In today’s post we'll go over a product bundling pricing strategy. We’ll see what it’s all about when it comes to pricing strategy (and no, it’s not just about selling a bunch of products together at a discounted price), and, we’ll see under which circumstances a price bundling strategy generates the biggest increases in revenues.
What is bundle pricing?
Product bundling pricing consists of selling two or more products together as a pack. Usually the goal is to make it seem like the products sold together are sold at a discount. However, the strategy behind bundle pricing is to transfer customers' willingness to pay from one product over to another.
I don’t know about you, but whenever I think of bundling, I always think of McDonalds’ bundle menus.
I confess I haven’t been to McDonalds in years, but I used to go there frequently back when I was a teenager. Before salads, green juices, gluten free, vegan, organic, or low whatever foods were in fashion, my friends and I just went to McDonalds.
Anyway, I must have eaten many, many lbs. of McDonalds’ fries, which I don’t even particularly like. Why? Well, the burger + fries + drink was such a great deal!
And that’s the power of a well thought out bundling price strategy! They made me spend more, to buy something I wouldn’t have bought, and still had me convinced I was being really smart about it. How brilliant is that?!
The big question for is: can you implement a similar product bundling strategy your business?
Product bundling example
Let’s imagine you are an online course creator, specialising in marketing and content creation.
You have created two courses; one focuses on online marketing, and another one on content writing.
Now… could you combine your courses in a way that will lead your customers to spend more than they would? And can you convince them that they got a great deal in the process?
As a part of you price optimisation process, you have surveyed your audience, and have an idea of how many of them would buy each course at different price points (based on survey and past experience).
You are now trying to understand how you can optimize your sales.
After you got the data from your survey, you made an initial analysis, and got to the conclusion that you have 4 market segments, each with 1,000 potential customers.
Two of these segments (1 and 4) have a much higher willingness to pay for one of the courses than for the other. Interestingly, segment 1 puts a high value on a content writing course and a much lower value on an online marketing one, while segment 4 values an online marketing course much higher than a content writing one.
Then, we have two intermediate segments. One is willing to pay more for a content writing course, the other for an online marketing one, but the difference in value between courses is not so high as in the case of segments 1 and 4.
And this, is a situation that begs for a bundle, since we have a product that is highly desirable for some segments of our market but not to others, and another product that is highly desirable for the latter segments, but not for the first ones.
But before we move on to create our price bundle strategy, let’s analyze the optimum price for the courses if priced individually.
What prices would result in higher sales without price bundling?
Let’s start with the content writing course.
Based on our initial analysis of the survey data, we got to the conclusion that segment 1 would be willing to pay up to $190 for the content writing course. Segment 2 would go up to 150, segment 3 $95, and segment 4, $35.
So if we were to price the course at $190, only segment 1 clients would buy. The other three segments wouldn't buy the course because they would consider the price to be too high. In this case, we would have 1,000 potential students buying the course for $190, getting us a total revenue of $190,000.
Now... if we priced the course for $150, two segments would buy: segment one, who would buy for 190, and segment two, who would buy for 150. Obviously, those who'd buy for 190, would also buy for 150.
So we would have 2,000 potential students, from segments one and two, buying the course for $150, for a total revenue of $300,000.
Similarly, if we'd price for $95, three segments would buy. We would have 3,000 students from segments one, two, and three, buying the course for $95, for a total revenue of $285,000.
And lastly, if we price the course for $35, all four segments would buy, getting us to a total expected revenue of $35 x 4,000 potential students. That is, $140,000.
So from this preliminary analysis, we get to the conclusion that what seems to be the optimum price for the content writing course if priced individually, would be the $150 that would get us 2,000 students to buy.
And with that price, we could expect our revenue to get to $300,000
Now if we follow the same analysis and rationale to analyze the online marketing course, we get to the conclusion that the optimum price for this course, if priced individually, would be $160. In that case, potential students from segments three and four would buy, for a total of 2,000 students x $160, which would lead to an expected revenue of $320,000.
So, summing up, if we were to price our courses individually, we would price the content writing course for $150, in which case we would sell to two segments: segments one and two, and we would price the online marketing course for $160, in which case we'd would also sell to two segments, but in this case, to segments three and four.
With these individual pricing strategies, we would expect to get a total revenue of $620,000.
What if we implemented a bundle pricing strategy? Could we possibly increase sales?
Well, you must have guessed the answer by now, so let's just see how.
Pure bundling strategy
What is a pure bundling strategy?
A pure product bundling strategy, or pure price bundling strategy, consists of selling several products together as a bundle, while not having them available for sale separately.
The first step to build our pure product bundling strategy, is to calculate how much each segment would be willing to pay for both courses. To do that, we'll add what each individual segment would be willing to pay for each one of the courses.
