In its simplest form, bundle pricing is the act of putting a number of products together to create a bundle of items, then selling that bundle at a price that’s lower than the cost of purchasing the items individually. We see bundle pricing being used to sell anything and everything, from grocery store meal deals to Adobe’s Creative Cloud.
The fact that so many organizations across industries choose to bundle up items is testament to the range of benefits this pricing strategy offers – if used intelligently. Mainly, bundle pricing brings advantages in terms of the consumer surplus i.e the difference between what a customer is willing to pay and the amount a business actually charges.
Typically, if the price of a bundle is lower than the predetermined value a customer has in mind, they will believe that they’ve secured a great deal.
Types of Pricing Bundles
There are several different ways of using bundle pricing to boost sales, but most applications of bundle pricing fall into the following two categories.
Pure Price Bundling
In pure pricing bundling, a seller creates a bundle of products which can only be purchased as part of that bundle. Usually, this pricing strategy is used when products would not be usable without accompanying items – for example a sound system and the speakers designed to work with it.
While companies could sell the speakers on their own, it wouldn’t make much sense for customers to purchase them without the sound system they’re designed to work with. So, the company might choose to create a bundle of all the equipment a customer might need to set up their system, making it easier for the customer to see which products they need and purchase them for a single, competitive price.
Pure price bundling covers other forms of bundling, such as leader bundling and joint bundling.
Leader bundling is the name given to the type of bundle which includes a single lead product, along with a number of accompanying products. The accompanying products are typically of lower interest on their own, so they’re put into the bundle to tempt customers to purchase them along with the high-interest, leader product.
Joint bundling is a simpler form of bundle pricing, where customers are influenced to up the value of their purchase. In this strategy, two products are put together into a single bundle, tempting a customer to buy two items when they might otherwise have only walked away with one.
Mixed Price Bundling
Mixed price bundling is a very common form of bundle pricing, which sees businesses offer products both individually and as part of a bundle. When purchasing as part of a bundle, customers tend to secure products at a lower price.
Products sold as part of mixed price bundles are commonly standalone items, which customers might feasibly buy on their own. While other products in a bundle may complement their use, they are not required to be able to use each item individually.
We often see mixed price bundling being used in the hospitality industry. Many restaurants and bars use this strategy to tempt customers to purchase more food or drink, through the use of meal deals and other promotions. These bundles allow a customer to buy a number of dishes at a price that’s lower than it would’ve been if they were ordered individually.
Mixed price bundling is also widely used in the software industry. Microsoft Office is a prime example of this. While many of Microsoft’s products can be used on their own, customers are offered a reduced price if they purchase several products within a bundle.
When (and Why) Would You Use Bundle Pricing?
If you’ve not considered using bundle pricing before, now might be a good time to start. It’s an enormously powerful strategy which is useful in terms of both increasing profit margins and ramping up brand awareness to help you capture the attention of new customers.
Increase sales (and margins)
Bundle pricing is a well-known way of increasing sales and maximising profit margins. It’s why companies like Amazon offer dynamic pricing bundles on almost every product listing.
Take a look at the Amazon website and you’ll see plenty of recommendations for complementary products on its product pages. On sites like this, bundle pricing is used to tempt customers to spend more. Customers also benefit as they’re able to buy more, but spend less than they would have done if they’d bought their products in different transactions.
Capture a different type of customer
All growth strategies depend on a company’s ability to keep capturing the attention of new customers. Bundle pricing is a great way to do this.
The use of bundle pricing helps a business appeal to buyers who are specifically on the lookout for deals and discounts, and might not otherwise have given the product line a second look. These customers will typically be drawn in by the idea of making a saving, and will therefore become aware of the brand – and ultimately make a purchase.
Sell slow-moving or underperforming products
Slow-moving or stagnant inventory can be a real problem for companies looking to move forwards, so any strategy that helps solve this issue is infinitely valuable.
Bundle pricing is a well-known method of shifting slow-moving stock, as it works in the same way as any other promotional deal. Customers who had been reluctant to purchase due to cost are far more likely to be swayed by a bundle deal, so bundle pricing is a brilliant method of selling underperforming products and still making a good profit.
The Disadvantages and Pitfalls of Bundle Pricing
Bundle pricing works wonders for many businesses, but like all sales strategies it does come with an element of risk. There are potential disadvantages to this method, which you’ll need to be aware of before you dive into a new bundle pricing strategy.
Profit margin cannibalization
Bundle pricing does have an effect on profit margins for individual products, because they’re being sold at a slightly lower price within the bundle. So, if you’re looking to sell an already popular, high margin product, it might not make sense to offer it within a bundle.
Bundle pricing will likely reduce the number of individual sales of a popular product, therefore eating into its profit margins. However, this is unlikely to cause an issue if the deal increases the sales of the accompanying products within the bundle. In this case, a company will see an increase in overall profits which could offset the slight decrease in the margins of the lead item.
The key to making a success of bundle pricing is understanding the popularity of your stock, and making informed sales forecasts. Businesses that do this are unlikely to face any setbacks due to bundle pricing, as profit margin cannibalization will only occur if a company underestimates the popularity of a bundle or one of the products within it.
Bundle pricing only works if the products within a bundle appeal to customers. All or most of the products in a bundle must be both popular and useful to potential customers, otherwise a bundle deal is unlikely to hold much influence over new or existing customers.
Create bundles that combine products your customers will love, ensuring that products brought together in a bundle all complement each other. That way, your bundle deal will make sense to customers – and it’ll prove far more effective as a sales strategy.
Be Smarter With Bundle Pricing
Bundle pricing, like most pricing strategies, is not a one-size fits all solution and, without proper insight, companies can often fall into one (or more) of the pitfalls outlined above. As with value-based pricing, the success of this approach is dictated partly by if/how much customers are willing to pay. If a customer doesn’t want and isn’t willing to pay for the items in the bundle then there is little value to be gained.
Businesses can get round this by being smarter with their approach to setting bundle prices. Investing in intelligent pricing software with AI-powered forecasting abilities can help organizations bundle items and set price points much more effectively, allowing them to capture more opportunity without relying on trial and error.
About The Author
Dan Cakora is a Business Consultant at Vendavo, and has worked in various aspects of Pricing for over 15 years. Dan started his career as a Field Economist responsible for helping to measure inflation for the federal government. Before joining the Vendavo team, Dan was a customer at a large, international B2B distributor. He has led Pricing teams, developed Pricing and Sales Enablement products, and has a passion for data visualization. Dan has an MBA from DePaul University and a BS in Economics from Purdue University.