Sunday, March 16, 2014

Why Bundling Products Is Bad For Consumers

You’ve probably seen all sorts of businesses offering bundles, from the local cable company to the nearest fast food restaurant.  A bundle usually involves the business offering some sort of discount for bundling together multiple goods or services.  For example, by subscribing to TV, internet, and phone service through your local cable company, you’ll receive the benefit of a lower overall monthly bill.

At first glance, bundles appear too good to be true.  You might think that the local cable company is cutting you a deal as a reward for being a loyal customer, but the business is actually just looking at improving the bottom line.

Example
Let’s say that James and Michelle are both interested in buying a hamburger, soft drink, and French fries at the local fast food joint.  The table below shows what James and Michelle are willing to spend for each item on the menu individually:


James
Michelle
Hamburger
$2.00
$1.50
Soft Drink
$0.30
$1.10
French Fries
$1.25
$0.40
Total Willingness to Spend
$3.55
$3.00

James values the hamburger and French fries the most, while Michelle values the hamburger and the soft drink the most.  If the fast food restaurant charged $1.00 for each item, James would only buy the hamburger and the French fries for $2.00 total while Michelle would only buy the hamburger and soft drink for $2.00, earning the fast food joint $4.00 total.

The fast food joint can do better than this by bundling the menu items together.  If the restaurant decides to bundle the hamburger, soft drink, and French fries for a total of $3.00, both James and Michelle would buy the bundle, earning the fast food joint $6.00 total, a $2.00 improvement.

Are they better off with bundling?
You might argue that both James and Michelle are still getting exactly what they want, which is true, but ultimately the business is benefiting by extracting more value from both James and Michelle.  The example becomes even clearer on a TV bill. TV plans typically bundle together a large swath of networks such as ESPN, QVC, The Cartoon Network, Fox News, Nickelodeon, Lifetime, etc. regardless of how much or little you watch or value each of those channels.

Where else are there bundles?
You’ll be surprised at the number of bundling examples all around you:
  • McDonald's, Burger King, Wendy’s, Taco Bell, etc. value meals that combine drinks, entrees, and sides.
  • Microsoft Office combines word processor, spreadsheets, and presentation software.
  • Comcast, Time Warner Cable, Cox, Verizon, etc. bundle together TV, internet, and phone services.  Additionally, the TV channels are also bundled by providing a group of channels rather than a la carte options.
  • AT&T, Sprint, T-Mobile, and Verizon bundle phone, data, text messaging into cell phone plans.
As a consumer, keep your eyes open and be aware of the power of bundles.  As a business owner, think of the ways to bundle your products to maximize your earnings.

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