INCREASING NUMBER of companies are realizing the value of combining separate elements of their product lines into bundles. Creating a bundle is like creating a new product. Thus bundles, like new products, can be instruments for implementing company strategy. Although bundles act like new products in the marketplace, they are typically much less expensive and risky to create. Also, given the important market advantage of reduced product introduction time, bundling has an added appeal. This article is devoted to the strategic use of bundles and bundle pricing.
A bundle is a group of products or services offered as a package. Bundles can have a wide variety of features. Some bundles include some items that are not available separately. Other bundles are offered at a price less than the sum of the individual item prices. Still other bundles endow the buyer with entitlements such as priority seat selection. In the case of a pure bundle, all items must be purchased as a complete package; they are unavailable any other way. As consumers we see the marketing aspect of bundling, but decisions about bundles aren't (or at least shouldn't be) the sole province of the marketing department. Bundling decisions typically have serious cost and strategic considerations and thus deserve the attention of general management. Consider the following example:
In 1983, the Dodge Omni and Plymouth Horizon were endangered products.' With the base car priced at $7,000 and all options priced separately (itemized pricing), these two variations on the same car could not compete with less expensive imports. At the time, the cars were available with a wide variety of options. Indeed, more than eight million combinations were possible. To become competitive, Chrysler switched to bundling and offered only forty-two combinations. The results were rather remarkable, as shown in Figure 1. Chrysler was able to reduce the price of the car, including a typical option package, by more than $1,000. The lower prices attracted new market segments and extended the profitable product life by several years. The price reductions were made possible by reduced manufacturing costs: longer production runs lowered setup costs; reduced interactions resulted in better quality; and reduced carrying and shipping costs alone accounted for a $2 million per year savings. Note that Chrysler presented the consumer with a new menu of choices at new prices; it introduced new products.