Product Bundling - Rationale

Rationale

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 (2009) review the research on bundle design and pricing in their book chapter.