The Economics of the Bibshort Team Bundle

RedWhite Apparel has a Bibshorts Team Bundle. By using it, customers can save 20% on their bibshort purchase. In this article, I will explain how the Team Bundle is sustainable for RedWhite despite being offered at a discount.

Please note that the Team Bundle's discount is currently set at 20% for a minimum purchase of 4 pairs of bibs (as of 16th August 2022). RedWhite will periodically review the cost structure of the bundle and make adjustments to the discount amount and minimum pair requirements in response to cost changes. This is done to keep the Bundle sustainable from a margin perspective.

The Cost Structure of a Single Bibshort

RedWhite's bibshorts have the following cost structure :

1. Cost of Goods (COGS) : the cost of manufacturing and shipping a bibshort from Europe to RedWhite's Singapore warehouse.
2. Customer Acquisition Cost (CAC) : the cost of paid advertising to acquire a paying customer.
3. Shipping Cost : cost of shipping a bibshort worldwide on DHL & FedEx
4. Fulfilment Cost : cost of paying for labour at the warehouse to pick and pack a bibshort order. This is charged on a per-order basis.

Through economies of scale, RedWhite can reasonably drive down COGS, but it eventually plateaus. One can't keep pushing cost of manufacturing down as it also erodes margins for the manufacturer and makes it unsustainable for them. 

This leaves Shipping & Fulfilment costs as the only levers for me to pull to drive cost down. 

On a per-bibshort basis, there's a tight limitation to this. However, the math changes when a customer orders multiple pairs of bibshorts.

The Cost Structure of a Bundle of Bibshorts

When a customer purchases more than 1 pair, the economics of a RedWhite order changes. Specifically :

1. Shipping Cost / bibshort drops : The cost of shipping a pair of bibshorts is only marginally less than the cost of shipping 4 pairs. Shipping 4 pairs means that marginal cost increase gets ammortised over 4 pairs, driving cost / bibshort down. 
2. Fulfilment Cost / bibshort drops : RedWhite's fulfilment cost is made of a fixed labour fee per order + a marginal fee on any extra items. The more marginal items in an order, the lower the total fulfilment cost / item.

When a customer purchases more than 1 pair of bibs, RedWhite saves money on shipping cost and fulfilment cost for the incremental bibshort.

The critical breakeven comes at 4 pairs. At this quantity, the marginal profit earned exceeds RedWhite's free cash flow needs on a per-order basis (corporate speak for over-earning on an order).

At this point, I have a choice :

1. Pocket the extra margin (and pay higher corporate taxes)
2. Reinvest it on the customer by offering a better price + lowering RedWhite's customer acquisition cost (tax-free)

From a tax perspective, it's a much better deal for me (and the customer) to simply offer customers a 20% discount on 4 pairs. The customer gets a great deal + they tell their friends about the 4 pair minimum (lowers cost of acquiring new customers).

To add a cherry on top of this, the more customers purchase Bundles, the faster RedWhite's inventory turns over and the more free cash flow the company earns in a calendar year without paying more company tax.

And it's all sustainable from a margin perspective.

The Team Bundle is a Win-Win for Everyone. However do take note of the special clause in the Returns Policy.

If you're able to get word out to friends about RedWhite's bibshort Team Bundle, please do so. Gather friends and tell them to give RedWhites a try. Ask them to join a group purchase and explain to them how the economics of it works.

While you're at it, I recommend reading the Returns Policy. There's a special clause in there for Bundles. 

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Are you someone who introduce a friend to the Team Bundle? Or are you someone who was introduced to RedWhite by a friend who wanted to buy a Team Bundle? Leave your reply in the comments below 👇