Pricing is one of the more fascinating areas of consumer psychology and behavior. Marketing academics have devoted much of their research to understanding perceptions of value and price and how framing the offer can make a big difference in consumer choices.
For example, the percentage of a discount matters more than the absolute value of a discount. I’ve noticed that small business owners often think in terms of a percentage discount (usually more of the same stuff- but you pay less if you buy more at one time and pre-pay). Their customers, would rather get one thing FREE (100% discount) instead of a smaller percentage on the whole purchase. (Think “Buy 9 Get One FREE!” as opposed to “Get a 10% discount when you buy 10!”)
This made me realize that what small business owners call a package is in fact often a quantity discount. The idea of packaging / bundling was originally developed as a result of differences in segment preferences for various (different) parts of the offer– ie. a product and a service together. As the example below shows:
| A’s willingness to pay |
B’s willingness to pay |
Entrepreneur’s Cost to Provide |
|
| Product | $1,500 | $3,000 | $1,250 |
| Service | $3,500 | $1,600 | $750 |
| Bundle Total | $5,000 | $4,600 | $2,000 |
So, if you sell the product and service separately- to sell to both A and B, you’d need to charge just $1,500 for the product (because A won’t pay more than that) and just $1,600 for the service (because B won’t pay more than that). Your total revenue would be $6,200. I have also included a column for the cost to provide the product and service and suggest considering ways to add items to the bundle that are low cost to provide but high value to your client (information goods are often in this category).
If however, you offer it as a bundle, you can sell the bundle for $4,600 and your total revenue will be $9,200. (So you’d make an additional $3,000!)
The take-away from this is that there are benefits to quantity discounts and getting cash up front. However, the real power of the package or bundle- is when you combine two complementary items to create a valuable offer.