Optimizing an Offer Bundle

By creating more than one bundled option designed to appeal to different segments, a marketer can get most of the benefits described above along with the financial rewards of segmentation. Auto manufacturers, for example, put features together in the “sport package” or the “luxury edition” that have a single price for that bundle of options, while cable TV operators create different bundles focused on families, sports enthusiasts, and movie buffs. Since very few buyers would want just one element of the bundle without putting any value on the others, few sales are lost relative to the bundling efficiencies achieved.

Adding to the benefits of bundling, sellers can often earn more profit by pricing a bundle than they could by pricing the individual elements when a particular relationship exists among the features included in the bundle. Bundling is profit enhancing when it is possible to bundle features and services that create high value for some significant customer segments but more moderate value for another. A simple à la carte price for one feature or service that optimized profitability from one segment would necessarily over or under price other segments. Bundling, however, can facilitate more profitable, value-based pricing to each segment. The following example illustrates the principle when the same features can be priced profitably for more than one segment, but the most profitable price level for different segments is not the same.

Musical entertainment can provide an ideal opportunity for profitable bundling, where the “features” valued differently by different segments are the different types of performances. In Boston, where the authors live, one can buy tickets in a series that includes a few headline performers — such as Green Day, Jay-Z, or Kenny Chesney — as well as some lesser-known but often more “innovative” performers such as Kings of Leon or Solja Boy. The challenge is that there are two large customer segments to which these concerts appeal.

There is a large general entertainment segment that views music as just one entertainment option. People in this segment are willing to pay a lot to hear great headline performers, so revenue from them is maximized at a high ticket price (say $60 per ticket). However, they need to be induced to try a concert that is more innovative (no more than $25 per ticket). Without their support, it is unlikely that innovative concerts could attract a large enough audience to justify offering them.

Fortunately, since Boston is home to multiple music schools and music aficionados, there is a smaller segment that is willing to pay as much or more to see new, innovative performers as to see headliner performers. However, because much of this segment consists of students and musicians, they are more price sensitive to the headline performers whose music they have already experienced. The challenge is to maximize income from these two segments combined.

Based upon past research and experimentation, assume that the concert promoters believe that the ticket prices in represent roughly the acceptable price that would optimize price and attendance by each segment alone at each concert type. Unfortunately, if prices were set at $60 per ticket for headline performances, much of the music aficionado segment would be priced out, leaving some seats empty. Even more importantly for the survival of the concert series, if the innovative performances were priced at $40 per ticket, the large general entertainment segment would fail to show, and so those performances would probably not be viable. Charging $40 per ticket for “headliners” and $25 for “innovations” would fill the halls for both types of concerts but would leave a lot of potential revenue on the table. Each segment would be underpriced for some type of concert for which the revenue optimizing price was higher.

EXHIBIT 3-3 Revenue Optimizing Pricing by Segment for Musical Performances

Optimizing an Offer Bundle

Because of this reversal of preference (“headliners” are valued more by the general segment while “innovations” are valued more by the aficionado segment), it is possible to price tickets more profitably as a bundle. After establishing single ticket prices of $60 for headliners concerts and $40 for innovative concerts, the promoter can offer a series of headliner and innovative performances at a discount from those prices that fill the halls. Since the music aficionado segment would pay up to $80 for one headliner plus one innovative performance and the general entertainment segment would pay $85 for the same combination, the series promoter could maximize revenue at $80 for the pair (or $160 for 4, or $240 for 6, so long as the subscriber must choose a specified number of concerts of each type to make up a series). The venues can then be filled and generate more revenue per patron from each bundle of concerts than would be possible with single ticket pricing only (totally only $65 for a pair). The magic behind this is that the different segments are paying the additional $15 per pair of performances for different reasons. Giving them both a reason to pay more within the same bundle facilitates the capture of that value without forgoing volume.

In practice, there are often more than two segments, segments of very different sizes, and more than two types of products to bundle. Maximizing contribution requires building a spreadsheet or employing complex optimization model to evaluate bundling alternatives. The principle, however, is the same for bundling features in auto packages, items to include in the four-course dinner special, items in a vacation package, or spots for advertising at different times on a television network. The key is to bundle elements that are valued differently by different segments so long as the incremental revenue earned from inducing more customers to buy an element of the bundle exceeds the incremental cost to supply it. In principle, one could maximize revenue from three segments with one bundle containing three different elements, each valued most highly by one of the segments.

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