Don’t Bungle Your Bundles
Product bundles can increase sales, but beware of customer value perceptions
Does grouping products together into a single-price bundle increase the perception of value? Most of us would answer “yes,” but surprising research shows there is at least one condition where such grouping can actually reduce the apparent value. Here’s the most surprising and counterintuitive part: the bundle may be seen as worth not just less than the sum of its parts, but even less than the individual product!
The Joy of Bundling
Creating a bundle of several products is a time-honored strategy. As I point out in my book Brainfluence, bundling can serve to reduce the “pain of paying” because it makes it harder for consumers to know what the “right” price is for the products. Auto makers no longer promote individual pricing for various options like leather seats or a better sound system – now, they are often part of a luxury package along with other amenities. The package may cost a few thousand dollars, but it’s hard for the buyer to discern if that’s a good deal because the bundle includes multiple unfamiliar items.
Bundling can also serve more pedestrian business goals, like encouraging customers to sample new or less popular products by making them part of a bundle. Creating attractive bundles can also increase the average sale amount.
When Bundles Decrease Value
Pepperdine researchers Alexander Chernev and Aaron Brough found that bundling expensive and inexpensive products caused subjects to avoid the bundles. In the Harvard Business Review, Chernev says,
Even when they found both items in a bundle attractive, they were willing to pay less for the bundle than for the more expensive product alone. We also found that people were less likely to buy bundles that combined expensive and inexpensive products. For example, people were more likely to purchase a $2,299 home gym when it was offered alone than when it was combined with a fitness DVD. This suggests that the popular strategy of adding premiums to products can sometimes hurt, rather than increase, sales. [Emphasis added.]
Chernev attributes this anomaly to “categorical thinking” – a mental shortcut that people use to make decisions. While such shortcuts are usually helpful, in the case of grouping expensive and inexpensive items faulty conclusions can be reached.
Crazy Bundle Math
Perhaps the most startling experiment conducted by Chernev showed that while people were willing to pay $225 on one piece of luggage and $54 for another when they were offered as individual items, they would pay just $165 for the items as a bundle! That’s $60 less than they would have paid for the more expensive item alone!
This seems like disastrous news for any marketer creating bundles, but it’s not. Presenting bundles in the right way can boost sales without negatively impacting perceived product values.
But Wait, There’s More
I’ve always said marketers can learn a lot from successful infomercials. Those ads have been tested and re-tested, and are on the air only because they make money just about every time they run. Bundling is a huge part of the strategy in these ads – just when you think you’ve seen the best offer on the countertop appliance, you hear, “but wait, there’s more!” The announcer proceeds to sweeten the deal with extra food storage bags, a set of steak knives, or some other relatively inexpensive item.
While the Pepperdine research would suggest that throwing cheap items into the package might cause consumers to revalue the deal and actually reduce the response rate, it seems unlikely that so many successful ads would employ the strategy if the bundled items really cut sales. Here’s why this works: the infomercials start by establishing a high anchor point (“Thousands sold at $199!), and then give the consumer a lower price (“Just four payments of $29.99!”). By the time they start throwing in the deal-sweeteners, the price has been set in the consumer’s mind and the extra items are indeed seen as adding value. The consumer doesn’t need to take a mental shortcut to estimate value, and the categorical thinking effect doesn’t occur.
Bundling After Effects
Often, bundles are temporary offers. For customers exposed to the bundle pricing, the effects can linger after the original offer expires. Researchers Mauricio Palmeira and Joydeep Srivastava studied the condition where a product is offered as a reduced price add-on to another product. For example, an offer might say, “Buy the suitcase, and get the tote bag for only $20!” This might well boost sales, but the study results showed that a low add-on price decreased the perceived value of the item. In the tote example, the $20 add-on price established an anchor price for the item that made it seem less valuable later.
The study also found that offering an item as a free add-on did not have a negative impact on perceived value. They posit that “free” was not a possible price for the product and did not create an anchor value like the reduced price promotion.
It seems likely that current sales of the add-on item in a bundle could be impacted as well. If the tote bag was being offered as an individual item for, say, $75 at the same time it was shown as a $20 add-on to a suitcase, consumers might well imagine the tote to be worth less than its asking price. (The study did not test this hypothesis.)
How to Bundle Without Reducing Value
If you are thinking about bundling multiple products, do it right:
- Avoid mixing a cheap item and an expensive item and simply promoting the package.
- If you are combining products with different values, establish the value of the individual items first, particularly the most expensive one.
- Take a lesson from savvy, results-driven infomercial producers and emphasize the additive nature of bonus items.
- Focus on non-price attributes of the product (e.g., durability or comfort) – the researchers say this will reduce the devaluation effect from mixed-value items.
- Avoid add-on pricing for bundle items – make the add-on free or display only the combined price if you want to sell the add-on individually later.