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Ideas for Leaders #690

Contradictory Attitudes of Consumers to Bundling

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Key Concept

The benefit to companies of bundling products and services is complicated. Consumers will demand more compensation and feel greater dissatisfaction if a component is missing from a bundle than if it is missing in isolation. However, consumers will be willing to pay less for an item added to a bundle (and derive less satisfaction from that item) compared to the same item purchased separately.

Idea Summary

Bundling products and services together impacts the perceived value of the individual items in that bundle in surprising ways. Recent research from professor Ayelet Fishbach of the University of Chicago’s Booth School of Business, working in collaboration with doctoral student Franklin Shaddy, shows an asymmetry in the valuation of individual items depending on whether the item is being added and subtracted from a bundle. 

According to the researchers, consumers will ask for more compensation from the loss of items from bundles, compared to the loss of the items in isolation. However, consumers will be willing to pay less for items that are added to bundles than they would pay for the identical items purchased separately.

Through a series of studies, the researchers explored the reasons for, and implications of, this loss vs. add asymmetry in valuation.

In one study, for example, participants who received four chocolate truffles as a bundle (called the ‘Lindt LINDOR Chocolate Truffle Bundle’) asked a higher price for selling one of the truffles than participants who received the truffles as separate items. In the same study, participants who received three truffles as a bundle were willing to pay a lower price for a fourth truffle than the participants who received the truffles as separate items. 

This study confirmed the asymmetry in valuation described above. When selling a truffle, participants in the bundle condition put a higher value on the loss of their truffle than the participants in the separate condition. When buying a truffle, participants in the bundle condition put a lower value on adding a truffle than the participants in the separate condition. 

Why the difference? 

The explanation according to the researchers is that a bundle is what they call a gestalt, which refers to a holistic unit that is more than the sum of its parts. In other words, consumers don’t see a bundle as separate items tied together, but as a single inseparable item. For them, removing an item from a bundle involves breaking apart a unit; adding an item to a bundle is simply sticking an ‘add-on’ to the unit. The loss of breaking something apart is greater than the gain of an additional piece — thus the loss/add asymmetry related to bundles.

This asymmetry can be expressed in other ways. The researchers demonstrate in a third study that consumers feel greater dissatisfaction from losing an item from a bundle than from adding an item to a bundle. 

However, according to a fourth study, if items in a bundle are identical or undifferentiated (for example, a three-pack of gum vs. the four differently flavoured chocolate truffles), the bundle is less likely to be viewed as a gestalt unit, and the valuation asymmetry will be attenuated.

A fifth study pinpointed one of the reasons viewing bundles as a gestalt leads to asymmetry in valuation: consumers feel a greater need to replace a missing item from a bundle than a missing item lost in isolation. A missing item from a bundle leaves behind an incomplete or ‘broken’ unit.

Finally, the researchers explored how the completion factor (that is, when the item being subtracted or added completes the set) negates the asymmetric bundling on valuation. In other words, whether the item is being added or subtracted (think of a stamp that completes a set of stamps), it has the same value. 

Business Application

This research reveals that the effectiveness of bundling as a marketing strategy is more nuanced than marketers might expect. One clear implication is that pricing decisions should take into account the asymmetry in customer’s valuation between an item dropped from a bundle and an item added to the bundle. 

The studies also show the potential pitfall of using bundled products and services to entice consumers with discounts: the strategy will backfire if one of the components of the bundle fails or is unavailable, since consumers will be more dissatisfied and demand more compensation than if the missing or unavailable component had not been bundled in the first place. 

Ironically, however, while the research highlights the potential drawbacks of bundles, it also reinforces the fact that consumers prefer bundles specifically because of this gestalt effect: consumers like the unit created by the bundle (which is why they are so loath to break it apart). 
The bottom line: Marketers are correct in assuming that consumers find bundles quite attractive, but would do well to remember the asymmetric variables explored in this research. This is a case where caveat venditor (seller beware) applies more than the familiar caveat emptor (buyer beware).

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Authors

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Source

Idea conceived

  • October 2017

Idea posted

  • February 2018

DOI number

10.13007/690

Subject

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