A McDonalds Happy Meal (Source: Wikimedia Commons)
Ideas for Leaders #238

Does Bundling Hurt Sales?

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Key Concept

While retailers and manufacturers may believe that bundling two products makes the package more attractive, research shows that bundling an expensive product with an inexpensive product actually diminishes the value of the expensive item. 

Idea Summary

When consumers buy two products bundled together, do they see the value of the bundle as the sum of the two values, or is it even more — do consumers see the value of the bundle as more than the sum of the two parts? According to new research, it’s neither. In fact, bundling an expensive product with an inexpensive product diminishes the value of the expensive product.

The reason, according Aaron Brough of Pepperdine University and Alexander Chernev of Northwestern University’s Kellogg School of Management, is what they call categorical averaging. When determining the value of a bundled item, consumers don’t break apart the bundle and consider the individual prices. Instead, they take the bundle as a single unit and determine an overall “average” price for the package.

The result is not what manufacturers and retailers are expecting when they create the bundle. Instead of adding value to their items, they are in essence reducing the value of the more expensive item — at least in the perception of consumers.

The reason, according to the researchers, is that consumers represent monetary value categorically as well as numerically. In other words, instead of looking at a price tag and determining based on that number that the product is expensive, for example, consumers will instead classify the product into a price tier on an expensiveness continuum and then make the judgment.

The most obvious expensiveness continuum is for the product category. For example, a $50 hamburger sits on the high end of the expensiveness continuum for hamburgers, while a $50 coat sits on the low end of the expensiveness continuum for coats. In other words, it’s not the number that counts, but how the number compares to other prices for that same product.

The classification of a product as expensive or inexpensive can be determined by another type of comparison. Is a $200 floor mat expensive? Not in the context of buying a $20,000 car. In the context of buying a $2 air freshener, however, it seems quite expensive. In short, a $200 mat is categorized as cheap on an expensiveness continuum that includes a $20,000 car and expensive on a continuum that involves a $2 air freshener.

What happens when consumers are asked to evaluate the price of a bundled product consisting of two items, one expensive, one inexpensive? Instead of logically adding the value of one item to the value of the other, consumers will place the bundled product as a single item on an expensiveness continuum. Because the two items are on very different price tiers, however, consumers will try to form a balanced evaluation of the product, one which converges the two polar opposite price tiers toward the middle of the continuum (for example, ‘moderately expensive’).

The result is subtractive rather than additive effect. The convergence-toward-the-middle categorization makes the bundled product seem less valuable than the expensive product alone. Ignoring the fact that the value of a combination of two products must be more than the value of one of those products alone (the rather logical additive effect), consumers will actually be willing to pay less for the bundled product than the expensive product. 

Business Application

Bundling is becoming more and more popular among manufacturers and retailers. By combining an inexpensive item to an expensive item, marketers hope to make the expensive item more attractive, leading to more sales. In fact, the research indicates that consumers will be willing to pay more for the expensive item alone than the item bundled with an inexpensive item. Instead of bundling items to increase sales, marketers should do the very opposite and eliminate the inexpensive item from the combination. The result will be an increase in the perceived expensiveness of the remaining item. The item can be sold with a higher price tag.

Unbundling items from different price tiers does not only increase the perceived value of an expensive item, but also increases the perception of a fair price for the different items. For the reasons cited above, many consumers will systematically undervalue a combination and thus complain that its price is unfair. Unbundling eliminates this rush to judgment on the fairness of a price.

Sometimes, items from different price tiers cannot be unbundled. In that case, the best strategy for managers is to somehow encourage the consumer to valuate the items separately or categorize the different items on a non-monetary dimension.

The bottom line is that bundling seems like an intuitive way to encourage sales. According to the research, marketers may actually be unwittingly devaluing their products — and discouraging sales.

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Authors

Institutions

Source

Idea conceived

  • August 2012

Idea posted

  • October 2013

DOI number

10.13007/238

Subject

Real Time Analytics