Illustrative Example

Bundling is a common means of aggregating similar or complementary goods or services. Most simply stated, bundling is the combination of several single items into a larger package. Computer vendors often bundle pieces of hardware (processor, monitor, printer, modem) into complete “systems”. Similarly software vendors combine several individual packages together to form “suites” of programs. The logic behind this action assumes that the composite offering is more valued than the sum of its parts. Typically bundles are presented in a manner that a price savings is possible in buying the whole over each component. Thus there is an implied quantity discount inherent in purchasing a bundle. From a theoretical perspective, the presents of a bundle can cause a desirable shift in the very character of the underlying demand curves. This effect can be seen in the two diagrams given below: Sample Demand Function for One Item Sample Demand Function for Multiple Item Bundle It should be noted that the demand curve flexes near the general point of optimal allocation for the bundle. The average price per item declines slightly from the best price for any individual item, but the increase in elasticity generally off sets the price lose. Specific Price Bundling Models Normally bundles work best for items with relatively high markups. Those products and services with higher contribution margins tend to contribute well to bundles. This type of bundling is called margin spread bundling. If incremental cost of a item is high, its impact on a bundle will be low. In these cases stand-alone sales are best. Additionally, it is better to bundle items that are interrelated or are all targeted toward an average customer. Thus unique or highly specialized item do not contribute well to a bundle. This is called aggregation bundling. Bundling is also effective for items that have high setup cost. The bundle allows for considerable savings by combining setup processes, thus substantially reducing the overall cost of adding several components. This form of bundling is called setup cost bundling. A special example of setup cost bundling exists for product/service categories that have high individual customer acquisition costs. Thus if several of these types of products can be bundled together, considerable saving are possible in avoiding redundant acquisition costs. Joint performance bundling is where the cost saving are due primarily due to functionality benefits. These are basic “add-ons” to a root or central product or service. An example would be an ISP that adds e-mail service and mall applications to its primary hosting service. These additions add value since they functionally support the basic product or service.