Price bundling is combining several products or services into a single comprehensive package for an all-inclusive reduced price. Despite the fact that the items are sold for discounted prices, it can increase profits because it promotes the purchase of more than one item.
Pricing Bundling Examples:
- Detergent and dryer sheets
- New phone with a data plan
- Bake at home pizza and a large soda
For example, mobile phone retailers frequently bundle the prices of several products and services together for their new customers. They offer the phone itself with a package that also includes the 2-year phone plan, internet access, and phone charger. This bundle benefits the customer because it provides them with all the tools they need for their phone all at once and it benefits the mobile phone retailer because they are selling the customer supplementary products and services other than just a phone.
The main appeal to sell things in a bundle is that you can introduce new or complementary products packaged with a consistent high seller. Many businesses do this to try to promote new products and get customers intesrested enough to buy more.
Advantages and Disadvantages
Bundle pricing has many advantages. The most important one is it that it allows companies to sell their lesser known or unpopular products with the popular ones. It will also help attract different kinds of buyers: buyers looking for deals, buyers looking for convenience or buyers looking for advice on items that complement each other. Some consumers will be spending more than they initially wanted when they see an offer they like (if you offer the product that they already wanted to buy with something they wanted to try but never got to it). Product bundles have lower marketing cost because you are promoting two or more products with an effort and resources for one.
No matter how great a strategy is there is always a downside to it. The biggest disadvantage for this one is that it can lead to cannibalization of your products that can be bought outside of the bundle. For example, you are selling a laptop and a printer together, but also separately. Because of this more printers could be sold through the bundle than on its own. This does cause lower profit for that particular product. There is also a chance that some consumers won’t buy something if it can’t be bought separately because they feel forced to buy more. So it’s crucial to choose the right products for the bundle.
Product bundles are very popular among customers. They make their lives easier because they save them time looking all around the store for each product, they help them decided on products they weren’t sure about trying them, etc. When done right, bundle pricing strategy drives more sales and profit for the companies, which is why it’s one of the most used ones.
There are two basic bundle pricing strategies, which are pure bundling and mixed. Let’s see what each of them means and how you can apply them.
- Pure Bundling
Pure bundling is when products are only sold together. In some cases, products don’t exist outside the bundle. The best example for that are TV channels offered by cable providers. They offer a number of packages and each one has a different combination of channels. If you want a specific one, that is offered in only one package, you have to get all of the others from that one. For example, if you want HBO, you will have to pay for HBO2 and HBO3 too, and other channels that go with it (depending on the provider). When you think about it, it makes sense for such products.
Pure bundling has three subcategories: joint bundling, leader bundling, and mixed-leader bundling.
- Joint bundling is when the two products are offered together for one bundled price.
- Leader bundling is when a leader product is offered for a discount if purchased with a non-leader product, accessory, etc.
- Mixed-leader bundling is a type of leader bundling with the added possibility of buying the leader product on its own.
- Mixed Bundling
Mixed bundling, also called custom bundling, is when customers are offered to purchase a bundle or separate products on their own. Consumers are offered complete cable, internet, and telephone packages. The price will depend on the level of service that the package provides. If you choose high-speed internet and maximum channels, it’s going to be much more expensive than getting a package with low-speed internet and minimum channels. Each of these services can be bought separately, but it’s just like the restaurant example – it will be more expensive.
Nonlinear pricing is a broad term that covers any kind of price structure in which there is a nonlinear relationship between price and the quantity of goods. An example is affine pricing. A nonlinear price schedule is a menu of different-sized bundles at different prices, from which the consumer makes his selection. In such schedules, the larger bundle generally sells for a higher total price but a lower per-unit price than a smaller bundle.