01 Oct 2012  Research & Ideas

Better by the Bundle?

Video game companies do it, fast-food restaurants, too. Why don't more companies bundle products and services together in one package at a bargain price? Research by Assistant Professor Vineet Kumar.

 

Sales can soar when companies bundle products together into one cheaper package—Happy Meal, anyone? Yet a buyer's affinity for such deals comes with a big caveat, according to new research: These groupings are often successful only if the consumer is given the option of buying the same products separately.

"Bundling is pervasive in several markets, and it works in many cases," says Vineet Kumar, an assistant professor in the Marketing Unit at Harvard Business School. People appreciate bundles even at places like McDonald's, where they can purchase burgers, fries, and drinks cheaper in a bundle—known as an Extra Value Meal—for cheaper than the products would cost if purchased individually.

"Bundling is pervasive in several markets, and it works in many cases"

But those same customers might not value being given only the option of a bundle without the ability to buy a burger alone, he says.

All kinds of products are sold in bundles. Microsoft Office is sold as a bundle of computer software, including Word, Excel, and PowerPoint. Cable companies offer their channels in bundle packages. Even a music CD is essentially a bundle of songs.

And yet research on how consumers view bundles has been thin. Do shoppers prefer them? Do sales increase when companies bundle their offerings? Or, would a bundle cannibalize sales from its existing products leading to lower overall revenues?

To help answer these questions, Kumar teamed with Timothy Derdenger of Carnegie Mellon University on research that culminated in their paper The Dynamic Effects of Bundling as a Product Strategy.

Kumar and Derdenger studied the handheld video game market between 2001 and 2005, specifically Nintendo's Game Boy Advance and Game Boy Advance SP consoles and the games for both devices. During that time Nintendo essentially enjoyed a monopoly because Sony's PlayStation Portable had not yet entered the market.

The researchers found that consumers might actually value the bundle less than they would value the individual component products, that is there was a "negative synergy" associated with the bundle. Despite this, they found that Nintendo sold the most products when it offered a bundle option—a video game console and a game sold together as one package-—coupled with an option to buy each piece individually.

Sales from this "mixed bundling" offering were estimated to be much stronger than a scenario where such a bundle was not offered. Total hardware sales were higher by approximately 100,000 units when bundles were offered. Much more surprising, the sales of software video games jumped by over a million units. The company would see an increase in revenue from bundling due to better sales for both hardware and software.

However, when a bundle was the consumer's only option—a "pure bundling" scenario—Nintendo would fare much worse, when compared with both offers that lacked any bundle as well as those with the mixed bundling option. Revenues decreased by over 20 percent compared with the mixed bundling scenario; the total hardware units sold declined by millions of units; and software units fell by over 10 million as well.

Wait and see

The pure bundling findings may run counter to some executives' expectations.

"If consumers really want a product and they only have the option of buying the bundle, you would think the company could potentially take in more revenue since the consumer has no choice but to get the bundle," Kumar says. "But it turns out that's not the case."

The reason: Consumers know they can put off buying and wait for a better deal because, after all, prices for video games and other electronics drop significantly over time. Nintendo's Game Boy console, for example, started out at $100 but within a year had decreased to $70.

"If consumers don't like the offering you put out, they can postpone their purchases. In a sense, you're competing with yourself over time, especially if you're a monopolist."

And in fact, there may be other factors that tempt consumers to hold off on purchasing a new product.

For example, people who bought video game machines when they were first released may not have had many game choices, whereas if they deferred their purchases until later, they would likely have had many more options. Besides, those who waited could have ended up with better, faster, more advanced products, as was the case for those who held out for the latest versions of the iPhones and iPads, which improved with each update.

"If no bundle is offered at all, people might wait until much later, perhaps even a year, to make purchases," Kumar says. "Nintendo doesn't want that. The more consumers purchase its products, the sooner Nintendo can make more video games."

So bundles can entice some consumers to buy consoles earlier, especially when they are offered the choice of buying either the bundle or the console.

"Those who are more price-sensitive choose the bundle, and those consumers are separated from the people who are willing to pay more for just the hardware alone," Kumar says. "Since the games are copied at close to zero cost to Nintendo, this gives the company a way to separate out segments of consumers—we call this dynamic customer segmentation."

Some consumers don't care much about the specific game and will go for the bundle, even if the game isn't great, because it is cheaper than buying them separately. Meanwhile, high-end consumers may buy the console alone and separately purchase games not included in the bundle.

