Pricing is one of the most important but least understood marketing decisions. Learn and practice concepts, techniques, and get to grips with the latest thinking on assessing and formulating pricing strategies. Analyze how firms attempt to capture value, as well as profits, in the revenues they earn. After this course, you will be able to contribute to the process of formulating pricing strategies for your own products and services, or those of your firm. This course has an additional focus on pricing dynamics and the reaction to and by competitors, taking a highly pragmatic approach and one that is directly applicable to your day-to-day professional life. Martin Boehm - IE Professor and Dean of the Business School with over 10 years experience - will guide you through four modules. We begin with the importance of pricing and how it ultimately can affect the bottom line. Then, we move on to methods to help you decide what is the optimal price for your product; and then price discrimination - should all your products follow the same pricing strategy or should you differentiate depending on the customer segment? Finally, we look at pricing psychology and how you can manipulate customers in order to drive the highest possible price for your product.
Bundling
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En provenance du cours de IE Business School
Pricing Strategy
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À partir de la leçon
Playing the Pricing Piano or Price Discrimination
What we see in the real world is that companies don't only charge one price for all their products, but rather set different prices for different products with respect to different customer segments. After looking at the benefits of price discrimination (and the significant revenue and profit potential behind it), you will be able to figure out what type and how to implement price discrimination for your products and services.
Rencontrer les enseignants
Martin BoehmProfessor of Marketing
Dean of IE Business School
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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.
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