Product bundling
Encyclopedia
Product bundling is a marketing
strategy that involves offering several products
for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor
, a spreadsheet
, and a database
into a single office suite
), in the cable television
industry (for example, basic cable in the United States
generally offers many channels at one price), and in the fast food
industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology.
Bundling is most successful when:
Product bundling is most suitable for high volume and high margin (i.e., low marginal cost) products. Research by Yannis Bakos
and Erik Brynjolfsson
found that bundling was particularly effective for digital "information goods" with close to zero marginal cost, and could enable a bundler with an inferior collection of products to drive even superior quality goods out of the market place.
In oligopolistic
and monopolistic
industries, product bundling can be seen as an unfair use of market power because it limits the choices available to the consumer. In these cases it is typically called product tying.
Venkatesh and Mahajan (2009) review the research on bundle design and pricing in their book chapter.
Pure bundling occurs when a consumer can only purchase the entire bundle or nothing, mixed bundling occurs when consumers are offered a choice between the purchasing the entire bundle or one of the separate parts of the bundle.
Pure bundling can be further divided into two cases: in joint bundling, the two products are offered together for one bundled price, and, in leader bundling, a leader product is offered for discount if purchased with a non-leader product. Mixed-leader bundling is a variant of leader bundling with the added possibility of buying the leader product on its own.
Bundling in political economy is a type of product bundling in which the product is a candidate in an election who markets his bundle of attributes and positions to the voters.
In peer-to-peer swarming systems for content dissemination, such as BitTorrent, bundling consists of disseminating multiple files together in a single swarm. Empirical evidence and analytical models indicate that bundling improves content availability in those systems. Both pure and mixed bundling are supported by BitTorrent.
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
strategy that involves offering several products
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor
Word processor
A word processor is a computer application used for the production of any sort of printable material....
, a spreadsheet
Spreadsheet
A spreadsheet is a computer application that simulates a paper accounting worksheet. It displays multiple cells usually in a two-dimensional matrix or grid consisting of rows and columns. Each cell contains alphanumeric text, numeric values or formulas...
, and a database
Database
A database is an organized collection of data for one or more purposes, usually in digital form. The data are typically organized to model relevant aspects of reality , in a way that supports processes requiring this information...
into a single office suite
Office suite
In computing, an office suite, sometimes called an office software suite or productivity suite is a collection of programs intended to be used by knowledge workers...
), in the cable television
Cable television
Cable television is a system of providing television programs to consumers via radio frequency signals transmitted to televisions through coaxial cables or digital light pulses through fixed optical fibers located on the subscriber's property, much like the over-the-air method used in traditional...
industry (for example, basic cable in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
generally offers many channels at one price), and in the fast food
Fast food
Fast food is the term given to food that can be prepared and served very quickly. While any meal with low preparation time can be considered to be fast food, typically the term refers to food sold in a restaurant or store with preheated or precooked ingredients, and served to the customer in a...
industry in which multiple items are combined into a complete meal. A bundle of products is sometimes referred to as a package deal or a compilation or an anthology.
Bundling is most successful when:
- There are economies of scaleEconomies of scaleEconomies of scale, in microeconomics, refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. "Economies of scale" is a long run concept and refers to reductions in unit...
in production, - There are economies of scopeEconomies of scopeEconomies of scope are conceptually similar to economies of scale. Whereas 'economies of scale' for a firm primarily refers to reductions in average cost associated with increasing the scale of production for a single product type, 'economies of scope' refers to lowering average cost for a firm in...
in distribution, - Marginal costs of bundling are low.
- productionProduction, costs, and pricingThe following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
set-up costs are high, - Customer acquisition costs are high.
- Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.
- Consumers have heterogeneous demands and such demands for different parts of the bundle product are inversely correlated. For example, assume consumer A values word processor at $100 and spreadsheet processor at $60, while consumer B values word processor at $60 and spreadsheet at $100. Seller can generate maximum revenue of only $240 by setting $60 price for each product—both consumers will buy both products. Revenue cannot be increased without bundling because as seller increases the price above $60 for one of the goods, one of the consumers will refuse to buy it. With bundling, seller can generate revenue of $320 by bundling the products together and selling the bundle at $160.
