There’s a reason customers are often given the option to subscribe to the entire Adobe Creative Cloud instead of just a single product like Photoshop. It’s because product bundling in many cases has proven to increase the amount customers are willing to pay, therefore increasing their average order value. As a result, this pricing strategy has become widely used by many ecommerce companies as a way to boost revenue.
However, product bundling doesn’t always work. To understand why some companies have had success with this pricing strategy while others have struggled, there are several aspects to keep in mind.
Pure Bundling Vs. Mixed Bundling
While bundling has been been around a long time, surprisingly little research has been done to determine whether consumers actually prefer bundles, if sales increase as a direct result of price bundling and if bundling cannibalizes the sales of standalone products. To answer these questions, Harvard Business School professor Vineet Kumar analyzed the video game market from 2001-2005, when Nintendo held the monopoly for video game consoles (though the principals described below are the same in competitive markets).
With previous research indicating consumers valued individual components of a bundle more than the bundle itself, Nintendo’s sales accordingly increased significantly when the company offered their console and video games together as a bundle at a lower price than if bought individually. Customers also had the option to buy each separately.The result of this mixed bundling model was console sales increased by over 100,000 units and video game sales increased over a million units.
Nintendo also experimented with ‘pure bundling’ and saw dramatically different results. Contrary to mixed bundling, pure bundling is when consumers are only able to purchase the bundle and are not given the opportunity to purchase products individually. Unfortunately for Nintendo, this type of product bundling led to a 20% decrease in revenue with a decline in hardware sales by millions of units and lower software sales by over ten million units. Consequently, it’s vital to know that certain types of bundling and consumer perceptions of the value of your individual products can make or break your bottom line.
The Consumer Psychology of Bundling
The divergence in sales seen in this example can largely be explained by consumers’ differing value perceptions. While offering a pure bundle option may seem like an effective strategy for selling popular products, giving consumers no choice but to buy the product in a more expensive package can actually deter a large number of buyers who only value one or two products in the bundle. For Nintendo, many potential consumers postponed their purchases waiting for a better deal where they wouldn’t be forced to pay for extras they didn’t want.
What’s most important to recognize is that consumers make purchases when they think they are getting more value than what they are paying for. This ‘consumer surplus’ rule of thumb must also be considered when creating product bundles.
For example, a customer purchasing Product A may be willing to pay $30 for it but only $5 for Product B. The two products sold separately may be priced at $20 and $10 respectively with an additional mixed bundle option of $27. At those prices, the customer would be willing to purchase Product A individually, as the selling price is below what they value it at, but not Product B.
Furthermore, the potential customer would also be unwilling to purchase the bundle because the difference between the stand-alone price for Product A and the bundle price is more than the customer is willing to pay for the second item. Consequently, the bundle price would have to be $25 or less for this customer to buy.
Improving Your Bottom Line
While there are potential pitfalls with product bundling, companies who have implemented it successfully have reaped significant benefits. Harnessing consumer demand for dominant products can strengthen sales and lower barriers to entry of secondary products. The result can be increased sales, a greater return on initial customer acquisition costs and increased awareness for a company’s product line, potentially creating long-term opportunities for add-on sales.
By having a strong understanding of customer value perceptions and packaging products together that complement each other, product bundling can be a huge opportunity for ecommerce companies. Digital products, which have low marginal costs, are especially suited for this pricing strategy and have shown a long history of success as seen by major players like Microsoft and Adobe. Ultimately, however, it is important to test bundles to see if they appeal to your customers and can raise your revenue.