[MUSIC] In the preceding modules we focused on analyzing prices for individual products. Nevertheless, reality shows that most companies offer multiple products to their companies. Multi-product companies have pricing options that go beyond setting prices for only the individual products. Profit opportunities lie in determining not only what price to charge but also what to price in the first place. Whether to set a prize for individual products or bundling them together. So today we would like to talk about price bundling and we typically have two different alternatives available. We can distinguish between pure price bundling, meaning that I'm only offering a bundle to the customers. The typical examples would be, for instance, cable television companies. So you can't really choose one channel or the other, but you typically have to buy a package including multiple channels. Another example might be, for instance, Microsoft Office 365. Where, as well Office Package includes Excel, Word, and PowerPoint. The other alternative in bundling is mixed price bundling and I would say this is the more common alternative out there in the market. You could think again of multiple examples. Just think of the food sector. Let's think of McDonald's, for instance, with their value meals. I'm combining a bundle of a burger, French fries, and drinks, but at the same time, it allows me as well to not only purchase the bundle, but purchase the different items individually. The same is typically true when we go at the other end of the spectrum, and we look at fine dining restaurants who follow a similar strategy. They would allow you to choose the starter, the main dish, and the dessert separately, but very often, they offer you as well bundles of complete lunch meals or complete dinner sets. We actually can go as well to a complete different industry and let's look at the fast moving consumer goods industry. We very often see when we go to a supermarket that companies such as Pantene, one of the leading brands out there in the shampoo business, would be combining their shampoo product with a conditioner product. The same is actually true when we look at toothpaste and toothbrush, both produced by Colgate. And we would actually see is while that Colgate is putting both of these products together in one bundle. What we typically see is that by combining these two different products in one bundle, that the bundled price, or the price of that bundle, is offering, in addition, a discount to the consumers. So, for instance, by looking at the McDonald's value meal, by putting the burger, the fries and the Coke together the resulting overall price will be typically lower than the prices taken individually. But this is always true could you think of examples where the bundle of price is actually more expensive than the price of the individual items? I'm pretty sure that you have come up with very interesting ideas or examples where we see that the price of a bundle is higher than the price of the individual items. Let me just add a couple of other examples that illustrate that point. We actually see that especially in the arena of collectors or collectors' items that sometimes a complete set might be priced higher than the individual items. Many of you might have heard, as well, about a magazine called Monocle. Monocle is typically characterized by being difficult to get. Difficult to find. And as a consequence what we actually see as well is that the yearly subscription for Monocle, for this particular magazine, is more expensive than the individual items. I would like to share with you another example from our Spanish market. In this market, curve four has introduced so called "Pack Ahorro" which basically means the savings packs, primarily targeted at families. We have recently had a couple of issues actually in the press, where customers complained that it's not really a savings pack because by analyzing the packs more in detail, what they found was that the overall package, the overall bundle was priced higher than the sum of the individual items. So, let's illustrate this with an example and actually try to find the right price for individual products for a pure bundle and for a mixed bundle. Let's look at the example of the telecommunications industry. Let's assume that this telecommunication provider offers only two different products or two different plans if you wish. One is the data plan and the other one is the voice plan. You're going to see this now in the chart at the horizontal axis and the vertical axis. So assume as well that we currently have only four different customers out there in the market. And you now see their willingness to pay appear for the voice plan and for the data plan. So let's assume customer 1, for instance has a willingness to play for the voice plan of $9, and for the data plan, a significantly reduced willingness to pay of $1.50. So the question now becomes by pricing them individually what would be the right price for the voice plan? What do you think? So let's see whether you guys were right. We have seen that we have four different customers in this market for a voice plan. We see that they have very different willingness to pay starting with customer one having the highest willingness to pay all the way down to customer four, having the lowest willingness to pay. What we can now do is, try to see what's the revenue implication of charging, for instance, the highest