Anant Bibhore

PGP 2010-12, INDIAN INSTITTUTE OF MANAGEMENT RAIPUR

• The practice of marketing two or more products and/or services in a single "package" for a special price. • Examples in consumer services:
• Banks offering credit cards at no annual fee, free traveler's checks and other services for customers with large certificates of deposit • Hotels are offering weekend packages that combine lodging and some meals at special rates. • Airlines offering vacation packages combining air travel with car rentals and lodging

The services offered by most service businesses are generally interdependent in terms of demand • Effectiveness of price bundling is a function of degree to which it stimulates demand in a way that achieves cost economies. . High ratio of fixed to variable costs and a high degree of cost sharing (the same facilities.• Rationale for bundling is based on two realities: 1. equipment. and personnel are used to provide multiple services) 2.

other product at regular price • MIXED-JOINT: a single price is set for two products purchased jointly. • Understanding where each form of mixed bundling is likely to be effective in pricing services. .• Pure bundling • Services available only in bundled from • Mixed bundling • Either purchase one or more services individually or to bundle • MIXED-LEADER: one product at discounted price.

• Basic economic rationale is transfer of consumer surplus. • Assumptions • Seller holds monopoly over at least one element • Independence of demand • Assumption do not hold for services firms because • Firms operate in a competitive environment • Services may have a complementary relationship .

• Relaxation of additivity assumptions .• Reservation price for bundle may exceed sum of reservation prices of individual services.

• Cross-selling – target segments 1 and 2 • Acquisition of new customer – target segment 4 • Retention – target segment 3 .

• Full distribution of reservation prices for A and B may not be known. however demand levels within each segment may be estimated • Demand responses required to change behavior may be deciphered .

volume gains from bundling may be equal in both directions. • When UQA and UQB are approx equal.• UQA substantially greater than UQB. • Mixed-leader gives unidirectional gains • Mixed-joint appropriate for bidirectional gains . then under mixed leader A will be best leader.

• For cross-selling. key to effective demand response to bundling is degree and type of complementarity. Three types of complementarity relationships • Complements due to economies in time and effort • Search economies – real cost to customer is reduced • • Enhancement in level of satisfaction with other products Enhanced customer satisfaction – one-way complementarity • • Enhancement in overall image of seller Bidirectional effects .

reducing real cost of B (PB – RPB/A) • Gains in case of unidirectional complementaries . the gap is (RPD – PD) + (PB – RPB/A) • Ways to reduce gap • Direct transfer of any consumer surplus from A to B • Price reduction on the leader A that increases consumer surplus on A • Selection of B so as to enhance utility of A (so that RPA/B > RPA) • Create search economies. is regularly/continuously purchased & UQA > UQB. A is the leader.• One of the products say A.RPB/A) • If customers buy competitors service D instead of B. • Issue • How to close the gap (PB .

• Such gains are clearly more likely to occur to the extent that bidirectional complementaries is present between the two services . say A • Issue • If customers to add B.PD) + (PB – RPB/A) • Ways to reduce gap • B enhances A • Price of A + B is sufficiently reduced. the gap is (RPD .• One of the services is already purchased.

Customer acquisition is the primary bundling objective when the strategic focus is potential new customer – those buying neither A nor B .

• A must be worth more if B also is purchased from the same source than A would be worth if purchase alone. . • Complementarity probability must be derived from the degree to which B enhances the search attributes of A.• Considering product A & B where A is the leader. • A should be price elastic and B must be complement of A.

the gap between prices and reservation prices can be overcome only if the price discount for the bundle generates a large gain in bundled sales.• In this case. • Bidirectional complemantary relationships are strong but have not been established previously in the consumer’s mind . since customer must evaluate the total package ( A+B).

Any reduction in the number of A-only and B-only buyers presumably occurs because these buyers now purchase the bundle .Assuming most bundling offers will be accessible to current customers. the profit effect will depend largely on the extent of cannibalization due to:• Reduce profit margin among customers already buying both A and B • Reduced number (though at the same margin) of A-only or B-only buyers.

• Even if cross selling is the primary objective.• Select A & B where UQA+B (the quantity of A & B sold without bundling) is small to minimized cannibalization effects. . • In mixed-leader margin product. bundling. selecting products that also generate new customers for both A & B will help offset cannibalization effects. the leader should be the lower • Mixed-joint bundling will be more attractive when the margins of the two services are about equal and when the unbundled sales volumes (UQA & UQB) are about equal.

Conditions leading to success of Bundling Programs Cross-Selling/Mixed Leader •UQA > UQB •(PA – CA) < (PB – CB) •Large consumer surplus on A •B enhances value of A and/or search economies reduce the real cost of B Cross-Selling/Mixed Joint •UQA = UQB •(PA – CA) = (PB – CB) •Each consumer has large consumer surplus on A or on B •Bidirectional complementarity between A & B due either to enhances image of seller or to joint search economies. .

complementarity ( or it can be established ) between A and B.Conditions leading to success of Bundling Programs Customer acquisition/Mixed Leader • If A is a leader. • A valued much more highly than B . demand A for elastic Customer acquisition/Mixed Joint • Demand for A + B elastic ( both A and B composed primarily of search attributes) • B and A complements because of search economies or enhanced •Strong bidirectional value.

Add-on bundling It is an add-on service that will not be purchased unless the lead service is purchased Add-on bundling has the following key features: • Because customer must choose between A and A+B. (i. Mixed-joint form is the only feasible bundling approach. .e PB = 0). • RPB/A = RPB because complimentarity must be unidirectional in the add-on case • Most add-on services will be so intertwined with the lead service that split relationship among service providers are not feasible.

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