You are on page 1of 3

25

Ce of p
ye

leb ub
ar
The Pricing Advisor™ is

s
PRICING

ra lic
published monthly by the

tin ati
g
Professional Pricing Society
The
3535 Roswell Road, Suite 59

on
Marietta, GA 30062

ADVISOR

!
770-509-9933
www.pricingsociety.com
Eric G. Mitchell, Publisher
All Rights Reserved © 2008
A P r o f e s s i onal Pricing Society Publication

May 2008

Writer Tim Smith examines the


practice of price bundling and identi-
Price Bundling to
fies which market conditions allow it
to best be applied to increase product
Increase Profits
W
sales and to improve profitability. An
hat is distinctive about strate a contrasting willingness to pay.
adjunct professor at DePaul’s Kell- price bundling vs. other
stadt Graduate School of Business, kinds of bundles? Is price Identifying the Price Bundle
bundling just another Price bundling is practiced in many indus-
Tim is the author of Hawks, Seagulls, form of discounting or can it improve tries. Telecom operators, such as AT&T
and Mice: Paradigms for Systemati- profits? When should an executive in- and O2, both price bundle internet and
cally Growing Revenue in Business vestigate price bundling? What must be phone. In some instances, they include
known before one can conclusively state mobile and digital television as well. Mi-
Markets. He also serves as chief edi- that price bundling is good? Valid ques- crosoft offers Word, Excel, Outlook and
tor of The Wiglaf Journal. For more tions like these deserve some answers. other products in MS Office Suite price
bundles. Even supermarkets will, at times,
information you can contact him at: In its simplest form price bundling, as offer discounted dishes in exchange for
tsmith@wiglafjournal.com. defined here and as used by others, in- loyal shopping; and this, too, can be de-
volves taking two distinct products and scribed as a form of price bundling.
offering them in a single bundle sold at
a single price. This is done to improve Bundling is not the same as using mar-
profits by making one offer to two dis- ket dominance to force acceptance of
In This Issue: crete market segments which demon- related products. Microsoft has repeat-

Page 1 PPS Happenings  1984-2008, Now in its 25th year


Price Bundling to Increase Profits
Upcoming Events
Page 4 t European Workshops: Hilton Metropole Hotel & Conference Centre–
London, England; 10-11 June, 2008.
Can Your Trade Funding
Be Better Managed? t Summer CPP Workshops: Hyatt Harborside Hotel–Boston, Massachusetts;
July 17-18, 2008.
Page 7 Workshops Include:
1. Making Profitable Decisions
Why High Demand Doesn’t 2. Best Practices and Strategies: Pricing for Profitability
Always Mean High Price 3. Business-to-Business Pricing
4. Price Structure & Strategy
5. Practical Approaches to Pricing Software and Related Products
Have a pricing article, case study
or story to share? Send articles to For the most up-to-date information about PPS events and programs, please
editor@pricingsociety.com. visit our website at www.pricingsociety.com.
PRICING ADVISOR
The 3535 Roswell Road, Suite 59
Marietta, GA 30062
770-509-9933
A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com

