Reports

Transaction Decoupling: The Effects of Price Bundling on the Decision to Consume

Dilip Soman and John T. Gourville, 1998, 98-131

Price bundling strategies, in which manufacturers charge a single price for multiple units of the same product (or for a single unit of many products), are becoming more prevalent. Commonplace in department and grocery stores, such bundling strategies are increasingly used in the pricing of services as well. For example, some theaters offer entertainment packages in which a single price includes admission to a series of plays as well as dinners and transportation. While previous research has examined consumers' decisions to purchase the product bundles, there is no research that addresses the effect of price bundling strategies on decisions to consume.

In this report, authors Soman and Gourville use an economics-based theory of individual consumer decision making—that consumers strive to gain enough utility from a product or service to recover the purchase price—to answer the following questions:

  • How do consumers evaluate the cost associated with each individual product that is sold as part of a bundle? What is the effect of this evaluation on their willingness to consume a product (e.g., a bottle of wine from a wine cellar) or a service (e.g., a theater performance that is part of a season ticket)?

  • What role does the motivation to consume have on the consumption decision?

  • What are the implications of the consumer evaluation process for the management of consumption?

Study and Findings
To examine these questions, the authors ran a series of experiments in which consumers were presented with bundled pricing scenarios in the services context (e.g., lift tickets at ski resorts, tickets to theater and sporting events).

They showed that in the case of a simple cash-and-carry transaction, such as buying a one-day lift ticket at a ski resort, a consumer can tightly link the costs and benefits of the transaction, and hence can easily "assign" a purchase price to the benefit derived from using the ski lift.

However, when a consumer pays a single price for multiple consumption opportunities (e.g., a four-day lift ticket pass or a series ticket to several theater performances), it is more difficult to make a one-to-one linkage between the cost and benefit. Hence, such transactions are "decoupled," and the consumer has a degree of flexibility in psychologically assigning a cost to each unit. Specifically, the authors find that consumers tend to price each unit at a value lower than the equivalent per-unit price. As a result, since consumers are trying to recover a lower allocated cost, they are more likely to forego an opportunity to consume a service (e.g., one of the theater performances).

Results also suggest that the physical format of the transaction strongly influences the extent of decoupling. For instance, if the series ticket is in the form of a booklet of tickets, linkage between cost and benefit is strengthened. On the other hand, if the series ticket is in the form of a pass, the transaction is decoupled.

Finally, results show that consumer motivation influences decisions to consume or forego a service. Specifically, in assigning a cost to each unit of consumption, the consumer can strategically assign a lower cost to a particular unit that he or she is motivated to forego, in favor of a more attractive alternative. For example, a consumer might forego a prepurchased session at a health club in favor of eating dinner out by rationalizing, "It didn't really cost me much at the margin." On the other hand, a consumer might strategically assign a high cost to a particular theater performance in order to justify consuming that unit, rather than spending some extra time at the office.

Managerial Implications
Results show that the pricing strategy and physical format of the transaction strongly influence consumption decision making, and suggest that marketers can manage consumption through pricing strategies.

For example, the finding that consumers tend to allocate a lower cost to each bundled unit in a services context suggests that consumers may also be more willing to consume a product that is sold as part of a bundle (e.g., a bottle of wine sold as part of a case). Thus, price bundling strategies might result in greater frequency of purchasing and higher profitability. A marketer might be advised to offer volume discounts or cross-category discounts as an incentive for bundled purchasing of products. Similarly, prepaid phonecards, laundry cards, and photocopy cards, which are promoted as convenient, have the potential to increase consumption and profits.

Further, since non-inventoriable services sold in a bundle are foregone more readily, marketers of services like theaters, sporting events, and health clubs, which are constrained by capacity, can utilize these findings to develop prediction models for attendance as a function of the pricing structure.

Finally, the results show that because of the flexibility of the consumer cost assignment process, persuasive messages can emotionally motivate consumers to consume or forego a service.

Dilip Soman is Assistant Professor of Marketing, University of Colorado at Boulder. John T. Gourville is Assistant Professor of Marketing, Graduate School of Business Administration, Harvard University.

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