Real World Examples of Pure Bundling
When you go to a fast food restaurant and have the option of buying different items (burger, fries, soda) as a package at a single price that is generally referred to as bundling. If you can also buy the individual items in the bundle separately that is called mixed bundling.
If however the items are only available if you buy the entire bundle that is called pure bundling.
What are some examples of pure bundling?
Most cable providers do not let you pick individual channels – instead you have to buy a package that contains the channel that you want.
It can be argued that this is a way of getting you to spend more. Imagine that you love cars and really only want one specific channel - Discovery Velocity. That is a pretty specialized channel, and is probably part of a big, expensive (relatively speaking) package that includes a lot of channels. Let's say 200 channels for $80 a month.
That means that each channel costs about $0.40 cents a month. But because of the pure bundling strategy you have to pay 200 times that amount and get a bunch of channels that you don't want.
But we tend not to look at it that way because of the heterogeneous demand effect, meaning that you place different values on the channels in the bundle. You place such a high value on the Discovery Velocity channel that all the rest of the channels seem almost free.
Software is often sold in "suites" – bundles that contain multiple applications. In the past this often meant physical "boxed" software, and the practice has continued as software has increasingly moved to the subscription model.
One example is Microsoft Office 365. For one price you get Word, Excel, PowerPoint, Outlook, OneNote, Publisher, and Access. You can't choose which of those applications you pay for.
Again this takes advantage of the heterogeneous demand effect. Most customers would place a high value on one, two or maybe even three of those products, and would willingly pay a high price for them. They would not pay as much for the rest. Bundling the products makes the package seem like a good deal regardless of what specific product(s) someone is interested in, and they spend more than if they could purchase the individual items separately.
There are seven titles in the bundle. We'll imagine that the monthly cost is $14 or $2 each. If you could pick (and pay for) the titles individually a lot of people would probably choose just Word, Excel and maybe one other. That means $4-$6 in revenue – a big drop in revenue.
They could of course charge more when buying a la carte. But even if they doubled the price, to $4 per title, it's still less than they get with the pure bundle.
The pure bundle lets the person who lives and dies by Word to think "OK, I'd pay $10 just for Word, all the rest for just $4 seems like a good deal". Meanwhile the accountant can think "I'd pay almost anything just for Excel, everything else is pretty much included for free".