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.
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.
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.
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.
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.
Bundling is targeted by antitrust agencies, particularly when done by monopolistic firms as a form of illegal price discrimination.