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Product bundling
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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 (i.e., low marginal cost) 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 (e.g. banking, insurance, software, automotive) 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.
Bundling is most successful when:
While many well-known examples of bundling are all products or services from the same store or provider, such as the sports package for a car or a grocery store's gift basket, in some cases, cross-industry bundles are assembled and sold. For example, some travel agencies have vacation tour bundles that may include air tickets, rail tickets, a rental car, hotels, restaurants, museum and sightseeing attraction tickets and live music event tickets. These bundles include products and services from the transportation, accommodation, tourism, food service and entertainment industries.
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: (1) the package is worth more than the "sum of its parts" for the consumer; (2) the bundle brings order and simplicity to a set of confusing or tedious choices; (3) the bundle solves a problem for the consumer; (4) 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 (5) 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 (this is the 2nd and 3rd point).
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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 (i.e., low marginal cost) 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 (e.g. banking, insurance, software, automotive) 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.
Bundling is most successful when:
While many well-known examples of bundling are all products or services from the same store or provider, such as the sports package for a car or a grocery store's gift basket, in some cases, cross-industry bundles are assembled and sold. For example, some travel agencies have vacation tour bundles that may include air tickets, rail tickets, a rental car, hotels, restaurants, museum and sightseeing attraction tickets and live music event tickets. These bundles include products and services from the transportation, accommodation, tourism, food service and entertainment industries.
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: (1) the package is worth more than the "sum of its parts" for the consumer; (2) the bundle brings order and simplicity to a set of confusing or tedious choices; (3) the bundle solves a problem for the consumer; (4) 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 (5) 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 (this is the 2nd and 3rd point).