When/why to use a bundling pricing strategy?
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.
Packaging / bundling is one of my favorite examples to show. It was originally developed as a way to capture (and deliver) value when different market segments value different parts of the offer differently. The chart below shows two market segments, A and B.
Segment A is willing to pay only $1500 for the product by itself, while B is willing to pay $3,000.
Segment B is willing to pay only $1600 for the service by itself, while A is willing to pay $3,500
Segment A is willing to pay $5000 for the two items bundled together, while B is only willing to pay $4600 for the bundle.
What should you do to maximize sales? to maximize gross profit?
| 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 (2x$1500 +2*1600).
I have also included a column for the cost to provide the product and service. So the total gross profit is $6,200-$4000=$2200. I 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 in sales and profit!)
Many small business owners think about packages as quantity discounts and getting cash upfront- which can be a good option. However, the real power of the package or bundle- is when you combine two complementary items to create an even more valuable offer.
p.s. this is an update to a blog post I wrote back in 2011! It’s all still relevant today as are many marketing principles 🙂