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In marketing, product bundling is offering several products for sale as one combined product. It is a common feature in many imperfectly competitive product markets. Industries engaged in the practice include telecommunications, financial services, health care, and information. A software bundle might include a word processor, spreadsheet, and presentation program into a single office suite. The cable television industry often bundles channels into a single tier. The fast food industry combines separate food items into a complete meal. A bundle of products may be called a package deal, a compilation or an anthology.
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. In a bundle pricing, companies sell a package or set of goods or services for a lower price than they would charge if the customer bought all of them separately. Pursuing a bundle pricing strategy allows you to increase your profit by giving customers a discount.
Bundling is most successful when:
- There are economies of scale in production.
- There are economies of scope in distribution.
- Marginal costs of bundling are low.
- Production 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 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.
Venkatesh and Mahajan reviewed the research on bundle design and pricing in 2009.
Varieties of bundling
Pure bundling occurs when a consumer can only purchase the entire bundle or nothing, mixed bundling occurs when consumers are offered a choice between 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 the software industry, bundled software is software distributed with another product such as a piece of computer hardware or other electronic device, or a group of software packages which are sold together. Software which is pre-installed on a new computer is an example of bundled software. A pack-in game is a form of bundled software.
Bundling, market power, and competitiveness
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. Some forms of product bundling have been subject to litigation regarding abuses of market share.
United States v. Microsoft
United States v. Microsoft was a set of civil actions filed against Microsoft Corporation pursuant to the Sherman Antitrust Act of 1890 Sections 1 and 2 on May 18, 1998 by the United States Department of Justice (DOJ) and 20 states. Joel I. Klein was the lead prosecutor. The plaintiffs alleged that Microsoft abused monopoly power on Intel-based personal computers in its handling of operating system sales and web browser sales. The issue central to the case was whether Microsoft was allowed to bundle its flagship Internet Explorer (IE) web browser software with its Microsoft Windows operating system. Bundling them together is alleged to have been responsible for Microsoft's victory in the browser wars as every Windows user had a copy of Internet Explorer.
- Adams, Yellen, W, J (August 1976). "Commodity bundling and the burden of monopoly". Quarterly Journal of Economics 90 (3): 475–498. doi:10.2307/1886045.
- Bakos, Yannis; Brynjolfsson, Erik (1999). "Bundling Information Goods: Pricing, Profits, and Efficiency". Management Science 45 (12): 1613–1630. doi:10.1287/mnsc.45.12.1613. JSTOR 2634781.
- Bakos, Yannis; Brynjolfsson, Erik (2000). "Bundling and Competition on the Internet". Marketing Science 19 (1): 63–82. doi:10.1287/mksc.184.108.40.20682. JSTOR 193259.
- Venkatesh, R. and Vijay Mahajan (2009). Vithala R. Rao, ed. "The Design and Pricing of Bundles: A Review of Normative Guidelines and Practical Approaches" (PDF). Handbook of Pricing Research in Marketing (Northampton, MA: Edward Elgar Publishing Company): 232–257. Retrieved 2012-12-10.