Product bundling
In marketing, product bundling is offering several products or services for sale as one combined product or service package. It is a common feature in many imperfectly competitive product and service markets. Industries engaged in the practice include telecommunications services, financial services, health care, information, and consumer electronics. A software bundle might include a word processor, spreadsheet, and presentation program into a single office suite. The cable television industry often bundles many TV and movie channels into a single tier or package. The fast food industry combines separate food items into a "combo meal" or "value meal". Unbundling refers to the process of breaking up packages of products and services which were previously offered as a group or bundle.
A bundle of products may be called a package deal; in recorded music or video games, a compilation or box set; or in publishing, an anthology.
Product bundling is most suitable for high volume and high margin products. Research by Yannis Bakos and Erik Brynjolfsson found that bundling was particularly effective for digital information goods with close to zero marginal cost, and could enable a bundler with an inferior collection of products to drive even superior quality goods out of the market place.
Most firms are multi-product or multi-service companies faced with the decision whether to sell products or services separately at individual prices or whether combinations of products should be marketed in the form of "bundles" for which a "bundle price" is asked. Price bundling plays an increasingly important role in many industries and some companies even build their business strategies on bundling. In bundle pricing, companies sell a package or set of goods or services for a lower price than they would charge if the customer bought all of them separately. Pursuing a bundle pricing strategy allows a business to increase its profit by using a discount to induce customers to buy more than they otherwise would have.
Rationale
Bundling is most successful when:- There are economies of scale in production.
- There are economies of scope in distribution. This can be seen in consumer electronics bundles where a big box electronics store offers all of the components for a home theatre setup for a lower price than if each component were to be purchased separately. The big box electronics store can exploit its economies of scope, as they distribute and sell a huge range of home theatre products.
- The marginal costs of bundling are low.
- Production set-up costs are high.
- Customer acquisition costs are high.
- Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product or service. This is particularly the case when a non-specialist consumer has information asymmetry when trying to buy all of the components of a home theatre. He/she would need to learn about all of the product specifications and the requirements for accessories used with the main items. For example, with Home Theatre in a Box, a consumer can feel confident that all of the included speakers are of the correct impedance and power rating and that all of the included cables are the correct models.
Consumers have heterogeneous demands and such demands for different parts of the bundle product are inversely correlated. For example, assume consumer A values a word processor software at $100 and a spreadsheet processor at $60, while consumer B values a word processor at $60 and spreadsheet at $100. Seller can generate a maximum revenue of only $240 by setting a $60 price for each product—both consumers will buy both products. Revenue cannot be increased without bundling because as the seller increases the price above $60 for one of the goods, one of the consumers will refuse to buy it. With bundling, a seller can generate revenue of $320 by bundling the products together and selling the bundle at $160. Thus, bundling can be considered a form of price discrimination.
Venkatesh and Mahajan reviewed the research on bundle design and pricing in 2009. A 1997 study by Mercer Management Consulting, in Massachusetts stated that good bundles have five elements: the package is worth more than the "sum of its parts" for the consumer; the bundle brings order and simplicity to a set of confusing or tedious choices; the bundle solves a problem for the consumer; the bundle is focused and lean in an effort to avoid carrying or including options, goods or services the consumer has no use for; and the bundle generates interest or even controversy. Number 1 can be read as simply that a bundle should cost less than buying each item separately; however, even if the bundle were to cost the same in dollars, a bundle may still be an appealing value proposition for a consumer, as they do not have to hand-pick each accessory and add-on item.
Bundling is often thought of mainly as a value pricing strategy, in that product bundles often cost less than if each item were purchased separately. However, bundling can also have other strategic advantages. For example, when a grocery store is making up a gift basket, they can use the design of the basket item list as a way to promote new products or brands that a customer may not know or as a way to liquidate merchandise that is not selling well. Also, even though many bundles are less expensive than all of the items if purchased separately, in some cases the bundle costs more than if each item was purchased separately; this tactic is particularly effective in high-end retailing where conspicuous consumption and prestige pricing elements come into play. A well-off home theatre enthusiast with a very high budget may find a $10,000 home theatre package attractive, even if it costs a bit more than buying each item separately, because this is an impressive total cost.
Varieties
Pure bundling occurs when a consumer can only purchase the entire bundle or nothing at all. There are two sub-categories of pure bundling:- Joint bundling, where the two products are offered together for one bundled price, and
- Leader bundling, where a leader product is offered for discount if purchased with a non-leader product, accessory or other item.
Advantages and disadvantages
Advantages:- Help the company sell some unpopular products and speed up inventory clearance. Product bundling combines the best-selling products and unpopular products with less inventory by setting reasonable prices to increase the attractiveness, so that consumers can buy combination products to help the company reduce inventory.
- Help the company generate more sales and maximize profits. Product bundling can maximize consumer surplus so that consumers feel that they have obtained additional items, so customers are more likely to spend a total of one time to purchase multiple products. This can help the company increase total sales revenue by increasing the average order value, average transaction value, and the amount of each transaction, because multiple products are more expensive than a single product.
- Enable the company to promote more differentiated products with lower marketing costs. The company can spend the same energy and cost to promote two or more products at the same time.
- Help consumers reduce decision-making pressure. Merchants use matching algorithms to set up bundled products that meet the needs of consumers, thereby guiding customers to choose options that meet their needs and reducing their decision fatigue. Bundles have the effect of reducing search costs.
- Decreases competition.
- Reduces consumer choice: consumers may be forced to buy bundles which don't contain all the things they wanted, and contain things they don't want, and may even be pushed into buying inferior products. For example, two companies both sell a bundle containing a computer and an operating system, but one has poor-quality hardware and one has poor-quality software. The consumer wants to buy each company's good product, but can't unless they pay for two computers and two operating systems and throw one of each away. A new company which sells only hardware or only operating systems also has to persuade the consumer to throw away a purchased product; this is a barrier to market entry.
- Can drive up consumer costs.
- A method of price discrimination.
- Product bundling may lead to the cannibalization of branded products. These products can be purchased outside of the bundled sales package. For example, if a company sells bundled products and individual products at the same time, then the bundled products will get more sales, which will reduce the profit of the individual products.
- When consumers cannot buy certain products individually, they may not buy them because they feel that the bundled sales package forces them to buy more products.
Software
Early microcomputer companies varied in their decision to bundle software. BYTE in 1984 observed that "Kaypro apparently has tremendous buying and bargaining power", noting that the Kaypro 10 came with both WordStar and Perfect Writer, plus "two spelling checkers, two spreadsheets, two communications programs and three versions of BASIC". Stating that year that a computer that weighs 30 pounds "really isn't very portable", Creative Computing concluded that "the main reason that the Osborne was a success was not that it was transportable, but that it came with a pile of bundled software". Compaq, by contrast, did not bundle software, stating that "You remove the freedom from the dealers to really merchandise when you bundle in software... Why should you be constrained to use the software that comes with a piece of hardware? I think it can tend to inhibit sales over the long run." MacWrite's inclusion with early Macintosh computers discouraged developers from creating other word processing software for the computer. Many companies sold multimedia upgrade kits—a CD-ROM drive, sound card, speakers, and what Computer Gaming World described as "a boatload of bundled software"—during the mid-1990s.