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Whitman experts find bundling best strategy for marketers

May 28, 2008

Amy Mehringer
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Amy Mehringer

Have you ever wanted to subscribe to HBO but not CNN? Or have you wanted to buy a TV, DVD player and stereo system all-in-one instead of separately? Component shopping is often a confusing place for consumers to tread, and marketers faced with selling components may be forced to resort to alternative pricing strategies, such as encouraging the consumer to buy each component separately, or together, or both.

Bundling -- the practice of offering two or more products as a package -- is common among marketers. The customer usually benefits from the reduced time spent searching for products, and the marketer can generate greater profits through price discrimination and demand expansion.

However, questions remain as to what type of component selling is most effective: pure component -- selling each component individually; pure bundling -- selling only the bundle; or mixed bundling -- giving the consumer the choice of buying the components individually or as a bundle.

New research by Amiya Basu, professor of marketing in the Whitman School of Management at Syracuse University, and Padmal Vitharana, associate professor of management information systems at Whitman, assumes that customers vary in their knowledge of components and finds that three factors determine the optimal pricing strategy:

1) the marginal cost of components;

2) the distribution of knowledge over the customer population; and

3) the relative sizes of customer segments where each segment is interested in the same subset of components.

A report on their research study, "Impact of Customer Knowledge Heterogeneity on Bundling Strategy," is forthcoming in Marketing Science. The researchers found that if marginal costs are very low, profit is maximized by pure bundling. As marginal costs increase, the pure bundling plan remains optimal only if customer knowledge is generally low.

They also found that if marginal costs are high and customers have a great deal of knowledge about the product, the best plan is either a pure component plan or a mixed bundling plan. If the customers are interested in a majority of the components, the best plan is a pure component plan at a high price. However, if customers tend to be interested in a minority of components, the mixed bundling plan with even higher prices for the components is best.

Future research by Basu and Vitharana will examine how the results of bundling and pricing change as the number of components increases and if competition is introduced.

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