Can the Convenience of “One Stop Billing” Bungle Your Bundle?
Given my interest in bundling, I’m always game for new insights on this popular pricing strategy. In the category of “you never know what will be popular,” I was surprised at the strong response I received on my bundling blog titled Why Do I Have To Buy Extended Cable to Get HBO. The overall theme of the close to 50 emails I received on this blog was eerily similar. As my friend George snapped, “Rafi, I get my cable, telephone, and Internet from my cable company. My cable company’s ‘one stop bill’ is one of my highest monthly bills…higher than my electricity or gas!” Similarly, Linda emailed “I was just looking at my $136 monthly cable bill last night and decided it’s too high.”
One of the standard “yada yada” features of bundling services is the notion that consumers will value receiving one bill for all of their bundled services. But what I’m realizing from Linda’s and George’s comments is that the absolute size of a “one stop bill” can be a negative attribute to bundling. Makes sense right?
The notion of big bills are bad dates back to a 1979 academic paper titled “Prospect Theory: An Analysis Under Risk” by Daniel Kahneman and Amos Tversky. Kahneman and Tversky made a fascinating discovery about how consumers, in general, code financial losses and gains. Discovery 1: consumers prefer a series of small losses as opposed to one big loss (this is why people buy insurance). Discovery 2: consumers prefer one big gain instead of a series of small gains (this is why people buy lottery tickets). The punch line of these discoveries is that consumers code losses differently than gains.
This insight has had revolutionary implications to both economics and marketing. This work has so influenced the field of economics that Kahneman was awarded the 2002 Nobel Prize for his work on prospect theory. In a “sort of” similar vein, prospect theory has won the endorsement of informercial entrepreneur Ron Popeil (seller of such gadgets as the Pocket Fisherman and the Inside-the-Egg Scrambler). In his Showtime Professional Rotisserie infomercials, Mr. Popeil rarely mentions his product’s $209.75 price. Instead, he frames price as “5 Easy Payments of $41.95.” So why does this master salesman convey price in this manner? The Beverly Hills based informercial king and the Swedish Nobel Committee both realize that consumers prefer a series of small losses over one big loss…
In line with prospect theory, follow-up interviews with George and Linda reveal that their large “one stop bill” was the impetus to trim their cable services. George even went so far as canceling his cable television service. My good friend now gets his media fix courtesy of an antenna for local shows (which is great for his HDTV), increasing his Netflix subscription, and downloading individual shows from iTunes. When I enquired how Linda and George would have acted if instead of one large bill, they received several lower dollar amount bills for each service. Both responded these smaller bills would have fallen below their radar screen. Thus, they would not have reduced their services.
So what’s interesting is that one of the long heralded benefits of bundling can actually be a curse for pricing strategists. When you are designing your product or service bundle, don’t “bungle your bundle” by ignoring the effects that prospect theory can have on your pricing strategy.
