Just Don’t Bungle the Bundle

Rags Srinivasan is one of the more insightful bloggers.  He backs his statements up with solid research and insight.  He recently took the pricing quiz on our website and sent the following e-mail: 

“By the way, I took the Pricing Quotient quiz in your web site. I am unable to pick one answer over the others to some of the questions. For example, the price of the bundle. All answers are possible and the marketer must choose the one that maximizes profit.”

He wrote an extensive and thoughtful post on why the last question in the quiz had no correct answer.   

Here’s the question in the quiz:

When bundling products for a solution, companies should:

1. Give the services away for free
2. Price the solution higher than the component offerings
3. Price the solution lower than the component offerings
4. Price the solution equal to the component offerings

The correct answer is 4.   I’ll get to that in a minute.  Rags points to three cases that point to no correct answer.

The first is when there is a bundle of higher quantities of the same product.  I call that a quantity discount.  Is it technically a bundle?  Yes.  The bundled per item price is still lower than the single item price so answer 4 would be correct.

The second case is a price for braiding at a hair salon.  The charge per braid is higher the more braids on the same head of hair–he takes this story from Steven Levitt of Freakonomics fame.  My cousin runs a hair salon and she would tell you that the reason that they charge more per braid for more braids is that they are smaller and more difficult and time consuming.  So Rags is right on this one.

Finally, Rags points to the difference between bundles that include integration of services and support.  In those cases, the cost of the bundle with the services could be more than the individual components without the services.  Once again, he is correct but on an important point of interpretation–one that causes lots of problem in the BTB world.  I’ve always said that the services have to be looked at as a separate “product” and charged for.  That way, when customers ask for discounts, the services can/should be taken away as part of the negotiations process.  If done properly, the issue of integration of services should meet the criteria of answer 4.

A common problem in BTB go-to-market strategies is that we “bungle the bundle”.  That is, we offer a bundle of multiple products and services.  Then, during customer negotiations, we list individual line items and begin to discount them so that the bundle is suddenly priced higher than the individual items.  This undermines the purpose of the bundle–to provide an incentive to customers to purchase the multiple items.

Correct bundles, with few exceptions (one of which Rags pointed out) need to have individual items priced higher than the bundle to work.  To execute properly, the individual items can’t be price discounted–the bundle should be.  That way you protect the original intent of the bundle.

By the way, one other time that you might price the items lower than the bundle is when research shows that there an interaction effect between product features.  That is, by combining two features, such as FM and stereo on a radio, it has a higher value than the total for the individual features, you can charge more for the bundle.   The problem with that is that most conjoint research designs assume that there is no interaction effect–another common mistake.  But we’ll save that discussion for when we’ve had a few drinks–it will be more interest.

Thanks to Rags for starting this discussion–we don’t do enough of that in the pricing field–here’s hoping for more.

Be Well—Reed