What is Product and Price Bundling?

Product and price bundling is used as a marketing strategy by businesses, where complementary products and services are combined and sold as a package deal. This bundled price is usually less than the total price of the individual products if they were to be sold separately. When bundled and sold, each product is sold at a reduced price. Using a price bundling strategy helps increase the average revenue per user and also increases the engagement with the user. This happens as the perceived value of the bundled products is more than the individual products.  

Some common examples of product bundles are shampoo & conditioner sets, value meals at fast-food restaurants, vacation packages, cable TV plans, etc. Some brands bundle up their best-selling products with complementary products to get consumers to try them. Using a bundle pricing strategy allows a business to increase its profit by offering customers a discount.  

When is Price Bundling used in a Business? 

Price bundling works as a strategy when the business has a range of products or services to offer or when a business wants to increase the value of low-volume products. Product and price bundling gives the customers ease of functionality and increases the overall experience for them by giving them the most value out of the product or the service. This helps increase engagement with the customers over some time.  

When the product has necessary integrations: Sometimes services are added to the existing functionality to increase value and facilitating integration. When a product needs the added services to function, price bundling helps the customers by providing the functionality they require in one single purchase. This is practiced in the SaaS and subscription market, where subscriptions are bundled up with added features like payment gateways, revenue recognition, and analytics. 

When the company decides to offer discounts on certain products: Discounts are offered by companies to tackle new competition or to increase engagement in the existing consumers. While discounting products can tarnish their perceived value, price bundling helps offset the negative impact by bundling up discounted products. This helps add more value to the purchase and generates more revenue for each purchase. 

While deciding on price bundling it is important to understand how consumers derive value from the product bundle. Combining products that do not increase in value as a bundle could impact sales negatively.  

Types of Price Bundling

Price bundling can be differentiated into two categories –  

Pure Bundling : This type of price bundling is entirely controlled by the business. It gives the consumers only one choice to buy the bundle the way it is or not at all. Pure bundling can be further divided into  

• Joint Bundling offers a combination of two or more products for a single price. This product bundle can only be attained through a single purchase. Example: G Suite as a consumer cannot buy Gmail or Sheets separately as stand-alone products. 
• Leader bundling also offers two or more products for a single price but is different than joint bundling as this bundle includes a naturally valuable product referred to as the leading product. 

Mixed Bundling – Mixed bundling is much more lenient than pure bundling. Mixed bundling gives the customers the choice to buy the mixed bundle as a single purchase or buy the individual products for a higher price. Example: Microsoft Office 365 can be bought as a mixed bundle or the components like PowerPoint or Excel can be bought separately. 

The Psychology behind Product Bundling and Sales 

Let us explore the example of Nintendo to understand the consumer psyche involved in buying into product bundles. When Nintendo marketed the Nintendo video games units through mixed bundling, the sales went up 100,000 and the video game sales also increased by over a million. However, when Nintendo used pure bundling where consumers were compelled to buy the bundled products only, the sales saw a drop of 20%. The sales for both video games & game consoles saw a decline. 

It is clear then that finding the right mix for bundling the products or the implementation of mixed bundling leads to increased sales. To find the right mix of products in a bundle, consumer’s perception of value has to be studied. Consumers will always favor products that give them value and are worthy of the price. To garner this perceived value, the bundle should hold weight for the customer and the bundled products should be available at a reduced price when purchased together rather than separately.  

Price bundling is an inherent component of an organization’s pricing and segmentation strategy. A well-thought-out and well-constructed product bundle will bring the appropriate value to the right audience segment at the right price. The right usage of product and price bundling will have a positive impact on a company’s profitability.  

Benefits of Price Bundling   

• Price bundling helps with the complexity of getting potential customers to buy specific products or services. Price bundling eases the buying experience and manages to increase the average order value of products by combining high-value and low-value products.  
• Bundling separate products based on values and features simplifies the buying experience by offering the consumers a one-stop-shop. This makes purchase decisions easy and efficient. It also increases engagement with the consumer. 
• Dynamic bundling of products based on complementary features helps increase sales & profit margins and also increases the value provided to the consumer.  
• It helps move an underperforming lower-volume product. Such products are bundled with a popular product to increase the value of the bundle. 
• Product bundling helps save money on marketing and distribution as there is a higher initial return on attaining and retaining a consumer.  

Determining Products for Bundling 

Post-determining product bundles that resonate with a customer and collating other information, the following five product metrics help the company stay ahead of the curve. 

1. Top & Worst sellers - The Company starts by evaluating the revenue from the most profitable products. Then they pair up or bundle complementary products that aren’t doing well. This kind of bundle helps to keep the inventory moving. New products can also be bundled with popular SKUs to promote them in the market. 

2. Annual Growth - The annual growth of a product shows its value appreciation in the last financial year. This metric when used in conjunction with the current inventory shows a year-over-year growth of that product. Analyzing the sales records can help determine if the product can be bundled with other complementary products.  

3. SKU Profitability - The metric gives a clear understanding of how some products are performing in the market as compared to other products in the inventory. SKU profitability helps separate the overhead costs and evaluate the true profitability of an item. This data helps the company to fine-tune its selling strategy. 

4. Listing Profitability – Listing profitability helps make significant decisions regarding selling on multi-channels by offering data on the profitability of an item as per one sales channel. This metric strongly indicates how and where to increase customer engagement. 

5. Trending Profitability – Trending profitability helps identify trends and the product dynamics over a period to decide which season will show an increase in the demand for the products. For example, holidays are the perfect time to introduce product bundles in the market to provide customers with value-added and easy gifting options.  

Disadvantages of Price Bundling

Creating the right bundle of products gives the customer value on every single purchase and also provides them with the ease of making a purchase. Where there are many advantages of product and price bundling, the value of some products and services bundled together can bring down the overall value.  

• Bundling can take the choice away from customers who may want to decide on their own and buy products separately. This can negatively impact the customer experience. 

• The bundle might not add value when the customer is made to feel that they have to unnecessarily pay for products they do not need. Such customers will look for other options. 

Summarizing Product and Price Bundling 

• Unbundled Pricing – Where bundling means combining multiple offers to increase value for a customer, unbundling is the complete opposite, where offers are split up into multiple small offers.  
• Pricing Strategy – A pricing strategy is a method or model used to determine the best price for goods and services based on market information like competitor pricing and customer preference. It helps maximize profits by choosing the right price.  

Common Mistake 

Cross-selling is often confused with upselling a product. Cross-selling means selling a different product or service to a consumer to add more value to the sale. Upselling means anything that will help increase the functionality or the price of the original purchase.  

Context and Applications 

This topic is significant in the professional exams for both graduate and undergraduate courses –  

• BA Economics 
• BA Economics Honors 
• MA Economics 
• BBA 
• MBA 

Related Courses 

• Advanced Macroeconomics 
• Strategic Business Management