One afternoon last year an employee of mine in the U.S. made yet another run to the local baby store to buy a box of diapers for his two year old son. At the store, he found something new on the shelf: a bonus-size box that contained a toy designed to remind parents and the toddler to visit the washroom at regular intervals. Although the total price of the special box was higher than the standard box, the advertised per-diaper price was noticeably lower. Eager to minimize his trips to the baby store and to speed the potty training process, the father bought the bonus-size box, happy in the knowledge that he was spending less at each visit to the changing table.
What this father encountered is a good example of price bundling, the strategy of selling various products or services together at a combined price. The roots of this practice can be found in economics. Basically, you and I buy things when our perceived value of what we want exceeds the price that we are asked to pay (a.k.a., a consumer surplus). Savvy marketers and pricing managers understand this phenomenon and work to enhance the perceived value of their products through creative bundling.
Most of us have experienced bundles of one form or another. The McDonald’s value meal, phone-internet-cable combos, and all-inclusive vacation packages are several common examples in the business-to-consumer space. In the business-to-business environment, contracts often contain solutions-oriented bundles, i.e., a combination of products and services that are customized to solve specific customer problems.
Unfortunately, we find that companies often treat bundling as purely a marketing tactic versus a component in a broader pricing strategy. It is not uncommon for companies to incorporate terms and features into a sale without understanding their inherent value. A final sale price, for example, can be adjusted by a number of basic elements including the amount of product delivered, the quality of the product delivered, premiums and discounts, the time and place of the transaction, the time and place of delivery, and the form of payment. Each of these elements is likely valued differently by customers and should be understood and managed closely.
A client in the internet space provides a good case study. Faced with growing competition, the company began looking for ways to differentiate its services. Competitive and market research showed that its customers had a high level of interest in a performance guarantee and that no competitor offered one. Marketing managers initially envisioned offering the guarantee for free during volume-focused sales campaigns. Testing and research by the pricing manager, however, found that a portion of the company’s value-conscious customers (i.e., those purchasing the more expensive and full-featured services) were willing to pay a premium for the feature, while more price sensitive customers placed little to no value on it. Armed with this information, the company expanded its offering to include a new high-value bundle with a performance guarantee at a 17% price premium, adding 2% to the company’s annual profitability.
Price bundling should be a core component of every company’s pricing and segmentation strategy.
Far from being a marketing ploy, well-constructed bundles deliver the right value to the right customers at an appropriate price. And as our client learned, they can have a meaningful impact on profitability.