Bundling Theory and Complementarity: How Value Is Created Beyond the Core Product

The majority of firms in digital marketplaces offer almost identical services, as is the case with client booking software, where at a fundamental level, customers can schedule and confirm an appointment on every booking system. However, there is a significant level of variability in the cost of such services, as well as an inconsistent level of service adoption across the various client booking platforms. In addition, some of the client booking platforms have an exceptional level of willingness-to-pay for the same service, when compared to others that offer what appears to be, at first glance, a thoroughly commoditized service. The underlying economic concepts that are used to explain this disparity between the various client booking platforms include Bundling Theory and Complementarity, both of which are extensively covered in Microeconomics and Business Management courses.

Bundling and Complementary Goods in Theory

Bundling occurs when a relationship between various products enables the sale of multiple products as a singular package instead of charging for each component individually. Complementarity between two goods consists of the increase in the value of one good through consumption along with another good. In basic microeconomic standards, if the price elasticity of demand for two goods is negative when cross-price elasticities are taken, then that indicates the two goods to be complementary in nature.

With respect to client-booking software, the bundled features include automated appointment reminders, client notes, messaging, and limited CRM capabilities. Standalone, none of these features are likely to generate much of a profit by themselves, as few small businesses would pay the necessary amount for "reminders only" or "client notes only". With respect to the bundle of features taken together, these products are in fact goods that are economic complements. Automated reminders reduce client no-shows; client notes allow for improved continuity of service between clients and providers; messaging facilitates client-provider communication and coordination; and CRM capabilities allow for reduced total administrative costs associated with booking services and managing client data. Together, these products generate more total consumer welfare than the entire sum of consumer welfare generated and that would be generated from the sale of each product individually.

Why Bundling Raises Willingness to Pay

One significant question around bundled theory is why firms can create a greater willingness to pay, even when the additional features have very low marginal costs (which is quite common in Software development). The answer lies in the way demand is smoothed, and how surpluses are extracted. Bundles of products include a number of different features. However, different consumers use or need different features. When these features are bundled together, each consumer's individual valuation is somewhat offset by the value assigned to other consumers to create a more broad consumer surplus for the entire bundle due to the price being the same for each feature.

Evidence from the industry's experience supports the above reasoning. An example is the auto-reminder systems offered by companies that provide support to salons and clinics. Industry studies show that consumers have reduced No Shows by 20-30% by using reminder systems. Each No Show would be a loss of revenue to the salon or clinic of between $50-$150. The value assigned to the auto-reminders when bundled with the scheduling package represents a large increase in value over what would be assigned to the auto-reminders if they were sold separately.

Bundling versus À-la-Carte Pricing

Three conditions create a compelling case for bundling of goods rather than pricing items individually; those three conditions are (1) low marginal costs, (2) heterogeneous consumer valuations, and (3) the items being complementary to one another. All three conditions are present in a strongly developing market such as SaaS booking platforms; therefore bundling will increase the likelihood of adoption for SaaS booking tools.

Continuing with the example of a salon owner evaluating multiple SaaS booking platforms, when evaluating platforms the salon owner will not be quite as cognitively burdened with analyzing each of the features associated with their decision to select a platform based on pricing alone but will instead think of the overall value of the service being provided and if that overall value is worth the price. As a result, many of the competitive analyses (e.g., Vagaro comparison) conducted on SaaS booking platforms focus on the breadth of features offered rather than feature pricing.

Real-World Examples and Market Structure

Calendly, along with Vagaro, illustrate this trend with two examples of their respective bundles. Calendly’s higher tiers include features such as reminders, integration with other applications and organization tools for teams; while Vagaro bundles bookings/paying customers, marketing tools and managing customers in one bundle. In both instances, the core scheduling capability is the basis of the bundles offered, and their additional services are the revenue-generating factors of the bundles.

From an organizational standpoint within a given industry, combining multiple services into a "bundle" provides a company with a competitive advantage (moat). Once an organization has created a single system consisting of client notes, histories and automated workflows, the switching costs increase dramatically; this is especially true even if a competitor has a similar booking calendar.

Graduate-Level Extensions and Welfare Implications

At the advanced level of bundling, firms offer their customers two-part tariffs and provide customers with both standalone and bundled products at their regular prices. These methods of pricing create complications for analyzing the impacts on welfare because bundling creates greater total welfare through decreasing the transaction costs associated with purchasing multiple products, while at the same time having bundled pricing force out a significant number of low-value customers who may only value one product in the bundle.

Overall bundling represents a strategy for maximizing the perceived value of client-booking systems, decreasing responsiveness to price changes, and re-capturing market value in those areas where the traditional value of the core product has been driven to the level of commoditization through discounts on the core product.