Price Bundling - Services Marketing

7/31/2019 Price Bundling - Services Marketing

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PGP 2010-12, INDIAN INSTITTUTE OF MANAGEMENT RAIPUR

Anant Bibhore


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The practice of marketing two or more products and/orservices in a single "package" for a special price.

Examples in consumer services:

Banks offering credit cards at no annual fee, free traveler's checksand other services for customers with large certificates of deposit

Hotels are offering weekend packages that combine lodging andsome meals at special rates.

Airlines offering vacation packages combining air travel with car

rentals and lodging


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Rationale for bundling is based on two realities:

1. High ratio of fixed to variable costs and a high degreeof cost sharing (the same facilities, equipment, andpersonnel are used to provide multiple services)

2. The services offered by most service businesses aregenerally interdependent in terms of demand

Effectiveness of price bundling is a function of degree towhich it stimulates demand in a way that achieves costeconomies.


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Pure bundling

Services available only in bundled from

Mixed bundling

Either purchase one or more services individually or to bundle

MIXED-LEADER: one product at discounted price, other productat regular price

MIXED-JOINT: a single price is set for two products purchasedjointly.

Understanding where each form of mixed bundling islikely to be effective in pricing services.


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Basic economic rationaleis transfer of consumersurplus.

Assumptions

Seller holds monopoly overat least one element

Independence of demand

Assumption do not holdfor services firms because Firms operate in a

competitive environment

Services may have acomplementary relationship


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Reservation price forbundle may exceedsum of reservation

prices of individualservices.

Relaxation of additivityassumptions


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Cross-selling targetsegments 1 and 2

Acquisition of new

customer targetsegment 4

Retention targetsegment 3


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Full distribution ofreservation prices forA and B may not beknown, howeverdemand levels withineach segment may beestimated

Demand responsesrequired to changebehavior may bedeciphered


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UQA substantiallygreater than UQB, thenunder mixed leader Awill be best leader.

When UQA and UQB areapprox equal, volumegains from bundlingmay be equal in bothdirections.

Mixed-leader givesunidirectional gains Mixed-joint appropriate

for bidirectional gains


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For cross-selling, key to effective demand response tobundling is degree and type of complementarity.

Three types of complementarity relationships Complements due to economies in time and effort

Search economies real cost to customer is reduced

Enhancement in level of satisfaction with other products

Enhanced customer satisfaction

one-way complementarity

Enhancement in overall image of seller

Bidirectional effects


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One of the products say A, is regularly/continuouslypurchased & UQA >UQB; A is the leader.

Issue How to close the gap (PB - RPB/A)

If customers buy competitors service D instead of B, the gap is(RPD PD) + (PB RPB/A)

Ways to reduce gap Direct transfer of any consumer surplus from A to B

Price reduction on the leader A that increases consumer surpluson A

Selection of B so as to enhance utility of A (so that RPA/B > RPA)

Create search economies, reducing real cost of B (PB RPB/A)

Gains in case of unidirectional complementaries


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One of the services is already purchased, say A

Issue

If customers to add B, the gap is (RPD - PD) + (PB RPB/A)

Ways to reduce gap B enhances A

Price of A + B is sufficiently reduced.

Such gains are clearly more likely to occur to the extentthat bidirectional complementaries is present betweenthe two services


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Customer acquisition is the primary bundling objectivewhen the strategic focus is potential new customerthose buying neither A nor B


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Considering product A & B where A is the leader.

A must be worth more if B also is purchased fromthe same source than A would be worth if

purchase alone. A should be price elastic and B must be

complement of A.

Complementarity probability must be derivedfrom the degree to which B enhances the searchattributes of A.


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In this case, since customer must evaluate thetotal package ( A+B), the gap between pricesand reservation prices can be overcome only if

the price discount for the bundle generates alarge gain in bundled sales.

Bidirectional complemantary relationships arestrong but have not been established previously

in the consumers mind


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Assuming most bundling offers will be accessible to currentcustomers, the profit effect will depend largely on theextent of cannibalization due to:-

Reduce profit margin among customers already buying both

A and B

Reduced number (though at the same margin) of A-only orB-only buyers.

Any reduction in the number of A-only and B-only buyerspresumably occurs because these buyers now purchasethe bundle


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Select A & B where UQA+B (the quantity of A & B sold withoutbundling) is small to minimized cannibalization effects.

Even if cross selling is the primary objective, selecting

products that also generate new customers for both A & B willhelp offset cannibalization effects.

In mixed-leader bundling, the leader should be the lowermargin product.

Mixed-joint bundling will be more attractive when the marginsof the two services are about equal and when the unbundledsales volumes (UQA & UQB) are about equal.


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Conditions leading to success of Bundling Programs

Cross-Selling/Mixed Leader Cross-Selling/Mixed Joint

UQA > UQB

(PA CA) < (PB CB)

Large consumer surplus on A

B enhances value of A and/orsearch economies reduce the realcost of B

UQA = UQB

(PA CA) = (PB CB)

Each consumer has largeconsumer surplus on A or on B

Bidirectional complementaritybetween A & B due either toenhances image of seller or to

joint search economies.


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Conditions leading to success of Bundling Programs

Customer acquisition/MixedLeader

Customer acquisition/MixedJoint

If A is a leader, demand A forelastic

B and A complements because ofsearch economies or enhancedvalue.

A valued much more highly thanB

Demand for A + B elastic ( both Aand B composed primarily ofsearch attributes)

Strong bidirectionalcomplementarity ( or it can beestablished ) between A and B.


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Add-on bundling

It is an add-on service that will not be purchased unless thelead service is purchased

Add-on bundling has the following key features:

Because customer must choose between A and A+B,(i.e PB = 0). Mixed-joint form is the only feasible bundlingapproach.

RPB/A = RPB because complimentarity must be

unidirectional in the add-on case Most add-on services will be so intertwined with the lead

service that split relationship among service providers arenot feasible.


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Documents

Price Bundling - Services Marketing