Bundling is a marketing tactic that involves offering two or more goods or services as a package deal for a discounted price. Examples of bundling are as widespread as McDonald's value meals and automobiles with features such as air conditioning, sunroofs, and geographical systems. The most well-known example is the bundled computer package complete with a monitor, mouse, keyboard, and preloaded software for a single price. Alternatively, one could select and buy each component of the system separately. All components being equal, the differences are that the buyer doesn't have to purchase each item separately, and that the bundled package could cost as much as a third less than the each-sold-separately package. Bundling can be of products from one company, but cross-industry bundling is not uncommon—for example combining airline tickets with credit cards.
Bundling has been researched for over thirty-seven years. While it doesn't always pan out, bundling has been shown to be an effective and profitable marketing strategy under a variety of circumstances, including so-called pure bundling, in which a group of products are only available as a bundle and aren't sold separately, as well as mixed bundling, where the products are sold both as bundles and as individual units. Industries that have implemented bundling of goods and/or services include utilities, telecommunications services, software and computer companies, journal publishers, automobiles, vacation packages, and fast food restaurants, to name a few. Bundling usually saves the consumer from 7 percent to 15 percent over the cost of purchasing the items separately.
Companies may choose to bundle goods for several reasons, including cost efficiency, market opportunities to enhance profits, and competitive strategy. Due to economies of scale, bundling may result in cost savings on the supply side. For instance, in some scenarios a company may save on packaging and inventory costs by bundling products rather than carrying them separately. There has been a fair amount of published research delving into what kinds of bundling practices are most likely to produce cost savings. Factors a company must consider include whether the bundled products compete with each other and whether the demand for the bundled products is positively or negatively correlated. And even though the tendency is to price bundles lower than the sum of their individual components, in some cases companies successfully pursue strategies in which the bundled price is actually higher. This is called 'premium bundles.'
As a competitive strategy, a marketer of a successful product may bundle a newer or less successful product with its stronger product as a means of edging its way into a new market. Perhaps the most famous example of this is Microsoft Corporation's bundling of various software applications. First they bundled Access and PowerPoint with Word and Excel. Later they bundled their Internet browser with their market-leading operating system. When they did this they increase their market share from 7 percent to 38 percent in one year. (In that example of bundling, which proved highly successful for Microsoft, the legality of the practice was the subject of protracted litigation, however, because it raised concerns about anti-competitive behavior.) In a broader marketing sense, bundling is often intended to entice value- and convenience-seeking customers who would otherwise buy from another supplier or multiple suppliers by offering unique or appealing combinations of goods relative to their competitors.
On the demand side, bundling is used to extract consumer surplus, or an economic value in excess of the purchase price, as suggested by Chuang and Sirbu. In the business-to-business market, for example, a national survey of telecommunications managers showed that 57 percent of businesses will subscribe to bundles of two or more services, while 19 percent of businesses would purchase bundled services if they were priced 10 percent lower.
As with most marketing practices, there is no exact formula for how to create a bundled package that will succeed in the marketplace. However, some observers have noted several qualities that appear common to many successful bundling strategies. According to a 1997 study by Mercer Management Consulting, Lexington, Massachusetts, good bundles have five qualities: (1) the package is worth more than the sum of its parts; (2) the bundle brings order and simplicity to a set of confusing or tedious choices; (3) the bundle solves a problem for the consumer; (4) the bundle is focused and lean in an effort to avoid carrying options the consumer has no use for; and (5) the bundle generates interest or even controversy.
In response to much of the deregulation or re-regulation in the utilities industry, companies are looking to bundle their services to provide their products with reduced costs to the consumer while using the power of free markets. According to a telecommunications bundling report published in Utility Business, 35 percent of telecom customers are as likely to purchase bundled services (local, long distance, and electric/gas services) from an electric/gas provider as they are from a local telephone service provider. According to another nationwide survey appearing in Public Utilities Fortnightly, residential consumers and small business owners are increasingly interested in purchasing bundled goods and services. These customers also want specialized packages that are offered at a discount of at least 5 percent with package increases directly proportional to the size of the discount. Overall, customers assume that bundling goods and services will add value and create economies of scale, according to a study in Security Distributing & Marketing.
In recent years, computer hardware and software companies have offered the bundling of their goods and services. Computer companies such as Gateway, Dell, and Compaq offer Microsoft products pre-installed on their hard drives as a prerequisite to a customer buying the product. These computer companies also offer extra software and peripherals as standard equipment with new desktop, laptop, or server models. Gateway, for example, offers a package including a mouse, mouse pad, wrist support, and maintenance kit for about $10 in addition to the purchase of a new machine. If these items were purchased separately, the cost could be as much as $40. In 1999, software publisher Corel Corporation began bundling its Word-Perfect Office Suite with a Hong Kong-based group, PC Chips Group, in order to appeal to smaller businesses looking for a computer with a large amount of software.
Computer hardware and software producers bundle their packages for several reasons. First, you cannot have a computer without software and vice-versa, and consumers would rather not incur the added expense of buying these two components separately. Secondly, it is very cost effective for both entities to enter into agreements to let their services co-exist with the consumer. Lastly, the bundling process gives these producers brand recognition in the market. Microsoft became the standard through selling its software products to the industry's largest computer producers such as IBM, Dell, Gateway, and Compaq.
Antitrust violations have forced some examples of unbundling. The European Court of First Instance ruled against Microsoft in December of 2004. Microsoft must provide the European market with a version of Windows operating system without their media player. The goal of this decision is to prevent Microsoft from having a monopoly.
There is some evidence that some consumers want unbundling. They want the option to buy exactly what they want, i.e., unbundled products. One example is pay-per-click advertising on Google and Yahoo. Advertisers would rather not pay based on an estimated audience, but are willing to pay for ads that actually are clicked on. Other examples include music (the consumer wants to download and pay for one song) or brokerage (buy one $5.00 stock) or pay for one periodical article rather than subscribe to the journal. This trend will not make bundling disappear, because for many consumers the package is easier and more convenient. However companies will need to carefully package bundles to meet consumer desires.
James C. Koch
Revised by Judith M. Nixon
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