set up packages – Oftentimes, hosting companies don’t have a full product development department in-house. As a result, putting together bundles is simply not feasible. By offering unbundled solutions you don’t have to invest the time and energy to create and manage bundles.
- Setting the proper pricing can be tricky – Pricing unbundled services often comes by looking at other hosting providers to see what they charge. But that tactic just creates an echo-chamber where prices continue to decline. One of the reasons hosting providers favor bundles is because they can differentiate their services. In an unbundled business model you can be sure that potential customers are going to evaluate your server prices and specs against the competition. And that means you have to find other reasons – non-technical reasons – to convince those potential customers to buy from you.
- Revenue is tied to the popularity of website owners’ internet endeavors – Since unbundled customers only pay for what they need, your revenue is ties to the success (or lack of success) of their websites. If they never max out their server then they have little reason to buy a bigger server. My suggestion is that if you offer unbundled pricing then you should target potential customers whose businesses are growing. That means that they may need to spend more money with you in the future!
- No overselling, just margin – As customers pay for only what they need in an unbundled world you have the opportunity to cross-sell other products (like email or security) to them, but your ability to upsell (as in a larger server or storage solution) is very limited. Even lightly-educated customers know they don’t need your biggest, beefiest server to power a single WordPress site.
- Forecasting revenue is difficult – Because revenue growth is tied to adding new customers who choose a variety of products, forecasting revenue is tough. Sure, you can look at historical sales as a good guideline, but do you REALLY have a way of knowing how many small, medium, large, and super-sized servers your customers will need in a given month?
As you can see above these models are in large part contradictory. Even though most hosting providers have traditionally offered one model or the other, an increasing number of companies are adding in bundled solutions (like Managed WordPress packages) to their current unbundled offerings. While there isn’t a “Holy Grail” for your pricing model I do believe that constant optimization of pricing model is crucial especially in the reality when growing revenue in hosting industry is become more and more challenging. My advice to you as a hosting provider is to regularly evaluate what appeals most to your clients, evaluate where the market is going, and constantly get customer feedback on the products and services they would like you to provide.
If you are a hosting provider looking for new ways to increase incremental revenue by giving customers new services, contact us here to learn how we can help. Finding new products to offer and sources of revenue isn’t difficult if you have the right partner at your side.