In a 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. Common examples include option packages on new cars, value meals at restaurants and cable TV channel plans. Pursuing a bundle pricing strategy allows you to increase your profit by giving customers a discount.
Based on Consumer Surplus
Bundle pricing is built on the idea of consumer surplus. Every customer has a price that he is willing to pay for a particular good or service. If the price you set is equal to or lower than what the customer is willing to pay, the customer will buy, as he considers the price a bargain. The difference between what the customer pays and what the customer was willing to pay is known in economics as the consumer surplus. Bundle pricing is an attempt to capture more of your customers’ consumer surplus.
Personalized Pricing
An example: Your car wash offers two services, exterior cleaning and interior cleaning. Using market research and your own experience, you’ve concluded that there are two primary groups of customers. Those in group A are concerned about appearances and are willing to pay up to $15 for the exterior package but only $8 for the interior. Members of group B are less appearance-oriented, but they value comfort; they’re willing to pay $10 for the exterior package and $9 for the interior.
If you were able to charge everyone exactly what they’re willing to pay, you could get $23 from each customer in group A and $19 from each in group B, for a total of $42 from a pair of A and B customers. With personalized pricing, there would be no consumer surplus.
Bundling Benefit
If you have no reliable way of telling whether customers are in group A or group B when they come in, personalized pricing is impossible. In a bid to get each customer to buy both services, you’d charge $10 for exterior and $8 for exterior, as each group is willing to pay that amount for each service. Each customer would produce $18 worth of revenue, for a total of $36 from a pair of A and B customers. The consumer surplus in this case is $6. Look again at what each customer is willing to pay for the two services: $23 in group A and $19 in group B. If you set an interior-exterior bundle price of $19, you’d make $38 per A-B pair, capturing $2 of consumer surplus.
Other Advantages of Bundles
Offering products in bundles provides benefits beyond simply getting more revenue from each customer. It simplifies production and reduces errors. Think about a fast-food restaurant where customers can quickly order the No. 3 or No. 7 rather than separately order a sandwich, fries and maybe a drink. It also heads off pricing disputes with customers. A customer might be perfectly happy to pay an all-in bundled price, yet be turned off by a laundry list of charges that add up to the exact same dollar amount.
One thought on “Determine Optimal Bundling Pricing”