Product bundling is most suitable for high volume and high margin (i.e., low marginal cost) products. Research by Yannis Bakos
Yannis Bakos
Yannis Bakos is a professor at the Leonard N. Stern School of Business at New York University. His primary area of expertise is the economic and business implications of information technology, the Internet, and online media. He is the co-founder of the , and the co-inventor of Flexplay...
and Erik Brynjolfsson
Erik Brynjolfsson
Erik Brynjolfsson is the Schussel Family Professor of Management at the MIT Sloan School of Management, the Director of the MIT Center for Digital Business and a Research Associate at the National Bureau of Economic Research...
found that bundling was particularly effective for digital "information goods" with close to zero marginal cost, and could enable a bundler with an inferior collection of products to drive even superior quality goods out of the market place.
In oligopolistic
Oligopoly
An oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
and monopolistic
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
industries, product bundling can be seen as an unfair use of market power because it limits the choices available to the consumer. In these cases it is typically called product tying.
Venkatesh and Mahajan (2009) review the research on bundle design and pricing in their book chapter.
Pure bundling occurs when a consumer can only purchase the entire bundle or nothing, mixed bundling occurs when consumers are offered a choice between the purchasing the entire bundle or one of the separate parts of the bundle.
Pure bundling can be further divided into two cases: in joint bundling, the two products are offered together for one bundled price, and, in leader bundling, a leader product is offered for discount if purchased with a non-leader product. Mixed-leader bundling is a variant of leader bundling with the added possibility of buying the leader product on its own.
Bundling in political economy is a type of product bundling in which the product is a candidate in an election who markets his bundle of attributes and positions to the voters.
In peer-to-peer swarming systems for content dissemination, such as BitTorrent, bundling consists of disseminating multiple files together in a single swarm. Empirical evidence and analytical models indicate that bundling improves content availability in those systems. Both pure and mixed bundling are supported by BitTorrent.
See also
- Competition lawCompetition lawCompetition law, known in the United States as antitrust law, is law that promotes or maintains market competition by regulating anti-competitive conduct by companies....
- Compilation albumCompilation albumA compilation album is an album featuring tracks from one or more performers, often culled from a variety of sources The tracks are usually collected according to a common characteristic, such as popularity, genre, source or subject matter...
- Freebie marketingFreebie marketingFreebie marketing, also known as the razor and blades business model, is a business model wherein one item is sold at a low price in order to increase sales of a complementary good, such as supplies or software...
- Local loop unbundlingLocal loop unbundlingLocal loop unbundling is the regulatory process of allowing multiple telecommunications operators to use connections from the telephone exchange to the customer's premises...
- Marketing co-operationMarketing co-operationA marketing co-operation or marketing cooperation is a partnership of at least two companies on the value chain level of marketing with the objective to tap the full potential of a market by bundling specific competences or resources...
- MulticartMulticartIn video game parlance, a multicart is a cartridge that contains more than one game. Typically, the separate games are available individually for purchase or were previously available individually . For this reason, collections, anthologies, and compilations are considered multicarts...
- Package holidayPackage holidayA package holiday or package tour consists of transport and accommodation advertised and sold together by a vendor known as a tour operator. Other services may be provided like a rental car, activities or outings during the holiday. Transport can be via charter airline to a foreign country...
- Price discriminationPrice discriminationPrice discrimination or price differentiation exists when sales of identical goods or services are transacted at different prices from the same provider...
- Product managementProduct managementProduct management is an organizational lifecycle function within a company dealing with the planning, forecasting, or marketing of a product or products at all stages of the product lifecycle....
- ShovelwareShovelwareShovelware is a derogatory computer jargon term that refers to software noted more for the quantity of what is included than for the quality or usefulness...
- Software bloatSoftware bloatSoftware bloat is a process whereby successive versions of a computer program include an increasing proportion of unnecessary features that are not used by end users, or generally use more system resources than necessary, while offering little or no benefit to its users.-Causes:Software developers...
- Tying (commerce)