Rafi Mohammed

OK...So When Should You Offer a Mixed Bundling Price Strategy?

Posted on January 18th, 2007 (0 Comments)

In my last blog, I argued that the way most text books and price strategy experts advise you to offer mixed bundles (the Adams and Yellen explanation) doesn’t make much sense in the real world (as a primary driver to mixed bundle). The obvious question you must be thinking is “Rafi, if mixed bundling is arguably the most popular pricing strategy on earth, when should I implement a mixed bundling strategy.” Great question and today’s blog is devoted to answering this question.

First off, I want to clarify some terminology. After reading my last blog, several of my economist friends called me in a huff. To my fellow mixed bundling aficionados, challenging Adams and Yellen borders on blasphemy. I stand by my conclusion that while Adams and Yellen’s mixed bundling explanation makes theoretical sense, it has little relevance in the real world. And I’m happy to go toe-to-toe with any naysayers. If you can provide everyday examples of Adams and Yellen’s theory, I’d love to hear from you!

Back to terminology. I found that my economist friends were mixing up two different bundling terms: (1) mixed bundling and (2) pure bundling. Mixed bundling is the practice of selling products both individually and in a bundle (which is usually priced below the sum of the individual product prices). The Value Meal (sandwich, fries, and soda) at McDonald’s is a great example of mixed bundling. You can purchase each food product individually as well as in a discounted bundle. Pure bundling is the practice of only selling bundles of products. For example, at most all-inclusive resorts, you can only purchase the entire bundle (lodging, dining, drinks, sports, etc.) – you don’t have the option to purchase items individually.

In this blog, I’m going to focus on mixed bundling.

In my experience, here are some reasons why in the real world, companies offer mixed bundles:

  1. Competition. If everyone else offers a bundle discount, perhaps you ought to also. Since most fast food restaurants offer Value Meals, McDonald’s really ought to consider doing so also.
  1. Volume Discount to capture diminishing value. Purchase a large volume of our related products and we’ll give a volume discount. The All-Clad Stainless 9 Piece Cooking Set is priced at $550, a $300 savings compared to if you purchased each piece individually. I really don’t need both a 2 quart and 3 quart saucepan or a grill pan set for my cooking needs – but at such a volume discount, it makes sense to buy the bundle (the discount captures the diminishing value I have for extra cooking pieces).
  1. Provide Information/Convenience. When there are a myriad of choices for customers to select from, bundles can help provide information in this uncertain environment. Check out the wide range of the services offered at your local car wash – there are too many for me to understand! What services should you buy? Bundles typically offered at car washes (e.g., bronze, silver, and gold packages) offer information on what services constitute a good, better, and best car wash.
  1. The notion of providing extra “value” to customers. I hear this explanation all of the time (from senior managements of Fortune 100 companies to CEO’s of mom & pop shops). Let’s face it, a discount often compels us to purchase products that we otherwise would not buy. Still don’t believe me? Think of your shopping trips to Costco. How many of you purchased the exact products you had planned to buy when you entered the store? If you did, you have more pricing will power than I do! I can’t resist the temptation of a great deal (how can you say “no” to 10 mangos for $5.99).
  1. Price discriminate between buyers of individual products and bundles. Suppose McDonald’s finds that its customers that only purchase sodas (e.g., to quench the thirst of a hot day) are willing to pay more than customers that purchase sandwiches and fries. A discounted bundle price will implicitly sell that soda at a lower price relative to customers that only purchase a large Diet Coke.

As pricing strategists, the above listed five reasons are the fundamental drivers for offering mixed bundles. In one of my next blogs, I’ll discuss my opinion that most bundles in a mixed bundling strategy offered in today's market are discounted more than they should be.

I think it’s time for practitioners to step back and reevaluate why they are offering their mixed bundling strategy. In my opinion, the Adams and Yellen price discrimination/negatively correlated demands reasoning doesn’t cut it in the real world. Ensuring that you are using mixed bundling strategies for the right reason(s) and at the right prices is key to pricing for profits and growth.

Have a question or comment, please feel free to send them to me! I update this blog three times a week – please consider signing up to be notified by e-mail of a new blog post.

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