Bundle Magic

Divinations, 2020-04-16

Some Theory

  • Bundling A+B+C+D provides more absolute value, but is more expensive than just B, and the value is in the eyes of the customer.

  • Unbundlers value only a portion of the bundle and can pay a lower price for it. [the most famous example: selling individual tracks via iTunes]

  • Bundlers value the extra choice and appreciate the discount. [Spotify, cable TV]

Unlocking the Value

  • Some products are in demand, but their price point is higher than customers want to pay.

  • Deadweight loss – when people’s demand is not satisfied because of the price.

  • Consumer surplus – when people could pay more for the item but end up paying less.

  • Price discrimination – when different customers get individually-tailored / haggled price for the same item.

  • Maximisation of revenue from each customer via price discrimination may not be possible due to the scale, reputation or laws.

  • The magic of bundling is packaging the products in such a way to reduce / eliminate deadweight loss and make it look like excellent value.

  • On top of this, demand for bundles shows lower variance [MK: think diversification in stocks] than for individual items.

Three Caveats

  1. This only works in cases if the other items in the bundle have some value to a customer. In other cases, the items should be unbundled and offered individually.

  2. Another complexity of bundling is simply explaining what’s in there. Strong brands may be too strong and standalone for bundling.

  3. Cost-wise bundling can work great for digital products (with zero marginal cost) and almost nothing else (other than madly overpriced goods).

Homework

  • What’s the fair way of splitting the proceeds if the items come from different vendors?

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