Price Bundling - a Powerful Strategy to Increase Profit

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Vol. 14 - No.1 - 2005 Price Bundling - A Powerful Strategy To Increase Profit By Georg Wuebker, Partner and Hermann Simon, Chairman Simon Kucher and Partners www.simon-kucher.com Price bundling is a powerful method to better exploit profit potentials and to maximize profits in a multi-product company (e.g. Deutsche Bank, Dell, McDonald's). The heterogeneity of demand is reduced and customers'' willingness to pay is exploited to the company's advantage. Price bundling can be applied in pure form (only the bundle is offered) or mixed form (both the bundle and the individual products are sold). In each case it has to be carefully investigated which form is superior and how it may compare to separate pricing for the individual products. There are no general or simple rules, but the optimal solution depends on the distribution of customers'' willingnesses to pay (reservation prices) and the costs. A reliable and valid measurement of individual reservation prices can be obtained by conjoint measurement. The profit increases obtainable through bundling are likely to be in the range of 10 to 40 %. However, antitrust aspects should be observed, particularly if the company is in a market-dominant position. Most firms are multi-product companies faced with the decision whether to sell products or services separately at individual prices or whether combinations of products

should be marketed in the form of "bundles" for which a "bundle price" is asked. Price bundling plays an increasingly important role in many industries (e.g. banking, insurance, software, automotive) and some companies even build their business strategies on bundling. A well-known case is Microsoft. By smartly combining its application software into the "Office" bundle, Microsoft extended the quasi-monopoly it had with Word to Excel, Access and PowerPoint. Microsoft increased the market share of PowerPoint and Access when it bundled these two less attractive products with the more attractive components Excel and Winword. The so-called "Office" bundle and its software components represent the standard in the application software market and have a share of over 80 percent. In a similar way, Microsoft is trying to monopolize the Web-browser market. In mid-1996, its Web-browser Internet Explorer had a market share of 7 percent, while Netscape's Navigator had a quasi-monopoly (over 80 percent market share). By bundling the Explorer with its operating system Windows, Microsoft's share rose to 38 percent and Netscape's lead in the browser market dropped to 58 percent by early 1997. In 2004, Microsoft dominates the Web-browser market with a market share of more than 90 percent. Price Bundling In Practice In practice, price bundling is very popular and appears in different forms:

In the film industry, "block booking" is frequently applied. The distributor does not offer single films to the movie operators - from which these would most likely cherry pick only the attractive titles - but supplies them with a "block" or bundle of more and less attractive films. In industries like computers, machinery, contracting, etc., whole systems (e.g. central processing unit, monitor, printer, software) are sold at a "system price". Bundling is particularly popular in the service sector. Examples are vacation packages (airline ticket, hotel accommodation plus rent-a-car), insurance packages, or menus in restaurants (hors d'oeuvre, entree, dessert). In the fast food industry, "value meals" are heavily sold at special discounts. Publishing companies offer their advertising customers socalled "title combinations". If companies advertise in several magazines of the same publisher they get substantial rebates. Bundling is also very often employed in the software industry, where it is known as suite selling. Microsoft's "Office" bundle contains three software programs in the standard version (Word, Excel, PowerPoint, and Outlook), which cost $ 410 each if purchased individually. The suite...
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