How to perceive bundling Creating a bundle is like creating a new product. Given the important market advantage of reduced product introduction time, bundling has an added appeal. A bundle is a group of products or services offered as a package. Not a marketing gimmick!! As consumers we see the marketing aspect of bundling, but decisions about bundles aren’t (or at least shouldn’t be) the sole province of the marketing department. Eg: In the given example Chrysler was able to reduce the price of the car, including a typical option package, by more than $1,000.
The price reductions were made possible by reduced manufacturing costs: longer production runs lowered setup costs; reduced interactions resulted in better quality; and reduced carrying and shipping costs alone accounted for a $2 million per year savings. Note that Chrysler presented the consumer with a new menu of choices at new prices; it introduced new products. Two important advantages over the typical “start from scratch” First, bundling avoids the large expenses and high risk of failure associated with the research and development. Second, bundling begins with good information on customer preferences and production costs.
Implications of managing bundles as new products: (1) Bundles have a wide variety of potential uses, and (2) implementing a bundling strategy requires a serious commitment. Bundling can be profitable when it lowers costs, expands demand, or enhances the performance of the products. Three market-expanding strategies: Aggregation bundling, Trade-up bundling, and loyalty bundling. Guidelines to conceder before bundling: Guideline 1: Promote bundling among components that have high setup costs. Guideline 2: Bundle items that have a high contribution margin ratio.
Guideline 3: Target the bundle for an aggregate market and offer higher priced individual items to unusual customer segments. Guideline 4: In a price insensitive market, create comprehensive bundles when demand is strong and multiple smaller bundles when demand is weak. Guideline 5: Use bundling to raise consumer switching costs and reduce consumer trial. Guideline 6: Use pure bundling when components perform better together than separately. Guideline 7: For new product categories, consider bundling that helps consumers understand the full range of product and service benefits.
Limitations of management’s ability to completely analyze a bundling opportunity: * The large number of possible bundles; * The need to carefully track consumer choices among all of these possible bundles; and * The extreme importance of sensitivity to competitive reactions. Decision analysis designed to meet above challenges: Framing the Problem Effective bundling requires insight, data, and judgment. To understand and simplify the problem, managers must depend on their insight. Our data gathering and analysis will help us judge the proper components in our bundles, and how extensively they should be promoted.
Gathering Data Next step is to capture customer valuations for the possible elements of bundle in a simple and useful way. Eg: Reservation price to represent a customer’s preference for a software product. The reservation price is defined as the most that the individual would pay for the item. One of the principle items of interest at this stage is the identification of bundles that do not simply sum to the valuation of the individual items. If the valuation of the bundle is more than the sum of the individual items, then that consumer segment views the bundle as performance enhancing.
If the sum is less, then that consumer segment views portions of the bundle as overlapping and wasteful. Analyzing the Results Analyzing whether using the bundling approach increases profit or not. What all factors contribute to the increase in profits? Learning: Even in market situations that are highly competitive, profitable opportunities may already exist within a company’s product line. The essential management step is to think of product bundles as a method for improving performance, lowering costs, and reaching out to new customer segments.