Rafi Mohammed

How Profitable is Bundling? Lessons From the Rock Concert Industry

Posted on September 6th, 2007 (0 Comments)

I thought it’d be fun to share the results of my Ph.D. thesis today. My dissertation focused on the profitability of mixed bundling (the concept of selling products individually as well as in a discounted bundle aka McDonald’s Value Meal) in the rock concert industry. As you can imagine, being in an economics department where everyone was trying to save the economy or the third world, my “research” wasn’t taken too seriously. That’s ok, I had a fun time anyway. While my friends traveled to out of the way places to work on their economic ideas, every summer I’d follow rock star Jimmy Buffett on his North American tours in search of data, economic insights, good music, and a margarita (…or two). I’ll let you decide what you think of my scholarly research.

Many summer concerts are held at outdoor amphitheaters that have two types of seating: pavilion and lawn. Pavilion seats (closest to the stage, assigned seating, and a covered roof that protects from rain) are generally preferred to those on the lawn.

In the 90’s many of these amphitheaters were using subscription series mixed bundling strategy to sell tickets. Initially, tickets are only sold in bundles that contain 4 or 5 similar sounding concerts. Individual tickets are not sold at this time. For me (as a researcher), this strategy was interesting for two reasons. First, unlike any bundling strategy known to the business world, the bundle price was greater than the sum of the ticket prices (unlike the Value Meals I talked about earlier). This anomaly provided the opportunity to discuss a new pricing concept. Second, approximately 33% of the major amphitheaters in the United States used this bundling strategy. The rest sold tickets individually. Since the same acts played at each amphitheater, I had great “experimental” (selling subscription series) and “control” (individual sales) markets. This allowed me to statistically calculate how many additional tickets a band sold simply because they were included in a bundle.

I discovered that bundling is very profitable and generates impressive growth. By just being included in the bundle, each “dog” act (less popular bands) sold an additional 3,187 tickets. Even the most popular bands sold an additional 724 tickets because they were in the bundle. Given that the average concert attendance was 11,585, this growth is significant. Where did all of these new customers come from? My bet is most customers bought the bundle, which included tickets for some shows that they otherwise not see, just for the security of having a pavilion seat for their favorite concerts. Implementing this pricing strategy resulted in: higher ticket prices (premiums were as much as 20%), 6% to 27.5% more tickets sold for each concert (the cost of accommodating additional fans is negligible), amphitheaters & bands selling additional products (refreshments, parking, CDs, T-shirts, etc.), and bands gaining valuable exposure to new fans. Not bad for a strategy that costs almost nothing to implement.

While pricing strategists have long hypothesized about the benefits of bundling, my work was the first to use real data to test the profitability of bundling. After my dissertation was published in the Rand Journal of Economics (a top economics journal), I (oh…I mean my research) finally did enjoy some validation. My professors actually started acknowledging my presence (instead of awkwardly looking down) whenever they saw me in the hallways! Such is the self esteem crushing life of a graduate student.

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