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: ECON 587 Studying price strategies: Price-bundling in e-commerce

Introduction

The role of price in the current economic system with the arising of e-commerce and online shopping is extremely significant. Setting the appropriate pricing is a balancing act and deciding on a pricing strategy is an important aspect of the business strategy. An effective pricing strategy can increase any business revenue and profitability. In this paper, the focus will be on bundle pricing – product bundle pricing- as one of the pricing strategies. Price bundling is a marketing strategy where two or more products or services are bundled or combined in packages (Adams & Yellen, 1976) with a total price lower than the price of each product if bought separately (Gayer et al., 2021). There are two types of price bundling strategies, pure bundling ad mixed bundling. When the product or service is always offered in package with other products or service this is referred to as ‘pure bundling’, whereas the product can be offered separately as well as in package with other products or services this is referred to as ‘mixed bundling’ (Adams & Yellen, 1976).

Literature review

In the first article, (Gayer et al., 2021) have investigated profit resulting from a new price bundling strategy called ‘sequential bundling’, in comparison with the two previously identified bundling strategies in prior research articles, the pure bundling and mixed bundling. The research compared the profit gained from each bundling strategy including the new suggested sequential bundling strategy, under the same conditions using microeconomics analysis. The analysis included numerical examples of both symmetric and asymmetric cost structures to illustrate the extra profit earned as a result of using sequential bundling strategy. The results of the analysis revealed that sequential bundling is the most profitable strategy compared with other bundling strategies for all predicted production costs. The analysis was under the assumption that price discrimination is similar among all consumers according to their initial purchase, sequential bundling yields higher profits. The researchers recommend practitioners to use this new bundling strategy -the sequential bundling- while suggesting options for business owners on how to determine prices in order to maximize profits.
In the second article by (Lin et al., 2020), the researchers studied how the pricing and product bundling can be affected by the competition in two-sided market platforms. They applied the competitive bottleneck model where customers only use one platform while sellers can join more than platform focusing on the influence of competition on pricing and bundling strategies on the two platforms. The analysis of equilibrium prices for three different scenarios, (1) two platforms with unbundled strategy, (2) two platforms with mixed-bundle strategy And the last scenario (3) one platform with unbundled strategy and one with mixed-bundle strategy.

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The result shows that each platform will charge the seller the same fee, hence if any of the platforms rises it seller’s fees, the number of sellers will decrease. Because of the cross-network externality, fewer customers will join this platform, resulting in a decrease in profit. The researchers also indicated that that in a mixed-bundling scenario, one platform charges users who only purchase platform access a higher price than in an unbundled scenario and are unaffected by the bundling strategy of the other platform. Furthermore, mixed bundling might attract more clients by offering a reduced price for integrated content. Under the mixed-bundling equilibrium, the platform can thus raise the access fee to increase revenues. Finally, the researcher discovered that the mixed-bundling strategy always proposes higher value for any two competing platforms.

In (Ma & Xie, 2018) research, the researchers investigated the stability of price decisions when a retailer employs a bundling strategy for complementary products. Considering the dynamic pricing system under the uncertainty of demand, the study focuses on a bounded rational decision-maker who adjusts decisions in each period and study the pricing system stability with the simultaneous game and sequential game.

The study highlights the importance of using a bundling approach since it increases sales and profits. The findings indicate that the decision maker should be careful when making decisions in the presence of system instability, since even little changes inside or outside the companies might result in the decision maker no longer being able to make optimum decisions. Furthermore, using a sequential game to price the bundled product results in higher system stability than using a simultaneous game, which means that the adjustment speed parameter can be decreased. This finding also revealed that if the decision maker uses a sequential game to price the bundling product after the SS items, the decision maker can arrive at the optimal position very quickly. Consequently, it can generate greater revenues in the long run.

The last article to review is by (Uripi et al., 2021), where the researchers Investigate the impact of price bundling capabilities on price value propositions and marketing performance and the mediating role of price value offerings. Structural Equation Model (SEM) is analysis was applied on collected data from 183 restaurant managers marketing and operations departments, to determine the research objectives and examine the measurement and structural model. According to the findings, the pricing bundling capability has a positive impact on the price value offers and marketing performance. Meanwhile, price value offers have a positive impact on marketing performance, and they offer protection against the influence of price bundling capability on marketing performance.

The analysis show that businesses utilize their resources and capabilities to generate value for their customers in order to improve their performance. Companies do this to attain greater performance through the production of value for their customers. The concept argues that the generation of value by customers mediates the influence of a company’s capabilities on its performance. When neither creates value for customers, the capacity cannot raise the company’s exceptional performance. The researchers recommend companies to improve their pricing bundling capability and price value offerings to reach an optimal marketing performance.

Conclusion

Companies that use a bundle pricing plan sell the bundle for a cheaper price than would be charged for individual products. Offering discounts may increase demand, allowing businesses to offer products or services that they might not have been able to sell otherwise and produce a higher volume of sales. Over time, bundling strategy may even assist to overcome reductions in per-product profit margins selling an item for less implies extracting less profit from it. Price bundling also assists companies in overcoming the difficulty of persuading potential customers to purchase specific products or services. It streamlines their purchasing experience and has the potential to raise average order values by combining high-value and low-value items.
After reviewing the previous four articles, my suggestion to SMEs online businesses is to take experts consultation before deciding on pricing strategy, because different e-commerce pricing strategies are utilized depending on the type of products sold, product demand, and competition. so in most cases, companies should avoid a solid bundling strategy because always there are customers who want to make their own choices. Eliminating the option of choice from the customer will reflect a negative impact on the business especially in markets where customers have more purchasing power.

References

Adams, W., & Yellen, J. (1976). Commodity Bundling and the Burden of Monopoly. The Quarterly Journal Of Economics, 90(3), 475. https://doi.org/10.2307/1886045
Gayer, A., Aiche, A., & Gimmon, E. (2021). Online sequential bundling: profit analysis and practice. Electronic Commerce Research. https://doi.org/10.1007/s10660-020-09452-x
Lin, X., Zhou, Y., Xie, W., Zhong, Y., & Cao, B. (2020). Pricing and Product-bundling Strategies for E-commerce Platforms with Competition. European Journal Of Operational Research, 283(3), 1026-1039. https://doi.org/10.1016/j.ejor.2019.11.066
Niu, B., Wang, J., Lee, C., & Chen, L. (2019). “Product + logistics” bundling sale and co-delivery in cross-border e-commerce. Electronic Commerce Research, 19(4), 915-941. https://doi.org/10.1007/s10660-019-09379-y
Uripi, C., Suliyanto, S., Adi, P., & Kaukab, M. (2021). The effect of pricing bundling capability on marketing performance: The mediating role of price value offerings. Accounting, 1101-1108. https://doi.org/10.5267/j.ac.2021.2.029