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How Bundling Works

by Patrick on September 7, 2011

Bundling services can add significant revenue to your business. There is a reason why fast food restaurants have combo meals and your cable company always wants you to sign up for more of their services. They aren’t doing it just to save you money; they’re doing it to make more.

In the example of the fast food restaurant, hamburgers sell for a dollar, fries sell for a dollar, and drinks sell for a dollar. Several people come in looking for something to eat or drink.

  1. Customer A thinks you have average hamburgers but your fries are his favorite in the whole world.
  2. Customer B loves your hamburgers and is indifferent to your fries.
  3. Customer C has just finished a long bicycle ride and wants a sports drink and some fries to restore the water and salt lost on his ride.

The chart below demonstrates their willingness to pay (WTP) for each item.

Burger

Fries

Drink

A

0.75

1.25

1

B

1.25

0.75

1

C

0.75

1.25

1.25

For customer A, if we charge him $1 for fries, we miss out on 25 cents that he would have paid. If we charge $1 for a hamburger, he won’t buy it because it’s not worth it to him. He’ll still buy the drink, and we receive $2 from customer A.

Similarly, with customer B, we lose out on 25 cents from the burger and a dollar from his unwillingness to buy the fries. The burger and the drink bring us $2.

Customer C only pays $1 each for the fries and drink that he would have paid more for, but doesn’t want the burger. We get $2 of the $2.50 he was willing to pay for the two items.

If we bundle the three, even at full price, we see things go differently. Customer A buys the fries and the drink, but the leftover 25 cents of WTP can go toward the burger. He was willing to pay $3 for the 3 anyway, and now he can without feeling like he spent too much on the burger. Customer B behaves the same way, and we get $3 out of them both.

Customer C is also willing to buy all three items now, and while we’re still leaving 25 cents on the table, we did manage to get another dollar out of him as well. If we take this further, we can take 25 cents off the full bundle price to sell the 3 at $2.75. This will convince budget minded people to spend buy, while the restaurant still makes $2.75 instead of $2. This way, the restaurant can still be the good guy by giving customers a better price, but still bring in more revenue.

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