price, charging a price of $9. We would actually see that the resulting revenues, as we sell only to one customer, would be $9. Our second alternative would be, let's lower our price to $8. That would allow us to already reach two different customers out there in the market. So our resulting revenue would now be $16. The question is does it make sense to go further down? Let's give it a try. Let's drop to $4.50. We now as you can already guess we're now able to sell three plans to customer one, two, and, three. Unfortunately, the resulting revenue is only going to be $13.50. So let than the $16 that we have seen at a price of 8. In order to complete this exercise, let's look at the lowest possible price of $2.50. We now would be reaching four customers but the resulting revenue would only be a mere $10. So we've already seen that the ideal price to charge the price that maximizes revenues in this particular example Is a price of $8, resulting in $16 revenues. Can you guess what is the right price for our data plan as well? As you probably have already identified correctly, the correct price for the data plan is $8.50, which would result in a total revenue contribution of $17. The challenge now is going to be what price would we charge if you're not going to sell these products individually but we would sell them as a bundle? What could be the right price? You will see that the solution to the right bundle price is absolutely the same as we have already seen for the voice and the data plan. The first step is what is the willingness to pay for the bundles for all four different customers? What we simply do, is we sum up the willingness to pay for the voice and for the data plan. Let's look at a very simple example of customer one. We have the willingness to pay of 9.0, plus the willingness to pay of $1.50 for the data plan. So the resulting willingness to pay for the bundle would be $10.50. And we can do very much the same for the remaining three customers. We now follow the same approach as we have done for the individual products. We're going to start yet again with the highest willingness to pay and look at the resulting revenues. So the highest willingness to pay in this particular case is starting at a bundle price of $13. At that price we will be able to sell our bundle to two customers. Customer 2, and customer 3. This would be resulting in a total revenue of $26. We could however reduce as well our price for the bundle to a price of $11.50. Now we would be able to reach a total of three customers and this would result in a total revenue of $34.50. We have already increased our revenue contribution. But let's see what's going to happen if we actually drop our price to the lowest bundle price of $10.50. Now the price of ten reach four different customers and we're going to be able to increase our total revenues to $42. So what we see in this particular example, the ideal price for each bundle to charge would be $10.50. We have also seen that we have significantly increased our revenue contribution by pricing the bundle instead of the two individual products the voice and the data plan. So we have now seen how to set prices for individual products and how to set prices for pure bundles. But as we have said before, there is as well the option to offer mixed bundling. So allowing new customers to either buy the bundle or buy the products individually. The solution is quite simple again. We're now combining the approach of individual product pricing and pure bundling, and we see this quite nicely when we look at the graph. We see essentially three different customer segments. We see one customer really valuing voice but not really caring about data. At the other extreme we see one customer really caring about data but not really caring about voice. And we see two remaining customers who seem to have a more balanced preference for voice and for data. So logically we would say why don't we try to sell the bundle to the balance preference customers and try to sell the voice plan to the customer who really cares about voice, and the data plan to the customer that really cares about data. We now see the solution already graphically. We actually see the perfect solution would be to price our bundle at $13. And with that price we would be able to satisfy customer 2 and customer 3. And at the same time, price our voice and data plan both at $9. This would, on one hand satisfy customer 1, purchasing only the voice product and would satisfy at the same time our customer 4, purchasing only the data plan. What we see yet again by mixed bundling we have further increased the overall revenue contribution for this simple example. Unfortunately it is not really possible to make general recommendations on what is optimal with respect to bundling strategy. However, you might want to keep the following guidelines in your mind. If customers, for instance, display a significant similarity in their valuations, viewing one product for instance as high value and another product as low value, typically not bundling at all tends to be the best alternative. If however the market is characterized by two groups of customers with very dissimilar valuations of products, we see that pure priced bundling is most of the time recommendable. And finally, if the market is characterized by a combination of customers, both with extreme and balanced preferences, mixed bundling is likely to be the best concept. [MUSIC]
