Product Bundle Pricing

Posted in Marketing and Strategy Terms, Total Reads: 2213

Definition: Product Bundle Pricing

It involves combining several products, usually complementary, and then selling it as a single product. It is a common feature in imperfectly competitive industries such as telecommunications, fast food and financial services. Examples include the Microsoft Office suite (which is a bundle of applications for word processing, spreadsheets, presentation, and so on), the McDonalds Happy Meal (which is a bundle of items such as a burger, fries and a cold drink) and bundling of TV channels by cable operators. Product bundling can be used as a means of differentiation and/or market expansion.

Product bundling decision usually involves four factors:

• Volume: Sales volume typically increases with bundling

• Margins: May be reduced

• Exposure: New customers may be attracted and new channels may open up

• Risk: Profitable channels may be cannibalized, resulting on lower sales and lower margins. Care should be taken to avoid channel conflict.

Bundling is most effective when production has economies of scale; distribution has economies of scope; marginal costs are low; set-up costs for production are high; the costs of acquiring new customers are high; the customer base is heterogeneous in its demands. It usually works very well for high volume; low marginal cost goods.

There are different types of product bundling: Pure bundling: the whole bundle or nothing; mixed bundling: customers can choose which items of the bundle they want. Research has found that customers value bundles less than they value the individual products in the bundle; i.e., the bundle has a negative synergy associated with it.

Although bundling usually involves complementary products, it could also combine dissimilar products to target a particular customer segment. In financial services, product bundling can be seen in some insurance packages.

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