It has long been a marketing axiom that customers buy bundles of satisfaction, not products. It follows, then, that they’ll respond to certain combinations of products and services — air conditioners with free installation, combinations of software packages, or season tickets with parking privileges. The difficulty is in devising the bundles that both appeal to consumers and give cost or demand enhancing benefits to the producers. Eppen, Hanson, and Martin argue that the best approach is to treat bundles not as marketing gimmicks but as new products. They offer seven guidelines for creating competitive bundles and a framework for implementing them.
1. D. Sease, "Getting Smart: How U.S. Companies Devise Ways to Meet Challenge from Japan," Wall Street Journal, 16 September 1986, pp. 1, 24.
2. This example and data were provided by a major automobile company as part of a joint effort on bundling problems.
3. These data were provided by a software vendor in connection with a consulting engagement.
4. Business Week, 9 October 1989, pp. 134–138.
5. See H .G. Demmert, The Economics of Professional Team Sports (Lexington, Massachusetts: D.C. Heath, 1973); and R. Noll, Government and Sports Business (Washington, D.C: Brookings Institution, 1974).
6. Confidentiality requires some disguise of the particulars of costs and consumer segments.
7. The actual purchase decision is determined by the consumer surplus, the difference between the reservation and the market price. Consumers choose products that enhance their consumer surplus. In high involvement purchases, especially those using professional decision makers, we expect the consumer to choose the bundle with the maximum consumer surplus. For lower priced consumer products, it is often best to make the choice somewhat random, with a larger chance of being chosen for a product yielding large consumer surplus.
8. For information on the conjoint methods most appropriate to a bundling analysis, see:
P. Green and W. Desarbo, "Componential Segmentation in the Analysis of Consumer Tradeoffs," Journal of Marketing 43 (1979): 83–91;
S. Goldberg et al., "Conjoint Analysis of Price Premiums for Hotel Amenities," Journal of Business 57 (1984): 111–132; and W. Hausman and D. Montgomery, "Making Manufacturing Market Driven" (Stanford, California: Stanford University Graduate School of Business, Research Paper No. 1103, October 1990).
9. These prices and consumer decisions were obtained using the modeling software in:
W.A. Hanson and R.K. Martin, "Optimal Bundle Pricing," Management Science 36 (1990): 155–174. In addition to calculating the best prices and possible bundles, this methodology allows for a variety of sensitivity analyses, such as responses by competitors.
R. Kipp Martin's work was supported by the FMC Faculty Research Fund at the Graduate School of Business, the University of Chicago.