Price bundling

From CEOpedia | Management online

Price bundling is a type of price discrimination. Price bundling is understood as a combination of 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. This type of price discrimination is practised in many sectors for example in the hardware and software sector and in the mobile phone sector. In particular, price bundling is used by companies that want to make their mark as system suppliers face the question concerning to what extent price bundling should be used to market different system components (T.Harrison, N. Estelami 2014)

Every company that provides different, possibly complementary services must decide whether to offer them each a separate prices or to bundle them at a special bundle price. Usually, but necessarily, the bundle price is lower than the sum of the individual prices. If only the bundle alone is offered, that is referred to as pure price bundling (Ch. Homburg, H. Schäfer, J. Schneider 2012, page 66) If, however, it is also possible to buy the individual products separately, we speak of mixed price bundling. The aim of price bundling is to exhaust the willingness of different customers to pay for different products. Price bundling is practised in many sectors. Examples include the hardware and software sector and the mobile phone sector. In particular, companies that want to make their mark as system suppliers face the question concerning to what extent price bundling should be used to market different system components. Furthermore, our observations reveal that more and more suppliers are using price bundling to counter the increasing price pressure from buyers (Ch. Homburg, H. Schäfer, J. Schneider 2012, page 66) There are two key underlying dimensions that can be used to classify the various forms of bundling strategies:

  • bundling focus (product or price bundling)
  • bundling form (pure or mixed)

Conditions for an effective price bundling

Price bundling is most effectively when:

  1. Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.
  2. Production set-up costs are high
  3. The average cost per unit lowers through increased production
  4. The average total cost of production decreases as a result of increasing the number of different products produced
  5. Marginal costs of bundling are low
  6. Customer acquisition costs are high

Advantages of price bundling

Main advantages of price bundling are:

  • The customer is presented with attractive bundled offers instead of simple discounts for individual products.
  • If a supplier is forced into price, this may be an expedient approach concessions by the buying power of individual customers, but does not want open price concessions.
  • Price bundling brings improved profit
  • Price bundling reduces the complexity in managing the customers based on their purchase type (Ch. Homburg, H. Schäfer, J. Schneider 2012, page 66)


Examples of Price bundling

  • For instance, many mobile phone companies use price bundling to offer customers an all-inclusive package that includes a phone and a data plan. This type of bundling allows the company to bundle items together and offer them at a discounted price, while still making a profit.
  • Another example of price bundling can be found in the software and hardware industry. Companies such as Microsoft and Apple use price bundling to bundle together their products such as computers and software in order to offer customers a discounted price.
  • The entertainment industry is another sector where price bundling is used. Companies such as cable and satellite providers often offer bundle packages that include a variety of channels and services for a discounted price.
  • Price bundling is also used in the travel industry. Airlines and hotel chains often offer package deals that include flights, accommodation, and other services at a discounted price.
  • Finally, in the retail industry, retailers often bundle together products in order to offer a discounted price. For example, a clothing store might bundle together a shirt and a pair of pants for a discounted price.

Limitations of Price bundling

Although price bundling can be a successful pricing strategy, it is not without its limitations. These include:

  • Complexity - Price bundling can be confusing to customers, as they may struggle to distinguish between the components in the bundle and their individual prices. This can lead to confusion and dissatisfaction, which can damage customer relationships.
  • Loss of customer choice - Price bundling means that customers are not able to pick and choose which individual products they want. This can be particularly disadvantageous for customers who only require one of the components in the bundle.
  • Loss of competitive edge - Price bundling can detract from a company's competitive edge, as customers may be less likely to shop around for better prices if they believe that the bundle provides them with the best value for money.
  • Low margins - Price bundling can be attractive to customers, but the discounts given on individual items may lead to low margins for the company. This can lead to reduced profits and can be counter-productive in the long term.

Other approaches related to Price bundling

One of the other approaches related to price bundling is to offer discounts based on the number of products purchased. This approach offers customers discounts when they purchase a certain number of products at once, such as "buy two, get one free" or "buy three, get one at 50% off." This type of price bundling encourages customers to purchase more items in order to save money.

Another approach is to offer customers discounts when they purchase items in bundles. This approach typically involves packaging multiple items together and offering customers a discounted price compared to buying the items separately. This type of price bundling encourages customers to purchase the bundle rather than individual items.

A third approach is to offer customers discounts when they purchase items at certain times. This could involve offering discounts for early purchases, such as pre-ordering, or discounts for late purchases, such as end-of-season sales. This type of price bundling encourages customers to purchase products at certain times in order to save money.

In summary, price bundling is a type of price discrimination used to encourage customers to purchase more items or to purchase items at certain times. Other approaches related to price bundling include offering discounts based on the number of products purchased, offering discounts when items are purchased in bundles, and offering discounts when items are purchased at certain times.


Price bundling — recommended articles
Optional product pricing — Product line pricing — Price-Taker — Discriminatory pricing — Skimming pricing strategy — Trade discount — Customary pricing — Differential pricing — Captive pricing

References

 

Author: Beata Franczyk

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