Price bundling
| Price bundling |
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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:
- Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.
- Production set-up costs are high
- The average cost per unit lowers through increased production
- The average total cost of production decreases as a result of increasing the number of different products produced
- Marginal costs of bundling are low
- 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)
References
- Hu N. Tian G., Liu L., Liang B., Gao Y. (2012) Do Links Matter? An Investigation of the Impact of Consumer Feedback, Recommendation Networks, and Price Bundling on Sales, IEEE Transactions in engineering management, Vol. 59 No. 2, page 189-200
- Myung E., Mattila A.S. (2010 Influence of Price on Consumer Meal Choice in a Bundling Context, Journal of Foodservice Business Research, Vol. 13, page 114-126
- Kohli Ch., Suri R. (2011), The price is right? Guidelines for pricing to enhance profitability, Business Horizons, No. 54, page 563-573
- Homburg Ch., Schäfer H. , Schneider J. (2012), Sales Excellence: Systematic Sales Management, Springer Science & Business Media, page 66-67
- Harrison T., Estelami N. (2014), The Routledge Companion to Financial Services Marketing, Routledge, chapter 8
Author: Beata Franczyk
