1. Cambridge Software / Pricing Bundle
I. Economic and Behavioral
Foundations of Pricing
II. Innovative Pricing
Concepts and Tools
III. Internet Pricing
Models
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2. Outline
Price Bundling
Pure Bundling
Mixed Bundling
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3. Examples Microsoft’s “Office” bundle
Lexus’s car + maintenance services
Dell’s PC + monitor
Comcast’s cable package consists of up to 200 channels of cable TV
Holiday’s package
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4. Types of Price Bundling
Pure Bundling
Products can only be bought together
E.g., Block booking of movie rights, Buffet
Mixed Bundling
Products can be purchased either individually or jointly
E.g., CPU+Monitor or separately; Buffet + a la carte.
Traditional pure component pricing forms the benchmark for evaluating the advantages of bundling
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5. Movie Distribution Example
Should Bundle Pricing be offered?
Movie distributors often sell packages of films rather than selling individual film rights because the package values vary less across buyers than do values of individual films
Buyer A Buyer B
Movie 1 $ $5000
Movie 2 $ $5000
Total $ $10000
Using a la carte pricing can sell movie 1 to both buyers for $5000 each and movie 2 to buyer B for $5000. Total revenue is $15000.
By bundling, both buyers will buy the bundle for $ So total revenue = $20000.
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6. Mobile Phone Operator Example
Basic mobile-phone service is provided at a fixed monthly fee.
The firm offers a number of value-added services including voice mail and a hot line for customer support.
What prices should be charged for these services?
While the fixed cost of providing each of the two services is substantial, the unit variable cost per customer is low (is set to zero for pricing purposes).
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7. Mobile Phone Operator: Data Requirements
Equal segment size
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8. Optimal Pure Components Pricing
Pv = 8
Price for Voice Mail
Group 4
Group 3
Group 2
Group 1
Price for Hot Line
Ph=8.5
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9. Optimal Pure Bundling Price
Group 4
Group 3
Price for Hot Line
Group 2
Group 1
1.5 9
Price for Voice Mail
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10. Optimal Mixed Bundling Price
Pv=9
Ph=9
Group 4
Group 3
Pv+Ph=13
Price for Hot Line
Group 2
Group 1
Price for Voice Mail
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11. Optimal Prices and Revenues for Different Forms of Pricing
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12. Key Observation and Insight
Willingness to pays for component products are negatively correlated.
Bundling improves profit because unexploited customer surplus (“money left on the table”) from one product is transferred to a second product.
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13. Product and Service Bundling – Machine Tools
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14. Different Forms of Pricing
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15. Rationale for Legal Restrictions
Restricts competition in the target product market
Microsoft case: Office Suite
Extends economic power to related markets
Microsoft case: Internet Explorer tie-ins
Hurts consumers
Forced to buy items that are of poor quality, or of limited use
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16. Punchline
Price bundling can work when willingness to pays for component products are negatively correlated.
Bundling can improve profit because unexploited customer surplus (“money left on the table”) from one product is transferred to a second product.
Price bundling can appear in the form of pure and mixed bundling. The distribution of WTPs determines which form is superior.
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