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Bundling Solutions for Technology Products

By Meghan Holohan

In lieu of marketing products in their standalone form, firms often offer combinations of products at special prices under a strategy known as bundling. Vacation packages, magazine subscriptions and season tickets for sporting events are just a few examples. Bundling can often benefit consumers by offering greater variety and discounted prices. Firms profit from higher sales and associated savings in production costs.

Alternatively, firms can sell both the bundle and the individual products. For example, buffet dinners can be offered alongside à la carte options. Such a strategy, known as mixed bundling, blends the advantages of offering products separately or only as a bundle.

R. Venkatesh, Pitt Business associate professor of business administration and area director of marketing and business economics, has been examining various forms of bundling. In a paper that appeared in a recent issue of the journal Management Science, he looked at the bundling of technology products".

"With many technological products, such as fax machines, software, and video games, the value of the product to an individual is related to the number of other users, Venkatesh says. There is no point in being the only person using a fax machine. The benefit tied to the size of the user pool is known as network effect.

In such instances, firms may be tempted to pursue bundling to increase sales and the size of the network. Microsoft's practice of combining its Internet browser with its Windows operating system is an oft cited example. But such an attempt could backfire if consumers not wanting one of the products decide to avoid the bundle entirely. Venkatesh and his coauthors examined this problem by considering the extent to which the bundled products are similar or dissimilar in their network effects. In categorizing their findings they point out that no one solution is best in all circumstances.

Consider two products that are similar in their network effects. Offering the products only as a bundle becomes the most appropriate approach. The power of bundling is magnified when network effects are stronger and when the two products can be reproduced cost effectively (e.g., two software packages). The lower marginal cost gives the firm greater flexibility in pricing and stronger network effects encourage a larger proportion of the market to adopt both products.

However, suppose only one of the two products yields the network effect. For example, in an e-mail client that provides a calendar utility, network effect accrues almost entirely from the e-mail side. Here mixed bundling—especially a variant of it—is most desirable. The firm benefits from offering the product with network effect in its standalone form and as a bundle with the other product. The product without network effect should not be offered separately.

"In this condition of dissimilarity, offering only the bundle can be a losing proposition because it will undersupply the product with network effect," explains Venkatesh.