Hard bundles & soft bundles: what’s the difference from a digital service provider perspective?

Last week, we wrote about the growing importance of mobile operator partnerships in helping digital merchants acquire new users in emerging markets. Such partnerships are commonplace for streaming services. But for those companies who have not teamed up with carriers it’s important to know: how exactly do these deals work?

The main model of cooperation today is called hard bundling. Mobile operators often sell service packs as a hard bundle where the consumer pays a fixed amount for a fixed amount of call minutes, text messages and mobile data. Third party services are bundled in the same way, with access to the digital service coming as part of the fixed price pack.

Mobile operators use these bundle offers to sign up new subscribers or have existing ones upgrade to a more expensive service pack, targeting both prepaid and postpaid users. In order to trigger the buying decision from the consumer, some “cookie” is usually provided to them: either a free trial is given to consumers, an extended trial is given in case of services which already have a free trial available, or the service is sold at a significant discount. The most common model is a very long free trial that can be between 6 to 12 months long.

Vodafone offers 24 months of Spotify Premium to users who upgrade to the Red Entertainment pack. Spotify usually offers subscribers 1 month of free service

To compensate for the lower pricing, service providers usually get a minimum guarantee of revenue from the mobile operators. The mobile operators receive a bulk amount of service licenses from the provider and handle everything related to marketing, customer acquisition and authentication. Once the “cookie” offer runs out, customers either have to purchase access to the service directly from the service provider or the mobile operator continues to bill the user on their monthly phone bill.

For service providers, hard bundles are a great way to acquire new users for very little effort, as the mobile operator is doing the heavy lifting. But there are a couple of issues with hard bundles that merchants need to be aware about:

  • Carriers manage the user activation and revenue collection in case of hard bundles. From the merchant perspective this happens inside a black box and the merchant cannot impact the user journey or conversion at the end of the “cookie” offer
  • A majority of users churn out after the bundle deal ends, as there is no seamless transition to paid accounts, especially in case of prepaid users who can not be charged to their phone bill
  • Carriers have no motivation to continue promoting the service to their users as their goal is to have subscribers upgrade their carrier service packs, not continue using the digital service

As a result, hard bundles usually result in the following for service providers:

Hard bundles & soft bundles: what’s the difference from a digital service provider perspective?

While the initial effort of getting new users onboard is taken care of, merchants still need to work on bringing back the churned out users and find a way to convince them to start paying for the service.

The other approach to mobile operator partnerships is soft bundling. In this case, the digital service is not directly tied up with a fixed price pack, but offered to mobile operator subscribers as an add-on. With hard bundles, the service access to consumers is fixed to X months, while with soft bundling the approach is more flexible.

For example, the mobile operator might still offer a 3 free trial to a user who upgrades their service pack, but they are also able to offer a 2 month trial to users who top up 5GB of data or extend free trial access by 1 week for every gigabyte of data that the user purchases.

Soft bundles are used to tap into the prepaid SIM card owners that are dominant in emerging markets: 74% in Brazil, 89% in Egypt and 98% in Indonesia. With hard bundles, collecting revenue from users is not an issue once the trial offer runs out because users receive a bill at the end of the month and pay for it.

At the same time, since operators lack the motivation and don’t know how to manage churn, the average lifetime value (LTV) from these users tend to be lower. In case of prepaid users in emerging markets, the average account balance of the SIM card usually ranges between $1 and $5, which means that attempting to charge the user for a full digital service price can fail and incentivises mobile operators to address the problem of maximizing the LTV.

As there are 3x to 50x more prepaid users in emerging markets compared to postpaid users, neither service providers nor mobile operators can ignore the potential. In order to tap into it, the low account balance needs to be accounted for, and several approaches can be used to solve this: implementing split billing (charging $4 weekly price instead of $10 monthly price), grace periods (notifying users in case of failed payments, retaining their access to the service and attempting to charge again in X hours) and tailoring offers (topping up data for extending a free trial to the service).

Soft bundles assume that in addition to a working bundling setup between the carrier and service provider, carrier billing has been integrated as well. This extends the potential of a bundling partnership beyond handing out free trials, as there is motivation also from the mobile operator to continue promoting the service to their user once the initial promotion runs out. As a result of bringing more flexibility to bundle partnerships, the cliff at the end of the promotional period is avoided:

Hard bundles & soft bundles: what’s the difference from a digital service provider perspective?

Hard bundles work great for postpaid subscribers where the mobile operator has the capability to charge users on a monthly basis, while soft bundles enable service providers to also tap into the dominant prepaid audience of emerging markets. Fortumo’s Bundling Platform supports both of these approaches.

Taken the fact that mobile operators are becoming less interested in paying upfront fees to merchants these days, soft bundles as a flexible option with significantly bigger consumer reach is becoming the more dominant model.

If you want to grow your user base in emerging markets through carrier partnerships and bundling, get in touch!