Cambridge Software / Pricing

Bundle

I. Economic and Behavioral

Foundations of Pricing

II. Innovative Pricing

Concepts and Tools

III. Internet Pricing

Models

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Outline
Price Bundling

Pure Bundling

Mixed Bundling

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Examples
Microsoft’s “Office” bundle


Lexus’s car + maintenance services



Dell’s PC + monitor


Comcast’s cable package consists of up to 200 channels of cable TV



Holiday’s package


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Types of Price Bundling
 Pure Bundling
 Products can only be bought together
 E.g., Block booking of movie rights, Buffet

 Mixed Bundling
 Products can be purchased either individually or
jointly
 E.g., CPU+Monitor or separately; Buffet + a la carte.

 Traditional pure component pricing forms the benchmark

for evaluating the advantages of bundling

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Movie Distribution Example
Should Bundle Pricing be offered?
 Movie distributors often sell packages of films rather than selling
individual film rights because the package values vary less across
buyers than do values of individual films
Buyer A Buyer B
Movie 1 $9000 $5000
Movie 2 $1000 $5000
Total $10000 $10000
 Using a la carte pricing can sell movie 1 to both buyers for $5000
each and movie 2 to buyer B for $5000. Total revenue is $15000.
 By bundling, both buyers will buy the bundle for $10000. So total
revenue = $20000.
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 Mobile Phone Operator
Example
 Basic mobile-phone service is provided at a fixed monthly
fee.

 The firm offers a number of value-added services

including voice mail and a hot line for customer support.

 What prices should be charged for these services?

 While the fixed cost of providing each of the two services

is substantial, the unit variable cost per customer is low (is
set to zero for pricing purposes).
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Mobile Phone Operator:
Data Requirements
Customer Maximum Prices ($ per month)
Segment
Voice Mail Hot Line Both

1 9.0 1.5 10.5

2 8.0 5.0 13.0

3 4.5 8.5 13.0

4 2.5 9.0 11.5

Equal segment size

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 Optimal Pure Components
Pricing
Pv = 8
10 Group 4
Group 3
9 Ph=8.5
8
Price for Hot Line

7
6
Group 2
5
4
3 Group 1

2
1
0
Price for Voice Mail
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Pricing Policy
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 Optimal Pure Bundling
Price
10 Group 4
Group 3
9
8
Price for Hot Line

7
6 Group 2

5
4 Group 1
1.5
3
2 9
1 Price for Voice Mail Teck-Hua Ho
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 Optimal Mixed Bundling
Price
Pv=9
10
Ph=9
9 Group 4
Group 3
8
Price for Hot Line

7
Pv+Ph=13
6 Group 2
5
4
3
Group 1
2
1
0 Price for Voice Mail Teck-Hua Ho
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Optimal Prices and Revenues for
Different Forms of Pricing

Optimal Prices Sales Volume

Sales
Type of
Revenue
Bundling
Voice Bundle Voice (Index)
Hotline Hotline Bundle
Mail Mail

Components
8 8.5 - 2 2 - 33(100)
Only

Pure
- - 10.5 - - 4 42(127)
Bundling

Mixed
9 9 13 1 1 2 44(133)
Bundling

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Key Observation and Insight
 Willingness to pays for component products are
negatively correlated.

 Bundling improves profit because unexploited customer

surplus (“money left on the table”) from one product is
transferred to a second product.

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Product and Service
Bundling – Machine Tools

Market S egm ent W TPs R em arks

S e g m e n t S iz e M a c h in e M a in t e n a n cBeu n d le
G roup (% ) U se
1 12 1250 990 2310

2 23 1450 540 1 7 5 0 C o m p a n ie s w ith o w

se r vic e te c h n ic ia n s
3 22 1080 1030 2 0 9 0 V e r y h ig h u sa g e

4 43 1390 870 2350

U n it V a r ia b le 550 470 1020

C o st
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Different Forms of Pricing

P r ic in g O p t im a l S e llin g P r ic e S a le s R
S trateg y V o lu m e ( % ) P r o fit t o C
M a c h inMe a in t e n a nB cuen d lin gM a c h in Me a in t e n aBn uc ne d lin Ign d e x

C o m p o n e n t s1 , 3 9 0 870 66 77 86240

P u r e B u n d lin g 2 ,0 9 0 77 82390

M ix e d B u n d 1lin, 4g5 0 1 ,0 3 0 2 ,3 1 0 23 22 55 1 0 3 ,9 7 0

U n it V a r ia b le5 5 0 470 1020

C ost
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Rationale for Legal
Restrictions
 Restricts competition in the target product market
Microsoft case: Office Suite

 Extends economic power to related markets

Microsoft case: Internet Explorer tie-ins

 Hurts consumers
Forced to buy items that are of poor quality, or
of limited use
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Punchline
 Price bundling can work when willingness to pays for
component products are negatively correlated.

 Bundling can improve profit because unexploited

customer surplus (“money left on the table”) from one
product is transferred to a second product.

 Price bundling can appear in the form of pure and mixed

bundling. The distribution of WTPs determines which form
is superior.

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