For example, in the case of segment 1, students would be willing to pay $190 for the content writing course, plus $70 for the online marketing course, which means that for both courses, they would be willing to pay $260.
This leads us to conclude that segment one would be willing to pay $260 for the product bundle, segment two would be willing to pay $245 for the same bundle, segment three $255, and finally, segment four would be willing to pay $230 for both courses.
Now the following step we would have to take, is to analyze what would happen if we were to price our bundle at each one of these price points.
So if we were to price our bundle for $260, only one segment would buy; segment one. That would get us a total revenue of 1,000 students x $260. That is, $260,000.
If we were to price the bundle for $245, three segments would buy: segments one, two, and three.
That would get us a total revenue of $245 x 3,000 students. That is, $735,000.
As for a potential price for the bundle of $255, in that case, we would sell to two segments.
That is, two thousand students, leading to a total revenue of $510,000.
Finally, if we were to price the bundle for $230, all four segments would buy, meaning we would expect a total revenue of 4,000 studentsx $230. That is, $920,000.
Summing up, if we look at the revenue that we would expect to achieve with each of these bundle prices, we see that the bundle price that maximizes our expected revenue, is the $230 one.
So if we were to price the bundle for $230, we would expect to achieve a total revenue of $920,000.
Now if we remember that back when we were optimizing the individual courses prices we were expecting to achieve a total revenue of $620,000, we see how the bundling strategy can increase our revenues.
But let's take our bundling strategy one step further.
Mixed bundling strategy
What is a mixed bundling strategy?
A mixed product bundling strategy, or mixed price bundling strategy, consists of selling several products together as a bundle, while at the same time having some or all of them available for sale individually.
As we've just seen, the optimal price for the bundle in our example would be $230. In this case, all four segments would buy. But what would happen if we were to select the second-best option?
In the case of the second best, we would price our bundle for $245. In this case, 3,000 would buy.
In fact, the only segment that would be left out, would be segment 4. And if we look at this segment's students willingness to pay for each one of the courses, we see that they'd be willing to pay $35 for the writing course, and $195 for the marketing course.
Which leads us to think: What would happen if we were to sell the bundle for $245, and the marketing course for $195?
Afterall, this particular segment that would be left out, is the one that has the highest willingness to pay for the marketing course. So let's take a second look at our numbers, and see what would happen in this particular situation.
In other words, let's see what would happen if instead of a pure bundling strategy, we were to implement a mixed bundling strategy.
Let's see how we could further optimize our revenues with a mixed bundling pricing strategy.
What would happen if we were to sell the bundle for $245, and the marketing course for $195?
Well, we would expect three segments to buy the product bundle, that is 3,000 students, plus one segment (segment four), to buy the online marketing course for $195.
That is, with this new mixed bundling strategy we would expect our total revenue to increase from $920,000 to $930,000.
Which leads us to wonder: what would happen if we move to the next bundling price? that is, $255.
Could we possibly increase our revenue even further?
And why not?
Well, segment two wouldn't buy the bundle.
And because they're only willing to pay $155 for the writing course, if you wanted to sell something to them, you would have to price the content writing course at $155, leading to lower overall sales.
In this scenario, we would be selling the bundle to 2,000 students for $255, getting us a total revenue from the bundle side of $510,000, plus we would sell the online marketing course for $195 to the segment four students, as we've seen previously, and, we would expect to sell the content marketing course for $155 to the remaining 1,000 students from segment two. So, with this new strategy, our expected total revenue would go down to $855,000, and therefore, not a great idea.
What would our final prices look like?
Well, if we were to use our new mixed product bundle pricing strategy, we would offer a bundle of both courses for $245.
At this price, 3,000 people would be expected to buy the bundle.
Then, we would offer the marketing course for $195. At this price, the 1,000 people from segment 4 would be expected to buy.
But what about the writing course? What do we do with that one?
Well, we'll price it at $195 too!
You see... the only segment that's not buying the bundle only values it at $35. So the expected sales volume at a higher price is low.
Therefore, we price it at the same level as the other course, even if we only expect a very small number of people to buy it. And why offer a course for $195 that we don't really expect people to buy?
Well... to start, pricing research isn't an exact science; there may be people who ARE willing to buy for $195. After all, segment one clients aren't very far away from that.
But most of all, we get to say that for $245 customers are getting a bundle worth $390. That simple!
This way, this mixed bundling pricing structure allows us to communicate the bundle as a 37% discount vs. the price of the individual courses. And increase expected sales from $620,000 to $930,000.
So, this is a type of pricing strategy that got me to eat fries I didn't really like, spend more money than if I had only bought what I really wanted, and feel great about it!