Group 6 Anant Bibhore 08 Aniket Choudhary 10 Lamzoulian Vaiphei - 30

PGP 2010-12, INDIAN INSTITTUTE OF MANAGEMENT RAIPUR

 The practice of marketing two or more products and/or services in a single "package" for a special price. Examples in consumer services:
Banks offering credit cards at no annual fee, free traveler's checks and other services for customers with large certificates of deposit Hotels are offering weekend packages that combine lodging and some meals at special rates. Airlines offering vacation packages combining air travel with car rentals and lodging

 Rationale for bundling is based on two realities: 1. High ratio of fixed to variable costs and a high degree of cost sharing (the same facilities, equipment, and personnel are used to provide multiple services) 2. The services offered by most service businesses are generally interdependent in terms of demand Effectiveness of price bundling is a function of degree to which it stimulates demand in a way that achieves cost economies.

 Pure bundling
Services available only in bundled from

Mixed bundling
Either purchase one or more services individually or to bundle MIXED-LEADER: one product at discounted price, other product at regular price MIXED-JOINT: a single price is set for two products purchased jointly.

Understanding where each form of mixed bundling is likely to be effective in pricing services.

 Basic economic rationale is transfer of consumer surplus. Assumptions

Seller holds monopoly over at least one element Independence of demand

Assumption do not hold for services firms because

Firms operate in a competitive environment Services may have a complementary relationship

 Reservation price for bundle may exceed sum of reservation prices of individual services. Relaxation of additivity assumptions

 Cross-selling target segments 1 and 2 Acquisition of new customer target segment 4 Retention target segment 3

 Full distribution of reservation prices for A and B may not be known, however demand levels within each segment may be estimated Demand responses required to change behavior may be deciphered

 UQA substantially greater than UQB, then under mixed leader A will be best leader. When UQA and UQB are approx equal, volume gains from bundling may be equal in both directions. Mixed-leader gives unidirectional gains Mixed-joint appropriate for bidirectional gains

 For cross-selling, key to effective demand response to bundling is degree and type of complementarity. Three types of complementarity relationships Complements due to economies in time and effort
Search economies real cost to customer is reduced

Enhancement in level of satisfaction with other products

Enhanced customer satisfaction one-way complementarity

Enhancement in overall image of seller

Bidirectional effects

 One of the products say A, is regularly/continuously purchased & UQA > UQB; A is the leader. Issue
How to close the gap (PB - RPB/A) If customers buy competitors service D instead of B, the gap is (RPD PD) + (PB RPB/A)

Ways to reduce gap

Direct transfer of any consumer surplus from A to B Price reduction on the leader A that increases consumer surplus on A Selection of B so as to enhance utility of A (so that RPA/B > RPA) Create search economies, reducing real cost of B (PB RPB/A)

Gains in case of unidirectional complementaries

 One of the services is already purchased, say A Issue

If customers to add B, the gap is (RPD - PD) + (PB RPB/A)

Ways to reduce gap

B enhances A Price of A + B is sufficiently reduced.

Such gains are clearly more likely to occur to the extent that bidirectional complementaries is present between the two services

Customer acquisition is the primary bundling objective when the strategic focus is potential new customer those buying neither A nor B

 Considering product A & B where A is the leader. A must be worth more if B also is purchased from the same source than A would be worth if purchase alone. A should be price elastic and B must be complement of A. Complementarity probability must be derived from the degree to which B enhances the search attributes of A.

 In this case, since customer must evaluate the total package ( A+B), the gap between prices and reservation prices can be overcome only if the price discount for the bundle generates a large gain in bundled sales. Bidirectional complemantary relationships are strong but have not been established previously in the consumers mind

Assuming most bundling offers will be accessible to current customers, the profit effect will depend largely on the extent of cannibalization due to: Reduce profit margin among customers already buying both A and B Reduced number (though at the same margin) of A-only or B-only buyers. Any reduction in the number of A-only and B-only buyers presumably occurs because these buyers now purchase the bundle

 Select A & B where UQA+B (the quantity of A & B sold without bundling) is small to minimized cannibalization effects.
Even if cross selling is the primary objective, selecting products that also generate new customers for both A & B will help offset cannibalization effects. In mixed-leader margin product. bundling, the leader should be the lower

Mixed-joint bundling will be more attractive when the margins of the two services are about equal and when the unbundled sales volumes (UQA & UQB) are about equal.

Conditions leading to success of Bundling Programs

Cross-Selling/Mixed Leader UQA > UQB (PA CA) < (PB CB) Large consumer surplus on A B enhances value of A and/or search economies reduce the real cost of B Cross-Selling/Mixed Joint UQA = UQB (PA CA) = (PB CB) Each consumer has large consumer surplus on A or on B

Bidirectional complementarity between A & B due either to enhances image of seller or to joint search economies.

Conditions leading to success of Bundling Programs

Customer acquisition/Mixed Leader If A is a leader, demand A for elastic Customer acquisition/Mixed Joint Demand for A + B elastic ( both A and B composed primarily of search attributes)

B and A complements because of search economies or enhanced Strong bidirectional value. complementarity ( or it can be established ) between A and B. A valued much more highly than B

Add-on bundling
It is an add-on service that will not be purchased unless the lead service is purchased Add-on bundling has the following key features: Because customer must choose between A and A+B, (i.e PB = 0). Mixed-joint form is the only feasible bundling approach. RPB/A = RPB because complimentarity must be unidirectional in the add-on case Most add-on services will be so intertwined with the lead service that split relationship among service providers are not feasible.