Buying Bundles: the Effects of Bundle Attributes on the Value of Bundling

We consider the situation in which a buyer has to find the optimal degree of bundling for buying goods and services. From a review of the literature we develop attributes associated with bundling. Each of these attributes has an effect on the value of a bundle. Combined, the attributes determine the value of a bundle. We describe how the various attributes of a bundle contribute to the value of a bundle given the context of the buying situation. Based on interviews, a further analysis of bundle attributes and their effects on the bundle value is provided. The results of this analysis can be used to assist in finding the optimal degree of bundling. INTRODUCTION OF THE TOPIC When a buyer has to purchase a set of products and/or services he searches for the optimal way to buy on the market. One of the decisions the buyer has to make is whether he bundles the products and/or services or buys them in separate lots. For example, buying various products and services needed for a construction project separately is an alternative to buying a complete project. This is an important decision as it can have a large effect on cost components such as the purchasing price and operation costs. -------------------------* Merijn M. Linthorst, M.Sc., Jan Telgen, Ph.D. and Fredo Schotanus, Ph.D. are a Ph.D. student, NEVI Professor of Purchasing Management, and Assistant Professor, respectively at the University of Twente, Enschede, the Netherlands. Mr. Linthorst’s research interests are bundling and splitting decisions in purchasing. Telgen’s teaching and research interests are the interface between public sector purchasing management and operations research. Schotanus’ research interests are cooperative purchasing and supplier selection. Copyright © 2008 by Merijn Linthorst, Jan Telgen and Fredo Schotanus LINTHORST, TELGEN & SCHOTANUS 514 The bundling decision involves, as observed in our exploratory empirical results, a large number of attributes (i.e., dimensions), such as the purchasing volume and the risk of bankruptcy or non-delivery. These multi-dimensional decision problems are often underestimated and are typically based on intuition (Grove and Meehl, 1996): often buyers immediately move on to selecting the right supplier for the products or services. A good understanding on what attributes play a role in bundling decisions can help buyers to make better founded decisions about the degree of bundling. Unfortunately, current research offers little guidance on important attributes for bundling decisions. It is therefore our research objective to improve the understanding on bundle composition. Specifically, we present a framework for making bundling decisions and we elaborate on the concept of bundle attributes. These bundle attributes contribute to the value of a bundle and can be used as a basis for a wellinformed bundling decision. We discuss the attributes and their effects on the value of a bundle based on a number of practical bundling decisions reviewed with purchasers. LITERATURE ON BUNDLING Purchasers have considered bundle options for centuries, though little academic discussions seem to be devoted to the decision problem (Schoenherr and Mabert, 2008). Most of the bundling literature has been written from a seller’s perspective in either a marketing or economics literature. In the next two subsections, we discuss the buyer’s and seller’s perspectives in more detail. Bundling From a Seller’s Perspective From a seller’s perspective, marketing literature on bundling has examined the firm’s promoting and pricing of bundles (e.g. Ansari, Siddarth, and Weinberg, 1996; Ben-Akiva and Gershenfeld, 1998), consumer evaluation of bundles (e.g. Johnson, Herrmann, and Bauer, 1999; Soman and Gourville, 2001), and the optimality of bundling, by modeling the various marketing options for a marketeer (e.g. Bakos and Brynjolfsson, 2000; Wilson et al., 1990). Economics literature has mainly focused on bundling as an entry deterrence mechanism (e.g. Nalebuff, 2004; Carlton and Waldman, 2002), bundling and efficiency (e.g. Fang and Norman, 2003), and bundling as a profit-maximizing BUYING BUNDLES: THE EFFECTS OF BUNDLE ATTRIBUTES ON THE VALUE OF BUNDLING 515 mechanism (e.g. Armstrong, 1999; Avery and Hendershott, 2000). Stremersch and Tellis (2002) state, in their examination of the literature on bundling from a seller’s perspective, that there is no integrative framework that explains what an optimal bundle is, given various factors that have an effect on an optimal bundle. Also, they state that the literature is ambiguous about definitions for bundling, key conditions for optimal bundling and legality of bundling. This makes it even more difficult to develop a framework for making optimal bundling decisions from a buyer’s perspective. Bundling from a Buyer’s Perspective The body of literature on bundling from a buyer’s perspective is much smaller than that from the seller’s perspective. Only a few topics in bundling have been covered from a buyer’s perspective. The study of Mabert and Schoeherr (2001) showed that choosing the right bundle structure significantly influences the buyer’s perceived performance of the bundle. This importance of the bundle structure was later confirmed by Beall et al. (2003). This stresses the importance of the decision on the correct bundle structure. Reasons for bundling by buyers are the benefits towards lowering the administrative costs, such as ordering costs (Looman, Ruffin and de Boer, 2002). Other authors mention benefits of bundling such as an increase of buying power (Ramsay, 2001; Schoenherr and Mabert, 2006) or an increase of economies of scale (Birou, Fawcett and Magnan, 1997). However, few studies have provided attributes that influence an appropriate bundling structure, or tried to construct a framework that can be used to determine an appropriate bundling structure. Perhaps Jap’s (2002) suggestion of an optimal bundle structure in terms of number of items and purchasing spend comes closest. She poses that bundles should have a high number of items and a high spend. This should be weighted against the potential inability of suppliers to deliver and the loss of competition. The paper by Jap provides useful suggestions, but does not provide a framework or even a list of attributes. Other research on bundling from a buyer’s perspective focuses on bundles for reverse auctions. The achievement of price reductions by increasing the number of different bundles in the same bidding event has been reported by Carter et al (2004) and Hur et al. (2006). Changing the bundle composition for repeat auctions can also help to further reduce LINTHORST, TELGEN & SCHOTANUS 516 the price (Arnold et al., 2005). Still, they do not study finding the right bundle composition itself. This paper adds to the limited body of research on bundling from a buyer’s perspective. Besides adding new reasons for bundling to the existing literature, we combine these reasons in a framework that can be used to determine an appropriate bundling structure.