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a blog from young economists at Nova SBE

All kind of Companies do it, from fast-food restaurants to high-tech companies.  Why don’t more companies bundle products together to make products more attractive? Is bundling always a win-win strategy?  

Bundling is a very persuasive strategy used by most of the biggest corporations in the world. This practice is typically implemented when the seller believes that the features of two or more products/services appeal to consumers more as a package than as separate offerings, making it cheaper for customers to buy the products/services as a bundle than separately.

But the main question is: How can firms increase their profits while selling products at discounted prices? And if so, why don’t more companies bundle products together to make products more attractive?

“Bundling is pervasive in several markets, and it works in many cases,” said Vineet Kumar, an assistant professor in the Marketing Unit at Harvard Business School. The truth is that, besides the fact that the items are sold for discounted prices, firms are able to increase their profits by offering bundles since it encourages the purchase of more than one item. Furthermore, this pricing strategy is often a way of creating a larger market for relative low valued products by selling them with a higher value.

Bundles are everywhere, from places like McDonald’s, where you can purchase fries, burgers and drinks cheaper in a bundle (e.g. the Happy meal), to software Microsoft Products like the Microsoft Office which is sold as a bundle of computer software, including Excel, Word, Power Point and more, in a single package for a cheaper price than if all products were purchased individually.

In point of fact, bundling has become one of the most powerful strategies to boost sales or overall profit (Telser 1979; Richards 2006; Schmalensee 1984; Sharpe and Staelin 2010) but also an efficient one in production costs reduction, shipping or carrying (Eppen et al 1991).

This type of strategy can be employed with both revenue or quantity maximization objectives since bundling products may ultimately result in the sale of products that were not being sold separately. Furthermore, it can be an effective tool for price discrimination by means of allowing sellers to segment the market based on consumers’ reservation prices, to introduce brand new products and to build entry barriers for rivals.

Still, it is not always a win-win strategy. Indeed, there are also negative effects of bundling for both consumers and companies.

Even though bundling strategies are generally seen as positive for companies as a way to increase consumption, Gourville and Soman (2001) showed that it might also be  hurtful in terms of consumption. A possible negative effect lies with the fact that as customers become acquainted with the concept of discounted bundling offers, it is expected that they only buy more of these specific products in the future when there is an ongoing promotional campaing (Levy et al. 2004, Hardie 1996). This contingency rises particularly in industries where customers show very low loyalty to the brands in question and the abundance of these campaings is high.

According to some research papers on the gaming industry, if the consumer really wants to get a brand new product now, and only has the option of buying it in a bundle, in theory this will ultimately benefit companies. From this assumption this strategy should translate into potentially higher profits for companies since the consumers have no choice but to get the bundle. This argument is false, and the reason for it is that consumers can postpone their need for buying these products today and wait for a better deal in the future because prices for video games and other kind of electronics decrease over time.

As a consequence, we can conclude that even though it is initially perceived as a win-win strategy both for company and consumer, in reality it is not. In some industries like the electronics’ one, the consumer can save more today and spend less in the future, buying the exact same product for a more affordable price. It is in fact a strategy that explore’s the consumer’s temptation and that is the main reason why it has become one of the most popular strategies across many different markets. It is a two-sided coin that if well applied can benefit both Company and Consumer.

João Cardoso – 695


Author: studentnovasbe

Master student in Nova Sbe

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