Cambridge Software / Pricing
Bundle
I. Economic and Behavioral
Foundations of Pricing
II. Innovative Pricing
Concepts and Tools
III. Internet Pricing
Models
March 12
Pricing Policy
Teck-Hua Ho
1
Outline
Price Bundling
Pure Bundling
Mixed Bundling
March 12
Pricing Policy
Teck-Hua Ho
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Examples
Microsoft’s “Office” bundle
Lexus’s car + maintenance services
Dell’s PC + monitor
Comcast’s cable package consists of up to 200
channels of cable TV
Holiday’s package
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Pricing Policy
Teck-Hua Ho
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Types of Price Bundling
 Pure Bundling
 Products can only be bought together
 E.g., Block booking of movie rights, Buffet
 Mixed Bundling
 Products can be purchased either individually or
jointly
 E.g., CPU+Monitor or separately; Buffet + a la carte.
 Traditional pure component pricing forms the benchmark
for evaluating the advantages of bundling
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Pricing Policy
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Movie Distribution Example
Should Bundle Pricing be offered?
 Movie distributors often sell packages of films rather than selling
individual film rights because the package values vary less across
buyers than do values of individual films
Buyer A
Buyer B
Movie 1
$9000
$5000
Movie 2
$1000
$5000
Total
$10000
$10000
 Using a la carte pricing can sell movie 1 to both buyers for $5000 each
and movie 2 to buyer B for $5000. Total revenue is $15000.
 By bundling, both buyers will buy the bundle for $10000. So total
revenue = $20000.
March 12
Pricing Policy
Teck-Hua Ho
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Mobile Phone Operator
Example
 Basic mobile-phone service is provided at a fixed monthly
fee.
 The firm offers a number of value-added services
including voice mail and a hot line for customer support.
 What prices should be charged for these services?
 While the fixed cost of providing each of the two services
is substantial, the unit variable cost per customer is low (is
set to zero for pricing purposes).
March 12
Pricing Policy
Teck-Hua Ho
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Mobile Phone Operator:
Data Requirements
Customer
Segment
Maximum Prices ($ per month)
Voice Mail
Hot Line
Both
1
9.0
1.5
10.5
2
8.0
5.0
13.0
3
4.5
8.5
13.0
4
2.5
9.0
11.5
Equal segment size
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Pricing Policy
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Price for Hot Line
Optimal Pure Components
Pricing
Pv = 8
10
9
8
7
6
5
4
3
2
1
0
Group 4
Ph=8.5
Group 2
Group 1
0
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Group 3
2
4
6
Price for Voice Mail
Pricing Policy
8
10
Teck-Hua Ho
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Optimal Pure Bundling
Price
10
9
Group 4
Group 3
Price for Hot Line
8
7
6
5
Group 2
4
3
2
Group 1
1.5
1
0
0
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2
4
Pricing Policy
6
8
Price for Voice Mail
9
10
Teck-Hua Ho
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Optimal Mixed Bundling
Price
10
9
8
7
6
5
4
3
2
1
0
Pv=9
Ph=9
Group 4
Price for Hot Line
Group 3
Pv+Ph=13
Group 2
Group 1
0
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2
4
Pricing Policy
6
8
Price for Voice Mail
10
Teck-Hua Ho
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Optimal Prices and Revenues for
Different Forms of Pricing
Optimal Prices
Sales Volume
Sales
Revenue
(Index)
Type of
Bundling
Voice
Mail
Hotline
Components
Only
8
Pure
Bundling
Mixed
Bundling
March 12
Bundle
Voice
Mail
Hotline
Bundle
8.5
-
2
2
-
33(100)
-
-
10.5
-
-
4
42(127)
9
9
13
1
1
2
44(133)
Pricing Policy
Teck-Hua Ho
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Key Observation and Insight
 Willingness to pays for component products are
negatively correlated.
 Bundling improves profit because unexploited customer
surplus (“money left on the table”) from one product is
transferred to a second product.
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Pricing Policy
Teck-Hua Ho
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Product and Service
Bundling – Machine Tools
Market
Segment
Group
1
Machine
Use
1250
WTPs
Maintenance Bundle
990
2310
2
23
1450
540
1750
3
22
1080
1030
2090
4
43
1390
870
2350
550
470
1020
Unit Variable
Cost
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Segment
Size
(%)
12
Pricing Policy
Remarks
Companies with own
service technicians
Very high usage
Teck-Hua Ho
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Different Forms of Pricing
Pricing
Strategy
Optimal
Selling
Price
Machine Maintenance Bundling
Components
1,390
870
Pure Bundling
66
1,450
1,030
2,310
Unit Variable
Cost
550
470
1020
23
Pricing Policy
Profit
Index
Relative
to Component
(%)
86240
100
77
82390
96
55
103,970
121
77
2,090
Mixed Bundling
March 12
Sales
Volume (%)
Machine Maintenance Bundling
22
Teck-Hua Ho
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Rationale for Legal
Restrictions
 Restricts competition in the target product market
Microsoft case: Office Suite
 Extends economic power to related markets
Microsoft case: Internet Explorer tie-ins
 Hurts consumers
Forced to buy items that are of poor quality, or
of limited use
March 12
Pricing Policy
Teck-Hua Ho
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Punchline
 Price bundling can work when willingness to pays for
component products are negatively correlated.
 Bundling can improve profit because unexploited
customer surplus (“money left on the table”) from one
product is transferred to a second product.
 Price bundling can appear in the form of pure and mixed
bundling. The distribution of WTPs determines which form
is superior.
March 12
Pricing Policy
Teck-Hua Ho
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