Two Different Industries, Two Very Different Pricing Paths

Jun 15, 2015

 

In the not too distant past two different industries started moving in opposite directions when it came to pricing. Was one path better than the other?

 

In the not too distant past two different industries started moving in opposite directions when it came to pricing their products and services.

The fast food industry started bundling their products and promoting those bundles aggressively. Instead of selling all of their products individually, they grouped complementary products like an entree, side and beverage (burger, fries and soda) into and offered these packages at a single price.

The practice of bundling is very effective, and these packages proved very successful. Research proves that bundles routinely prompt people to buy more (in the form of items and larger sizes) than they would otherwise. These bundles are also more efficient to sell as there is a significant reduction in ordering costs. The customer chooses just one bundle instead of agonizing over several different items.

In another industry, florists started to unbundle their products. At one time, many florists offered free delivery. Of course it was never really free, the cost of delivery had simply been bundled into the price. Many other florists had been charging for delivery, but very low prices that did not reflect the real cost. To some extent, delivery was still bundled into the cost.

As fuel costs rose and pressure to compete on price increased most florists started unbundling, and charging separate delivery fees that more accurately reflected the cost. In some cases, delivery became a profit center.

Florists also started unbundling outgoing wire fees. At one point, most florists did not charge an outgoing wire fee, instead bundling it into the cost of the flowers. But, as wire services began aggressively raising their fees florists again chose to unbundle and charge outgoing wire fees.

In some ways, this is like the airline business. Also faced with rising fuel costs and pressure to compete on lower base fares airlines have systematically unbundled their products and prices. Most recently it has been the introduction of fees for checked bags. In the past, they started unbundling and charging for other things that had once been "free" – things like food, drinks and headphones.

Which approach is right? It's worth noting that people rarely like unbundling. Air travel just keeps getting cheaper (fares are about 50% lower than they were thirty years ago) but passengers still consider checked baggage fees to be outrageous and hate having to pay for food. Unbundling may help customers better understand costs and what exactly they are paying for, but they still resent the practice.

Nobody resents having the option of buying a bundle at a fast food restaurant. People generally like fast food and hate airlines.

Airlines can get away with it because there are fewer options and, to a large degree, no real alternatives to flying. You can choose not to travel, but once you decide to travel airlines often become unavoidable. They also face a market where decisions are made by comparing the lowest base fares online. If unbundling, and enduring the wrath of customers, helps them win that price war it is probably a good compromise.

When it comes to fast food there are far more options and alternatives. Bundling products makes them more desirable and increases spending. Further unbundling (charging for things like condiments, napkins, etc.) would be disastrous.

Neither approach – bundling or unbundling – is so compelling that it should be offered exclusively. As much as airlines have unbundled their lowest fares, higher classes still bundle things like checked bags, food and drinks. They recognize that there is a place for both.

The same thing applies to florists. There is a case to be made for unbundling, but there are many customers that will appreciate bundled pricing.



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