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Does price bundling really work?

May 19, 2010

 

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Price Bundling - always remember to promote your standard pricing or your bundle price will have no credibility

Price bundling – or simply bundling – is a way to leverage greater revenue from a “warm” customer. But does it really work? Bundling can take many forms but typically it involves retailing a “lesser” product/products alongside a stronger one, or selling a group of related products together in a logical package. The impact is to increase sales of an underperforming product on the back of the stronger sales of the stronger product. Or to increase the sales of a group of relatively underperforming products. Result: stronger revenues than would be achieved by selling the products individually.

So, on balance, bundling does work. But can it be made to work better? The key to all price transactions is that discount must only be given in response to a behavioural trait. That’s the first thing to say. At A Brand Day Out, we don’t discourage discounting, we merely state that brands are built on logical presence and strategic behaviour. Discounts are rewards for behaviour, not part of a price/brand perception.

Some companies I know spend all their time giving discount on sales of products just because. A policy of permanent discounts and sales only devalues your brand but also makes it difficult to test and experiment with conditional price offers.

So, if your company is one of those which always offers discounts, then the first thing to say is that bundling may not be as effective for you (save to bundle lower priced products at an even lower price and therefore lower profit).

Let’s now look at a more responsible company. A bundle might be between Product A at £50, which sells well and a lesser product at £30 which has sold poorly. One option is to bundle both products together at a bundled price of £64 – a  discount of 20%. A second option is to offer product B at £14 (a discount of 53%) and keep the price of product A at £50. To the company, both options deliver the same revenue but to the customer which bundle option appears to make more sense?

In the first option, your company has surrendered £16 in potential value for the sake of the sale – presenting an overall discount of 20%. The key to this option is that the normal retail price of either product applies if the customer chooses to buy only one of the products. It must be remembered that bundling has been used for the strategic purpose of selling higher volumes of product B; price value must not be surrendered to those customers who plead to have the discount only on product A.

In the second option, your company has again surrendered £16 in potential value for the sake of the sale but the saving is less clear – it might take them a while to work out that they have saved 20%. To the customer, this is a lesser offer than the first option. The benefit to the company of this option is that product A retains its brand value strengths while product B appears to offer great value. Product A potentially basks in the reflected glory of generosity.

So which option works best? A Brand Day Out has been reviewing available literature on price bundling  and, as you would probably expect, confirms that the first option is more effective than the second. In other words, it pleases corporate strategists AND customer perception. Even though the price to be paid is the same, it is crucial to keep things simple so that customers can understand.

In the first option, all products are discounted ONLY if you buy them all, otherwise prices are standard (reinforcing the actual value of each product). In the second option, only one product is discounted. The customer might only want the lead product (A) and think that frankly he/she is not going to pay the extra £14 for a product they don’t want.

The key to effective bundling is customer awareness of your standard pricing. Surrender standard pricing promotion at your peril, as this is the basis for a pricing strategy which is easy to understand by customers. If your standard pricing is consistent, and promoted, then bundled pricing strategies become easier. Because customers have a reference point.

But here’s a word of caution. As businesses reach maturity, often bundling has developed into a legacy affair where key accounts only buy as a bundle and have no idea about individual prices. This leaves companies who have not consistently promoted standard prices, in the difficult position of “reselling” bundle elements to key accounts who are attempting to reduce the price of their bundle. If there are no price reference points for individual bundle elements, company sales teams face the difficult position of retaining sales of individual products which have no individual price/value reference points. So, once again, the promotion of your standard pricing at all times is crucial.

So, does price bundling really work? The answer is yes, if presented in the right way. But product managers and brand managers need to ensure that the individual components of any bundle are consistently presented at standard price and bundle price in order for the customer to understand that price discounting is in response to a behavioural trait. In this case, buy A and B together and save 20%, buy A or B alone and save nothing.

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