Marketers love to bundle products for good reason. Bundling encourages consumers to buy more. However, new research suggests it’s not that simple. While bundling gets buyers to buy more, it can also make them less willing to pay more for the additional bundled items and more likely to be frustrated if a bundled item is taken away.
University of Chicago Booth School of Business Professor Ayelet Fishbach and Chicago Booth Ph.D. candidate Franklin Shaddy explored bundling in “Seller Beware: How Bundling Affects Valuation.” Their study, which will be published in Journal of Marketing Research, defines bundling as the sale of two or more individual products together, in one seemingly “whole” package.
Fishbach and Shaddy conducted six experiments in online shopping that examined what they refer to as “the asymmetric effect of bundling on valuation.” They created the perception of a bundle in different ways: physically binding items together, placing items in a container labeled as a bundle, displaying items in close proximity, and referring to objects as a bundle. In each experiment, the authors manipulated whether consumers evaluated bundles or the same products offered separately.
While they did not use financial services or insurance products, they believe their findings apply to consumers when buying these products as well. The effects might even be stronger.
Asymmetry applies to the valuation of items offered as a bundle. “Consumers will demand more compensation for and experience greater dissatisfaction from the loss of items from bundles, compared to the loss of the same items in isolation.”
So if only two of the three pieces of luggage a buyer ordered arrived in time for Christmas, that customer would feel particularly dissatisfied. Although the customer only wanted one suitcase when originally logging onto Amazon, the bundled set of products became one “whole” product in the customer’s mind. Therefore, in losing one of these products, the Christmas gift feels incomplete.
However, Fishbach said, “consumers will offer lower willingness-to-pay for and experience less satisfaction from items added to bundles, compared to the same items purchased separately.”
This illustrates the asymmetric effect of bundling on valuation: Despite demanding more for losses from a bundle, consumers are not willing to pay more for additional items added to bundles. Likewise, adding an item to a bundle does not excite consumers as much as losing an item from a bundle frustrates them.
This disparity could change the way marketers approach bundling products and services for consumer purchases.
The professors predict their research on bundling would hold for financial services products, as in insurance where personal lines insurers frequently give discounts to those buying both home and auto coverages.
“Bundle discounts are very prevalent in this industry,” Shaddy said. “This means that the expectation of price differences between bundled and non-bundled products is probably fairly strong.”
He said he thinks there is a “lot of room for the ‘gestalt’ mechanism” to operate in this context and cited an example of an insurer offering a bundle of insurance products that covers all needs similar to a car dealership offering a comprehensive service package.
“Knowing that all of your potential issues are taken care of with one company should be compelling,” he said. “This is akin to selling an insurance solution that takes care of everything, whether it’s home, auto, boat, or something else. When it comes to insurance, people probably really value that sense of having a complete solution.”
However, because customers probably have a strong impression of these insurance bundles as “wholes,” policyholders are probably sensitive to losing any piece of their coverage. “Once you have an insurance bundle that covers everything, you are likely way more resistant to switching one component, such as auto insurance, to another company, just because you see a better rate, for example. You would ruin the sense of having everything ‘taken care of,’ so to speak, with one company.”
Researchers at J.D. Power uncovered some generational differences in consumer enthusiasm for bundling. Nearly half (48 percent) of Gen Y customers unbundle for price and 32 percent unbundle for better coverage, compared with 41 percent and 19 percent, respectively, of Boomers.