Product bundling

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Product bundling is a marketing strategy that involves offering several products for sale as one combined product. This strategy is very common in the software business (for example: bundle a word processor, a spreadsheet, and a database into a single office suite), and in the fast food industry in which multiple items are combined into a complete meal.

The strategy is most successful when:

there are economies of scale in production,
there are economies of scope in distribution,
consumers appreciate the resulting simplification of the purchase decision and benefit from the joint performance of the combined product,
when the marginal costs of bundling are low.
when production set-up costs are high,
when customer acquisition costs are high.

Product bundling is most suitable for high volume and high margin (i.e., low marginal cost) products. Research by Yannis Bakos and Erik Brynjolfsson found that bundling was particularly effective for digital "information goods" with close to zero marginal cost, and could enable a bundler with an inferior collection of products to drive even superior quality goods out of the market place.^[1]

In oligopolistic and monopolistic industries, product bundling can be seen as an unfair use of market power because it limits the choices available to the consumer. In these cases it is typically called product tying.

Pure bundling occurs when a consumer can only purchase the entire bundle or nothing, mixed bundling occurs when consumers are offered a choice between the purchasing the entire bundle or one of the separate parts of the bundle.