"It's crucial to allow that flexibility to the consumer"

"It's crucial to allow that flexibility to the consumer," Kumar says. In fact, more sales might result if a company like Nintendo gave consumers even greater choices, perhaps by allowing them to choose among a variety of games to bundle with the console.

"Nintendo puts out only certain bundles with certain games," he says. "If the company allowed consumers to purchase consoles with any game they wanted—create the bundle themselves—it might do even better."

The BMW bundle

Although it's difficult to determine without additional research, Kumar says a bundling strategy is likely to find success with a variety of products—especially where one piece of the bundle is produced at very low cost. Digital products, which have low marginal cost, are especially suitable for bundling. It also helps if the bundled products work well together, he says.

For example, luxury cars such as BMW are often coupled with packages of options that work well together, essentially a mixed bundle. The consumer has the option to purchase just the base model or a model equipped with a convenience package or technology package.

"Ideally you should be bundling products that have a positive synergy together," Kumar says, "but what we have shown here is that even when synergy is negative, bundling can be profitable. Bundling might fail because you have chosen the wrong product, but that wouldn't be my biggest worry," he says.

"Bundling is a rather easy way of putting new product offerings together to complement the product line. There's more potential to get it right than to get it wrong."

About the author

Dina Gerdeman is a freelance writer based in Mansfield, Massachusetts.

Comments

    • Srini
    • Director, HP

    There are two sides to the bundling story. 1. If the original individual items were fairly priced and in a competitive market. If you then offer a bundle in such a situation where you pass on a part of the benefit you get by bundling to the consumer - you can actually make it work consistently. 2. If you bundle the items to make it appear attractive and have a jacked up base component cost, the market will soon discover that. It's only a matter of time before regulators or competition will force you to change.

    Let me give an example. Car Warranties in India are bundled with a caveat - that you need to do the servicing in the so called "authorized dealers". This is clear abuse of bundling power, especially when all car manufacturers use the same technique - it's oligopoly. Now the regulator is stepping in - and such bundling will hopefully go...

    Let me tell you another situation where bundling is abused. The TV channel boquet (again I am familiar with the Indian market). You find the bundle attractively priced to the point where if you subscribed to each of the channels individually you will almost pay 80% for each (of the bundle cost). The reality here is that this is an abuse of the circumstance. So it will need some time before the regulator or one of the competitors dispense with this technique.

    So in conclusion I am not stating that bundling is bad. Abuse of bundling would be good in the short run, but could take a hit in the long run.

     
     
     
    • kAPIL kUMAR sOPORY
    • Company Secretary, SMEC(India) Private Limited

    Bundling strategy is utilized to make the consumers buy as per the sellers' choice - this reduces the right of choice which is what many consumers detest. The sellers plan of action is to let people buy a part of the bundle which is not otherwise preferred. In this they do succeed by pricing the bundle in such a way that it is less than if the items are to be purchased separately. "Take one, get two (or more) is a similar ploy to lure people to purchase more than required just because of such offered 'attraction'.

     
     
     
    • Priyanka Bora
    • Student, SRMI

    Getting the art of bundling of products or services right seems to be about striking the right balance. It is about enticing the customer who seeks Value and Convenience. Pure bundling might work in some scenarios where one of the products is very successful and the other is either a new product or a less popular offering, but definitely, one which adds to the overall value offered by the bundle. A good example of this could be Microsoft combining Access and Powerpoint with Word and Excel. In case of mixed bundling a simple strategy of pricing the bundle lower than the individual items can work well if the right items are combined, for example, McDonald's Value Meals. The consumer must have a need for all the items in the bundle. Only then can the bundle as whole seem profitable and the consumer might be motivated to substitute alternative choices with what is on offer. In another scenario the non-essential item of the bundle should only consist of a small fraction of the bundles overall cost. In some cases the Strategy of pricing the bundle higher than individual prices have also been seen to succeed these are called as 'premium bundles'. I believe the most important factor that makes them click is the convenience and access, it is what makes them premium. The whole point of the bundles becoming more attractive when an option of individual purchase is available makes sense. We as consumers always compare before deciding and thus we love choices, it makes us feel in control. Thus the ability to chose adds to the value of the product as a whole. Also then it works for a larger variety of customers- those who find value in the bundle or those who prefer a few items alone.