edly found itself in the courts for the both parties better off. Furthermore, Figure 2. There are not two distinct seg-
latter practice, most recently in Europe such a bundled discount offered in one ments, but rather only one and the de-
with respect to its Media Player tie-in to year may lead to the expectation of the mand for Rho is low.
the Windows operating system. (Other same discount being applied to a premi-
potential examples of this include: Sony’s um product the next year. This may then Likewise, the “willingness to pay” plot
selling of Blu-ray and Intel’s use of mar- sap the profits out of the most valuable in the case of the purchasing agent’s ploy
ket development funds to drive sales of products. would have a single point, where the
chip sets related to its core microproces- agent is simply driving the transaction
sor line.) Using demand for a dominant What separates price bundling from price towards the origin and away from
product to help sell a secondary offering market dominance bundling (and the profitability (see Figure 3).
is a bundling strategy which seeks to purchasing agent’s ploy) is the second
improve profits by creating barriers to part of the price bundling definition: The Rho and
exclude competitors. However, a differ- that it aims to improve profits by offer- Omicron Example
ent logic underpins price versus market- ing a single offer to two discrete market The profitability of price bundling can
ing dominance bundling. Specifically, segments which demonstrate contrasting be demonstrated with a simple example.
the former is a market driven strategy, willingness to pay. Suppose the market has two distinct
while the latter is competition driven. segments. The Rho fans have 600,000
Contrasting Demand is Key members, and the Omicron lovers have
Price bundling is also not the same as As an example, the willingness to pay for 400,000 members.
interacting with a single purchasing two products—Rho and Omicron—can
agent who requests multiple products in be plotted along two axes. This shows Rho lovers are willing to pay $110 for
a single transaction but at a lower collec- that the market has two distinct seg- Rho, but only $65 for Omicron. Mean-
tive price. When dealing with distribu- ments. One values Rho more; and the while, Omicron lovers are willing to pay
tors, many manufacturers will find an other prefers Omicron. You can now see $170 for Omicron, but only $50 for Rho.
agent who requests the entire order, but the contrasting willingness to pay (see The situation is summarized in Figure 4.
at a lesser bundled price. In other words, Figure 1).
the agent seeks a discount at the seller’s Let us further assume that Rho and
expense. Rather than falling for such a By comparison, the “willingness to pay” Omicron are products with no vari-
ploy, the company should first investi- plot in the case of market dominance able costs. Such products can be found
gate whether the customer values certain bundling would not have two segments. in markets dependent upon intellectual
items more than others, and then deter- For instance, if Omicron is the domi- property or large infrastructure projects,
mine if the increased sales volume war- nant product and Rho is the second- such as pharmaceutical, software, infor-
rants a discount which would still leave ary product, the plot would appear as in mation, telecom, and transportation.

Figure 1: Contrasting Willingness to Pay Figure 2: Market Dominance Bundling

 May 2008
PRICING ADVISOR
The 3535 Roswell Road, Suite 59
Marietta, GA 30062
770-509-9933
A Pro f e s s i o n a l P r i c i n g S o c i e t y P u b l i c a t i o n www.pricingsociety.com

In this market profit maximization Clearly, $175 MM is better than $134 example were zero, this was not a re-
along single product lines would en- MM, and so price bundling leaves the quirement and was used only for sim-
courage the company to offer both Rho company better off. Even though the plicity.)
and Omicron at high prices correspond- sum of the individually profit maximiz-
ing with the higher willingness to pay. ing prices is $280, and the bundle price Price bundling does not have to be
As such Rho lovers would buy Rho at is $175 (a sizable $105 discount), the pure. Companies can offer both the
$110, and Omicron lovers would buy bundle is more profitable. Price bundling bundled product and the stand-alone
Omicron at $170. can also be said to leave customers better products alongside each other to maxi-
off because Rho lovers now have access mize profits. Bundling also does not
Any customer seeking both Rho and to Omicron, and Omicron lovers have have to be static. The grouping of goods
Omicron would have to pay $280, and access to Rho. and services can evolve and grow—or
our map of customer demands indicates dissolve—overtime; just as the product
that no buyer is willing to pay that sum. Executive Decision Making strategy evolves.
With these prices, the company would Price bundling can improve profitabil-
gain $134 million in revenue (see Figure ity. To some, the bundling exhibited in To execute bundling convincingly, pric-
5). the previous example may appear to be ing strategists must reach beyond their
a form of deceptive trickery in which a internally focused efforts of creating list
However, the company could instead discount increases profits. Yet, it is not. prices, reporting transactional prices,
offer the Rho-Omicron bundle. Such There are distinct features to the market and managing discounting routines.
a bundle would be priced at the mini- and a cost structure which enables price They must have market research that in-
mum sum of the cross product willing- bundling to improve profits. dicates contrasting demand between at
ness to pay between the two bundles. least two discrete market segments.
In this case, it would $175. At $175, As discussed, to profit through bun-
the Rho-Omicron bundle would be val- dling, you must have at least two dis- When the strategists understand the
ued by both Rho and Omicron lovers. crete market segments with contrast- structure of the market they serve, they
As such, all market participants would ing demand for two distinct products. are in a better position to uncover the
purchase, and the company would gain It is also favored by offerings with low hidden profits that may be unleashed
$175 million in revenue (see Figure 6). marginal costs. (While the costs in the through price bundling.

Figure 3: Purchasing Agent’s Ploy Figure 4: Contrasting Demand

Figure 5: Single Product Line Profit Maximization

Figure 6: RhoOmicron Bundle

May 2008