Why bundling made sense?

As part of the TC Global Investments Investor Relations (IR) team, I was involved in pari-passu fund-raise
for real estate project overseas. The services that were bundled together were as follows:

 IR team charged a success fee once the funds were remitted.

 Legal Services Fees
 Due Diligence (DD) Fee – Outsourced to two different companies, DDA and DDB 1.
o DDA usually projected more conservatively and appealed to more risk-averse clients
o DDB was more realistic in its valuation

Consumer segmentation and percent are given below.

Consumer Type Traits WTP Elasticity

Consumer Type 1 Most sophisticated but rarest of clients, Very High Highly price inelastic
value time above everything, and want but highly time-
Bankers to run the transaction with sensitive
minimal involvement themselves and
willing to pay a high premium for it

Consumer Type 2 Sophisticated clients but not time- Very High Highly price inelastic
sensitive. Appreciate the risk that goes
with any investment but wants bankers to
carry the burden with minimal
involvement themselves.

Consumer Type 3 Straightforward clients but risk-averse. Moderate to More price-sensitive

Don’t want to pay a premium on the High than 1&2 but less
offerings but willing to pay a premium on than 3&4
risk-aversion.
Consumer Type 4 Clients with past or current issues with the Low for Highly elastic for
financial system, the legal system (Legal Admin/Succes admin/success fee but
would mean wrt outstanding cases against s and Due highly inelastic for
the business)2 diligence fee. legal fee
They are open to paying a premium for Very high for
legal and related services but still bargain legal fee
hunters w.r.t admin fee.

Consumer Type 5 Bargain hunters for success/admin fee, no Low for Highly elastic for
outstanding legal issues but highly risk- Admin/Succes admin and legal fee
averse s and legal fee. but inelastic for due
Very high for diligence
due diligence

1
The to us was 0 as both the firms were on retainer and had to generate quarterly reports based on project
progress and any changes in business environment. The clients were not aware of this.
2
Legal issues would mean not guilty verdict in court of law, or outstanding issues in consumer court,
environmental cases etc. Clients with offenses of moral turpitude were refused our offerings
 fee

Why Bundling?

A first-degree price discrimination could not be followed despite assessing a potential WTP for each
category as information exchange and communication between clients was unmonitored. Any leak of
differential pricing would lead to loss of credibility for the firm in a highly competitive environment.

WTP Each Category

 WTP for each service Client # Success Fee Legal Fee Due Diligence Fee Sum
Potential Fee NA
100,000 30,000 10,000 140,000
Consumer Type 1 1
110,000 30,000 5,000 145,000
Consumer Type 2 1
100,000 30,000 10,000 140,000
Consumer Type 3 2
85,000 20,000 30,000 135,000
Consumer Type 4 2
75,000 50,000 5,000 130,000
Consumer Type 5 4
80,000 20,000 30,000 130,000

Additionally, if the services were not offered as a bundle then the total potential revenue would be 3:

3
Assuming MC is negligible for upto 500 clients
Success Fee Clients Revenue
110,000 1 110,000
100,000 2 200,000
85,000 4 340,000
80,000 8 640,000
75,000 10 750,000

Legal Fee Clients Revenue

50,000 2 100,000
30,000 4 120,000
20,000 10 200,000

Due Dilligene Fee Clients Revenue

30,000 6 180,000
10,000 7 70,000
5,000 10 50,000

Total Revenue 1,130,000

With Bundling:
Price # of Clients Revenue/Profit Total Surplus CS Potential Revenue Lost DWL
145,000 1 145,000 1,335,000 - 1,190,000 1,190,000
140,000 2 280,000 1,335,000 5,000 1,055,000 1,050,000
135,000 4 540,000 1,335,000 15,000 795,000 780,000
130,000 10 1,300,000 1,335,000 35,000 35,000 -

Thus, bundling of services was a more efficient strategy due to the reasons outlined above and a
revenue increase of 15%.

2) P<AVC

A well-renowned Middle Eastern real estate and infrastructure developer, seeking a footprint in India by
establishing a corpus of 2,000 Cr. by allocating only 15%-20% (300-400 Cr.) of the total towards
affordable housing in the 1st phase and remaining towards infrastructure development.

The costs for the affordable housing in Sq units are delivered are outlined below 4.

4
The MC, AVC, and TC are assumed to be time independent despite fluctuations in costs of materials.
Additionally, 500k sq units of area constructed is a considered equal to 1 economic unit as cost differential is
within that range is negligible.
 INR Cr. per sq/Units
Q Revenue Contribution to PE Contribution to Group Fixed Cost TVC P AVC MC ATC
1,000,000 200 40 10 400 220 2,000 2,200 2,200 6,200
1,500,000 300 60 15 400 325 2,000 2,167 2,100 4,833
2,500,000 500 100 25 400 503 2,000 2,010 1,775 3,610
3,500,000 700 140 35 400 658 2,000 1,879 1,550 3,021
4,000,000 800 160 40 400 735 2,000 1,838 1,550 2,838
6,000,000 1,200 240 60 400 1,065 2,000 1,775 1,650 2,442

7,000

2,400

6,000

2,200
5,000

2,000
PER SQ. UNITS

4,000

1,800
3,000

1,600
2,000

1,400 1,000

1,200 -
1,000,000 1,500,000 2,500,000 3,500,000 4,000,000 6,000,000
Q

AVC MC P Fixed Cost ATC

Reason for Selling below AVC
For the fist 3 years the firm was not expected to cross the 2 Mn. Sq units each year. However, the
offering price was still 2000 INR/Sq. units, despite higher competitor prices and lower than AVC at those
quantities for the following reasons:

1. With all approvals in place, the firm envisaged establishing credibility with local bodies for
infrastructure development, projects with high ROI.
2. Cheaper access to capital in domestic market - The chances of receiving a higher rating are greatly
enhanced by credit history, cash flow, regular audits etc. which the firm planned to follow by high
inventory-turnover. The interest cost is between 8% and 12% depending upon credit rating.
3. Establishing relationships with supply chain stakeholders which the firm foresaw provided the
following benefits:
a. Higher Accounts Payable cycle
b. Establishing forward contracts to mitigate risks against volatility in steel and cement prices.
c. Gaining priority delivery in case of supply shortage

As evident from analysis above, each of the points mentioned above would support the decision of the
Firm to bid for and sell at lower than AVC under the affordable housing scheme to gain a higher ROE
overall.