Product Bundling: To Do or Not To Do?

Tim Fishburne brings attention, in this cartoon, to the issue of product bundling that many product categories face: To bundle or not to bundle?

What do Customers Want?

To answer this question, we need to understand customer needs in the context of a category’s competitive landscape. Most of the time, customers are not really against bundling, they just want a bundle that is relevant to their needs.

In my experience doing research for subscription services, the “à la carte” model usually under-performs the all-inclusive “cafeteria” model. This may sound counter-intuitive since freedom of choice is given to customers. The hypothesis is that customers would pick and choose and thus pay as needs arise. If you ask consumers, many would say they would be behind this hypothesis.

However, when faced with the choice between a bundled product or individual services, people realize what a psychological burden this is.

Product Bundling Can Trigger Irrational Behaviors 

Research has shown that our cognitive biases sometimes make us behave in irrational ways. Presenting the price of individual features does something to our brains. It suddenly makes us aware of a cost we need to consider every time. This requires mental energy that we rather spend doing something else.

For example, I was involved in a research project in which the client wanted to lower prices. The new pricing strategy was to eliminate an “unlimited” offering and create bundles limited to three products.  If you wanted more than that, you could pay $0.99 for each additional item.

No matter how many ways we tested this concept using conjoint analysis, monadic testing, and qualitative research, the “unlimited” offering always won. In the long run, a customer would save money by going with the new offering. However, customers couldn’t predict they would be happy with only 3 items. Hence, this generated anxiety. Customers wanted to have unlimited access “just in case.”  Consequently, the additional $0.99 looked like too much to pay in an imaginary scenario of unlimited consumption, which was unrealistic.

Research Approach to Product Bundling

In the case of Cable TV, Fishburne uses it as an example in which customers clamor for unbundling. In contrast, I’d argue that customers are most likely asking for the opportunity to create customized bundles that reflect their preferences.

Customers, who say they would like to buy “à la carte” at the time of purchase, tend to underestimate the amount of time required to figure out what to buy. They would have to be aware of all the available channels to make a rational decision. Unfortunately, since this is unlikely to happen, many would feel they are missing something, which tends to generate anxiety.

Luckily, there are research methods, such as conjoint analysis, that can be used to unravel the bundling conundrum. This approach helps to avoid making blind decisions that could have a negative impact on revenues and profits.

I hope that companies facing this issue are aware that research can help them to do just that.