Thursday, October 9, 2014

The Cure For Unbundling: Bundling

The "gissel," as I then called it: a no-brainer in a bundled, limited-choice, situation.

There's an ad running on TV about how great it is to get one free checked bag on an airline if you use the right credit card.  Before deregulation, airlines were glad to get passengers.  Flying cost more, but we had more room.  (In those pre-hijacking, pre-terrorism, days you could also say goodbye or hello at the gate to the people who were dropping you off or picking you up, and just walk onto the plane.)  Having to use my credit card to rack up "points" so I can check a bag free is not a big marketing coup with me.

The airlines, and other retailers, have been "unbundling" services in an effort to help the top line of their profit & loss statements.  I remember my career employer doing the same thing at the wholesale level in the '80's and '90's--and for the same reason.  We needed to improve our gross margin rate.  We increased our minimum order, rates for direct labor, and added surcharges for scrap, handling, and delivery.  Activities previously considered "overhead" were turned into "profit centers."

Phone companies have done it.  Hospitals have done it.  Banks have done it.  I have to pay a ridiculous $30 fee to stop payment on a check at my bank, even though I have a substantial CD with them.  That would have been unheard of years ago.  Of course, banks and vendors don't want people to write checks in the first place: they want us to do electronic transfers for everything.  Even though their systems have been repeatedly hacked.  It's hard to think of a service-oriented industry that hasn't "unbundled" in recent decades.

I don't like to be unbundled.  I like it simple--with less freedom of choice.  Take buying a new car.  The American approach has always been to unbundle.  The option list is extensive (as I discovered when I bought my Mustang).  It was tedious to go through the list with my salesman.  By contrast, the Japanese, after they had achieved market penetration with economy cars, offered us three choices: stripped, medium, or loaded.  This may have been because the cars were assembled in Japan and were on the high seas.  Special-ordered cars were more trouble than they were worth to the Japanese when the lead time was 3 months or more.  Or maybe it just reflected Japanese consumer culture.  This practice persists long after Japanese carmakers put up assembly plants in North America.

The equipment level was (and still is) almost entirely dependent on which model you chose.  To illustrate, I'll use my 1983 Mazda RX-7.  (My Honda Civic Si is a poor one, because Honda considers it almost a different car.  Everything is standard: it's the power train that comes at a significant price premium.)

The RX-7 came in three trim levels: S, GS, and GSL.  Here's how Mazda segmented them:

The S (base car) came with narrower tires on steel wheels.  Upgrade not offered.  Limited options, most of which were standard on the GS.  The message was clear: "You want a nicer car, to your own taste or otherwise?  Buy a GS."

The GS came with better interior lighting, upholstery, steering wheel, remote trunk release, an armrest with storage, remote-controlled side mirrors, and halogen headlights.  You got wider tires, but had to pay extra for alloy wheels.

On the GSL, you got everything on the GS plus alloy wheels, cruise control, electric windows, a rear window wiper, a sunroof, and the best stereo.  The only thing I didn't care about was the stereo.  For me, the GSL was a no-brainer.  And I didn't have to spend 40 minutes in the salesman's cubicle, resisting his multiple tries to "upsell" me.

I don't recall the price spread between the trim levels, but it was probably about 10% more for a GS and 10% more again for the GSL.  With several models within a nameplate, how many choices more than three within a model do you need?  Hail to the Japanese for simplifying car-buying!

Then there's the Porsche approach: "You want our fastest car?  We're gonna de-content it and charge you more--much more.  And then we're gonna make attractive things like carbon-ceramic brakes a hugely expensive option on top of that."

Of course, a seller can take bundling too far.  My cable TV plan is one level higher than basic.  It gets me about 10 channels that I want--and 49 that I don't.  I would love to have the "American car-buying plan" for cable: cherry-pick the channels.

Or a seller can take bundling way too far.  Despite the airlines' claims, you have only two choices: unpleasant confinement for an undetermined amount of time (first class), or the same with torture added (tourist class).  For the airlines, "unbundling" simply means allowing the victim to select the instruments of torture.  Independently, years apart, without discussing it, Hotshoe, Watchtower, and I have each concluded that we've taken our last airliner trip.

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