11/05/2009

Bundling with Qwest

Bundling is a pricing strategy that many companies use to get their customers to buy more than they usually would. Bundling is taking more than one product and selling it as one with one price. The price of the bundle is usually set at a lower price than the products would individually sell. This gets the consumer that may have originally set out to buy only one product to consider buying two or three products to receive a discount on their original product and get more value by having the other products.

There are two types of bundling. The first is pure bundling the second is mixed bundling. Qwest uses mixed bundling which gives the consumer the option of purchasing their products either separate or bundling them. Pure bundling is selling the products in a bundle exclusively. Many products at the store seem to utilize this pure bundling.

Pure bundling and mixed bundling are profitable only when direct segment discrimination is not possible and the demands of the produces are negatively correlated. Mixed bundling is profitable when the marginal costs are low. Qwest is a perfect example of mixed bundling. Their costs for adding cable internet to a customer that is purchasing cable TV is very small.

I am of the opinion that many companies do not have the time or resources to research their own product's demand and supply to utilize bundling to its fullest extent. Many small business owners learn whether or not bundling is profitable through trial and error rather than market research. Larger companies like Qwest have done very well capitalizing on bundling pricing strategy.

http://livingeconomics.org/article.asp?docId=288

6 comments:

Lucas said...

Qwest is amazing at the pushing their product and their bundles. I utilize their DSL and every time I phone in with an issue, they ask me if I would like to take a quick survey to see if they can help me out with my other services that I may have with other companies. I tell them that I am completely satisfied with the other companies and unless they can offer me a lower price, then I tell them to disregard the offer and tell them good-bye.

Qwest has capitalized on their bundling packages by being able to offer less expensive options for the first year and then after that year the prices almost double. What they do not disclose, is that you are locked in to a two year contract and have to continue paying that new price for a year.

Erin said...

Bundling is a great method of increasing profit by giving consumers options. I agree that a company does have to use trial and error to determine if bundling is profitable rather than by using market research.

Qwest does a great job at marking their bundles. Unfortunately, I have some awful experiences with Qwest customer service and billing. I have used their bundling offers only to get incorrect bills every month. This results in at least a 30 minute call every month. To make bundling work and to retain current customers a company has to live up to their promises. Qwest has the right idea and offers the correct prices, but in my experience it has been very difficult to get my bill to reflect their promises.

Michael said...

I think Qwest is using the right strategy for their product. With bundled pricing, Qwest earn more profit then separate pricing. But for buyers it is not good strategy because they will not get surplus. Qwest is offering their service with two years contract. For first two or three month they offer service at very low price then after they charge more. And they also charge the fee for cancellation of contract. So customer has no other option. I think they are not offering good price but they are locking the customer in an agreement. At last, customers are paying more then other service provider. So I think bundling is good strategy for sellers but not for buyers.

Leah said...

Business owners need to be careful with bundling. Bundling products that people don't necessarily want to pay for can be dangerous for the business offering the bundle. Sometimes if the company does not offer the products individually at a good price the customers will go elsewhere. An example of this is Qwest because the younger generation does not have a need for a home phone line and that is what is offered.

Dr. Tufte said...

-1 on Blake and Michael for grammatical errors.

Michael: the whole point of bundling is to not let the consumers get surplus. I think you've got it backwards.

Bundling is an interesting issue, but I think it is overblown in ManEc books. I tend to think that bundling tends to be done to reduce employee errors, rather than to extract surplus.

Fred George said...

There are a lot of cell phone companies that offer preset cell phone packages. Some companies offer very basic bundled services and all the customer has to decide is which service satisfies his or her needs more fully. I think that very few bundled services meet a high percent of customers needs exactly. Bundled products were probably thought up with the idea that it is the solution for maximizing company profits, decreasing employee mistakes and minimizing purchasing decisions for each individual customer.