Published by MBA Skool Team, Last Updated: November 05, 2014
What is 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.
Hence, this concludes the definition of Product Bundle Pricing along with its overview.
This article has been researched & authored by the Business Concepts Team. It has been reviewed & published by the MBA Skool Team. The content on MBA Skool has been created for educational & academic purpose only.
Browse the definition and meaning of more similar terms. The Management Dictionary covers over 2000 business concepts from 5 categories.