From the series on pricing strategy, the following details a strategy called price bundling, product bundling, a compilation, or a package deal. This is when a customer buys two or more products or services together for one price instead of buying items separately for individual prices.
This is an interesting strategy. Aside from being a popular tier pricing strategy, bundling pricing strategy is a game of perception.
There are many people who’d argue that it’s not a pricing strategy, but a marketing strategy.
At least, they’re related. If bundles are put together and tested properly, the result can satisfy your customers and have a positive impact on your business’s profitability. For example, the right bundle can:
- increase your overall sales
- increase your average sale
- increase your gross profit margin, and
- decrease your marketing cost.
Example of the bundle pricing strategy
Essentially, price bundling offers several products or services for sale as a combined product.
Think about your last fast food visit. If you requested to buy one or two single items, were you asked if you’d like to make it a combo?
Or, if you were with your kids, did you end up purchasing a kids’ meal?
This is an example of bundling everyone can relate to.
Also, the example of the kids’ meal illustrates that bundles don’t have to be made up of the same type of products. A regular combo may be a burger, fries, and a drink—which are all food items. Unlike the regular combo, the meal for kids includes food items and a toy.
All-inclusive vacations are another example; you get hotel, flight, car, and food plan all for one price.
B2B - business to business
In the business to business (B2B) world, you’ll find many solution-oriented bundles—products or services bundled to solve specific problems.
For example, telecommunication companies often bundle phone and internet.
Some bundles are taken a step further and packaged in a way that they speak to a specific audience, like the example of a phone and the internet which is geared to small businesses.
In the software as a service (SaaS) world, bundles often take the form of subscription plans. For example:
- a basic plan might include a set number of users with limited features.
- a business plan might include more users, a certain amount of customer support, along with additional features and applications bundled in, and
- the enterprise plan might throw unlimited support into the mix and unlimited access to all the business’s features and applications for as many users as required.
How to Leverage Bundle Pricing?
To successfully use this pricing strategy, you have to create bundles where the perceived value exceeds the asking price.
If you get the right value in front of the right customer at the appropriate price, you’re more likely to make a sale.
Bundling is most successful when:
- the average cost per unit lowers through increased production
- the average total cost of production decreases as a result of increasing the number of different products produced
- marginal costs of bundling are low
- production set-up costs are high, and
- customer acquisition costs are high.
Consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product.
Price bundling and revenue recognition
We see this pricing strategy most commonly in a one-time purchase scenario, in which case revenue recognition is straight forward. However, price bundling can be applied to a product or service that’s invoiced on a recurring basis, such as in the SaaS subscription plan example above.
If this is the case, revenue would have to be recognized over time. In line with the ASC 606 accounting standard, businesses can only recognize their revenue as its value is received by customers. The process of tracking and accounting for this can get complex and labor intensive.
Billing automation with accurate revenue recognition functionality becomes extremely appealing as businesses grows.
Used properly, the bundling pricing strategy can be very beneficial. But it’s not a right fit for every business. We recommend making sure it’s the best solution for your business before selecting a pricing strategy.
To read more on our pricing strategies series, check out:
- Freemium + Upsell
- Multiple Editions
- Pay As You Go
- Base + Overage
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