The Bundle Pricing Strategy

Monday, August 17, 2015

The bundling of products has long been a pricing strategy for both tangible and digital goods. Nevertheless, many marketers lack a strong understanding of this methodology.

Why bundle goods in the first place? The only reason is to convince consumers to do something that they would not normally do. Full stop. I could end the article there, but I suppose a bit of elaboration might be welcomed by my readers.

If consumers are eager to buy two of your products at full retail price, there is little reason to combine them into a single offering. Should you bundle them together and offer a reduced price for the set, you'd literally be giving up money for no reason whatsoever.

Product bundling can help firms to achieve a number of goals including:

• Increase income (by increasing customer benefit) - If the vast majority of your customers will buy one product or the other (but not both), a bundled offering can yield significant income. Even if the average bundled sales price is only slightly higher than the cost of either product independently, the additional revenue does not represent cannibalized income. Note: firms must be careful to prevent arbitrage, lest profit-hungry businesses buy your bundles and sell each component individually. A noteworthy counter argument to my claim is McDonald's which perplexingly bundles two ten piece Chicken McNugget orders for the price of a single ten piece Chicken McNugget order.
• Increase profitability (through deceit) - Some unethical companies bundle products without offering a reduction in total price. Others actually increase the price above and beyond that of the components. I strongly discourage this practice, as one's reputation can be tarnished and future profitability limited as a result.
• Penetrate a new market - If a new product is introduced and faces strong competition, a bundled item can ride the coattails of an already successful product. Many readers have heard about the court case United States v. Microsoft Corp.. Back in the dot-com days, Microsoft employees realized that although they dominated the desktop, the firm had little control over the ways in which people interacted with the internet. The firm could leverage its existing dominance to gain a foothold in this new market by bundling its web browser (Internet Explorer) with its operating system (Windows). In so doing, the firm would reduce the likelihood that customers would use other web browsers. Who in his right mind would think about acquiring a copy of Netscape if he already had a web browser on his desktop? Producers utilizing this strategy will often be able to take advantage of psycological biases, such as the halo effect.
• Increase liquidity - Offering a limited-time financial discount to consumers who buy multiple products will undoubtedly shift demand forward. This means that companies facing liquidity issues can capture more money in the short term, should the need arise.
• Broaden revenue streams - Many computer manufacturers (with the notable exception of Apple) preload undesirable software (aka crapware) in exchange for a fee paid by the softwares' publishers. These development houses hope to leverage the software installations for their own benefit - often (though not exclusively) via upsells to the end user.
• Disguise lack of value in offerings - Bundles reduce the transparency of the value equation. By selling a unified collection of many goods at a single price point, consumers will find it difficult to compare the bundled offering with unbundled offerings. While it's relatively straightforward to compare a single word processor's price against another, it's very challenging to compare a word processor, some phone support and a training manual with the value of the individual components.

Is bundling right for your business? Maybe. If you'd like to know for sure, contact me for a consultation. While you're at it, make sure to read through the world's greatest software pricing book too.