Gray market danger.
There is some danger of gray marketing, the distribution of unauthorized products
through alternative channels. For example, it might be that leading mail order
companies can buy shrink-wrapped products at bundled prices on the gray market
and then sell them for full retail-list price through their catalogs or into
their retail channels. Although the bundling contract forbids this, little tracking
is done. This opportunity is particularly available for mail order companies
that sell both the hardware, peripherals and titles. It is important to factor
in the level of technical support that may be required by so many tens of thousands
of titles reaching the market in a short period of time. If the title is in
any way support intensive, the developer must consider the increased technical
support requirements that this sudden release into the market will generate.
A sliver of SRP.
Bundling deals generally bring between 10 and 18 percent of the suggested retail
price when the total shrink-wrapped product is delivered. If a master disc is
delivered for duplication by the hardware manufacturer, the developer is generally
paid between $2 and $5 per unit. A bundle deal is generally for a minimum of
10,000 units over the course of twelve months. A best-seller, like Icom Simulations'
Sherlock Holmes, Consulting Detective, Volume One, is reported to have placed
150,000 units in the market on both Mac and MPC platforms. It is guessed that
90 percent of these units were moved through bundling deals. The large volume
buyers for bundling deals include Sony, Apple and NEC.
Built into cost of goods.
Manufacturers generally have a budget for bundling built into the price of the
product or the special promotion they are marketing. They will, for example,
build an $80 cost factor into the cost of goods, and will apply this to the
acquisition of three or five titles that will be shipped with the product. Then
they will look for value: the most interesting titles for the least money. This
will allow them to bundle either a highly visible product or more titles in
the bundle. Once an order is placed, say for 20,000 units during a 12-month
period, the manufacturer will ask to have the titles shipped in smaller batches.
The minimum shipment order initially should be at least 1,000 units, and the
reorder number at least 500 units. Otherwise the developer is at a disadvantage
in manufacturing planning.
Approaching a bundle.
The savvy developer will negotiate for payment for the total volume, so that
the manufacturer does not get the 20,000-unit price, and only order 2,000 units.
This negotiation can result in an upfront payment for all the units, which is
unlikely, or a higher price per unit for each shipment quantity. In this way
the developer fixes the delivery schedule and the pricing "ORO" (on receipt
of order). There are three ways to approach bundling: do it yourself (i.e.,
approach the manufacturer yourself), go to a distributor (either Software Toolworks
or Compton's New Media), or wait until the manufacturer comes to you.
In order to build a bundling arrangement
in-house,
it is important to dedicate a salesperson to build a database of CD-ROM hardware
products. There are only about 70 drives on the market, and additionally, sound
boards and other peripherals. The salesperson would then contact these companies,
solicit their interest, and send a shrink-wrapped product for evaluation. This
is a labor-intensive assignment, but it leaves the control and the relationship
directly with the developer. Another alternative is to contact Software Toolworks,
which has a special OEM group of several salespeople, or Compton's. Sometimes
the manufacturer will come to them to obtain a total bundle of titles already
in their warehouses, so that the manufacturer may receive one shipment of five
or more titles directly from the distributor's warehouse. This implies that
distribution through these distributors would enhance the opportunity to do
bundling through their arrangements with manufacturers. This should be carefully
considered, as a developer's choice of distributor is based on many factors
other than opportunities for bundling. The last option is to wait until the
manufacturer comes to you for the product. This is likely to occur if the product
is a best-seller. Manufacturers will not seek out a product that is niche-specific,
but will want to bundle products that have broad appeal.
When to bundle.
It is important to understand that bundling is not appropriate until a developer/publisher
has multiple products on the market. It is unwise to bundle your first or second
product, as this is likely to erode your success in selling the fully priced
retail version of the product. That's because when retailers know it's being
bundled, they won't give it precious shelf space at the same time. In addition,
distributors know not to try to give a title to retailers if it's being bundled.
So there's resistance at both levels. Bundling is also a hindrance to developing
a relationship with a new media distributor prior to having several products
on the market. The distributor will interpret the bundling as a lost opportunity
for his sales of your products. On the other hand, if you have several products
out, say 10 or more, you can "sacrifice" a title into a bundling deal, gaining
revenue and further exposure of your company's product line into a uniquely
qualified market of first-time buyers of the technology.
Bundling at the end.
There has been some discussion in the industry of a strategy for bundling titles
that are at the end of their life cycle. This sounds like a good idea, but has
rarely been tested, since most titles have not sold through the duration of
their life cycle yet. This might be the most appropriate strategy for games,
which have a higher "spike" on selling and a quicker decline in their life cycle.
Bundling should be carefully considered as a part of a product's life cycle
and distribution strategy. Its benefits should be leveraged to best advantage,
and bundling should never be entered into without weighing its impact (successful
or not) on the company's financial plans, positioning and total product strategy.
Joey
Tamer refines the vision, strategy and success of companies --
Fortune 1000, capitalized start-ups and investment fund.
www.joeytamer.com
(310) 245 5310 joey @ joeytamer.com