Rafi Mohammed

Shakespeare on Pricing: To Offer One Bundled Price or Break Out Charges Separately, That is the Question...

Posted on May 8th, 2007 (0 Comments)

Over the weekend, I visited my favorite pizzeria that I used to frequent during my college days (20 years ago) at Boston University. The décor hadn’t changed much, many of the employees were still there, and their pizza remains amongst the best I’ve tasted. It was a wonderful visit down memory lane. To satisfy my future cravings, I picked up a delivery menu that proudly proclaimed “Free Delivery” (music to my ears). Given my vocation, I immediately examined the prices and was surprised that they were higher than those on the restaurant’s “dine in” menu. Of course, my crafty pizzeria had baked a delivery fee into their delivery menu prices (as opposed to listing regular prices and adding a delivery fee). So, delivery was free…as long as you paid the delivery menu prices. Not exactly ethical…but did I mention they make excellent pizza?

This experience reminded me of a paper by Marco Bertini & Luc Wathieu (“The Framing Effect of Price Format,” Harvard Business School Working Knowledge, June 2006). Suppose your product is composed of separate components (e.g., core product, shipping, installation). Marco and Luc investigate whether from a pricing standpoint, it’s best to frame price as one singled bundled price (e.g., $2,500 for product, shipping, and installation) or as a compilation of prices (e.g., $2,000 for product, $200 for shipping, and $300 for installation). What they found is that when prices are broken down by service, consumers scrutinize these prices and tend to overweight the importance of these individual price components. For example, I recently wanted to purchase some high-end thank you cards from Crane.com. The cards I selected were $12 (good value) but then they wanted $5.95 for delivery (which I think is ridiculous)…so I did not make the purchase. By breaking out the product and delivery prices, I focused on the high delivery fee instead of the overall value of these premium branded cards delivered to my mail box. Had the prices been framed as $15 plus $2.95 delivery or $17.95 plus free delivery (both very attractive to me)…I’d be writing thank you notes to my friends on Crane stationary. How would you react to Crane’s price framing?

This notion of price framing also works as an incentive for consumers to make purchases that they otherwise would not make. The mantra at most online retailers is: the more your purchase, the higher the delivery fee. In contrast, Amazon offers free delivery on purchases greater than $25. How many of us have made additional purchases that we otherwise would not have made, just to hit that $25 threshold? I fall for this price framing strategy all of the time. Sure I saved $3.98 in shipping…but did I really need that “The Best of the Monkees” CD?

Just today, Bank of America announced that it was offering no-fee mortgages (see “Bank of America Cuts Mortgage Fees” by Ruth Simon & Valerie Bauerlein in today’s Wall Street Journal). Bank of America isn’t going to charge borrowers for loan applications, title insurance, appraisals and flood certifications or require them to get private mortgage insurance. Interestingly, Bank of America is referring to this new pricing structure as part of its “disruptive strategies” to gain market share in businesses where it has been relatively weak…pricing is a key strategy, my friends

Of course, you’d expect that Bank of America will simply bake these fees into its annualized percentage rate. When queried on its rates, a Bank of America spokesman explained that the bank’s rates are competitive “but we’ve never tried to compete solely on price”…a nice spin indeed, but what’s interesting is that by making this simple pricing change, Bank of America feels that it will attract more businesses. Now that’s fascinating!

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