Consider the last purchase you made. Did you get what you paid for? Did you pay for things you didn't want? It may not be entirely your fault. As much as your own impulsive or unplanned decision-making can cost you money, you also have to contend with sales tactics that companies use to increase your spending. Two common sales practices that many firms use are versioning and bundling. Airlines engage in versioning by selling the same travel service to all customers while offering different levels of amenities for first class and economy tickets. Grocery stores bundle products together, offering a discount on the purchase of several of the same item.
TUTORIAL: Economic Basics
Both of these techniques are used to increase sales and promote products, while offering savings to consumers. However, some instances of versioning and bundling are designed to fool and confuse shoppers into overestimating the value of an offer. To make sure you aren't falling for false deals, you need to learn the details of versioning and bundling and the pros and cons of each tactic.
Versioning involves selling a product to a group of consumers and then altering that product and selling it to different consumer groups. A classic example of versioning occurs when an information technology firm sells professional and standard versions of software. A higher-priced professional version may have all the features of a software program, whereas a standard version may have limited features. (Memorable advertising and selling techniques increases sales and keeps competitors at bay. Check out Advertising, Crocodiles And Moats.)
Versioning can be applied to non-software goods and services as well. An automobile dealer engages in a form of versioning when it offers "fully loaded" cars equipped with options like navigation and heated power seats, while offering the same model car, without additional features, at a lower cost.
Is versioning good or bad for consumers? If the different goods or services are seen as imperfect substitutes, then consumers are able to maximize their utility by choosing between the altered versions. But if the goods are not seen as substitutes, firms can earn higher profits as certain consumers may be paying for features they do not need, and aggregate consumer satisfaction is not being realized. A firm might even be earning higher profits by illegal price discrimination.
Bundling involves combining multiple products and selling the items as a package. A typical example of bundling involves installing software on a computer and selling both the computer and the software as one product. In this case, the software would have to be purchased along with the computer, regardless of the consumer's desire for the embedded software. When firms engage in bundling, the combined products might not be able to be separated, leading to the possibility that consumers are being disadvantaged. (Check out the history and reasons behind antitrust laws, as well as the arguments over them in Antitrust Defined.)
Bundling can benefit the consumer if:
- A price advantage is realized compared with the total cost of the individual items.
- Individual items within the bundled package can be purchased separately.
Consider a bundled bedroom furniture set - such as beds, bedside tables and dressers - that may be purchased at a discount to the total price of individual products sold separately. In this case, if the consumer were interested in purchasing all the items, they would potentially benefit from a bundled discounted price. If the consumer wanted the bed and dresser but not the tables and could not purchase the items separately, this form of bundling would not be mutually beneficial. (Do you know how companies really make their money? Learn to assess the systems by which businesses generate their revenue; see Getting To Know Business Models.)
Bundling in the form of tie-in sales can be illegal if consumers are forced to purchase a product only when combined with another item. Assume a business requires that only branded parts of computer hard drives can be used to retain a consumer's warranty. Warrantors cannot illegally bundle the sale of only branded items in exchange for the warranty. (For more read Consumer Protection Laws You Need To Know.)
Who Profits from Versioning and Bundling?
Versioning is a very common sales method that can provide benefits to both firms and consumers.
Firms engage in versioning to sell more products, and consumers may be able to maximize utility by having more options for differentiated products. Firms may be able to sell more units and consumers can realize greater utility if goods are seen as imperfect substitutes, resulting in increased aggregate consumer satisfaction.
Using the example of computer software, a consumer who is looking for a standard version of an office program would benefit if they were able to pay a lower cost and receive the basic features of the professional software. This group of consumers receives the benefit of the services they require at a lower cost for the standard version. The firm benefits as well by making a sale that may not have been made if only the higher priced professional version was available. (Learn more about finding winners in the retail industry; read Measuring Company Efficiency.)
However, versioning can disadvantage the consumer if the goods or services are not imperfect substitutes, leading to the possibility that firms are engaging in price discrimination. In its basic form, price discrimination involves selling separate goods at different prices even though there is no significant difference in the products. Price discrimination via versioning is rarely enforced.
Companies can attempt to profit by bundling as well. Assume one set of consumers is willing to pay $900 for a laptop and $100 for office software. If a company sells laptops for $799 and office software for $199, this set of consumers would be willing to purchase the laptop but might not want to buy software.
Assume a second set of consumers would be willing to pay $700 for a laptop and $300 for office software. If the company were selling laptops for $799 and office software for $199, this second set of consumers would be willing to purchase the office software, but might not want to buy the laptop.
By bundling the two products and selling the item for $999, the company hopes to sell to both groups of consumers. The additional profit potential to the company would be the sale of the item that might not be sold individually. The cost to the consumer would be the excess cost of the less-desired item above the utility for that item. (Learn how the economic term "price-taker" may separate investors from traders in Setting vs. Getting: What Is a Price-Taker?)
The Bottom Line
It's important to know what you are paying for. The next time you go shopping, try to identify whether a company is engaging in versioning or bundling. Understanding the company's tactics may help you make a better decision about what to buy.