Anyone who travels regularly will be well versed with the idea of bundling – the packaging of core services with ancillary ones – in order to help boost loyalty and create a sense of added value.
Those who fly business or first class, for example, are treated to lounge entry at the airport, perhaps a cooked breakfast and a barista-made cappuccino before an early morning flight.
But it's not just premium travellers who benefit from bundling. People staying at low-end, economy hotels can often enjoy a bundled breakfast and coffee as well.
This peculiarity – bundling at both the high end and the low end of the cost scale – is one that UNSW Business School marketing lecturer Jihwan Moon and colleagues have been investigating to better understand how it works to benefit business.
Why do airlines typically bundle offers at the high-end of their service levels, at first and business-class levels, when hotels bundle instead at the economy end? It doesn't seem to make sense when the two industries are dealing with the same market of business and leisure travellers.
Another surprising issue Moon was keen to dissect is that consumers most often believe they are receiving extra value when they purchase a bundled package, even when they're not.
So, passengers on a cruise ship that charges an extra $150 to bundle three on-shore excursions, each of which would usually cost $50 on their own, typically feel the bundled deal is better value. This, Moon says, is known as the 'bundle-framing effect'.
Levels of differentiation
There is a clear reason why some businesses bundle at the premium level and others at the bottom. The paper,
Product Line Bundling: Why Airlines Bundle High-End While Hotels Bundle Low-End, by Moon and co-authors Steven Shugan, Qiaoni Shi and Nanda Kumar, explains that it has to do with levels of core differentiation.
The researchers discovered that a specific level of differentiation between product or service offerings delivers optimal results for a business. If levels of differentiation are too low, or too high, revenue falls.
Consumers, it seems, crave some form of differentiation, whether it's to satisfy a need to be as economical as possible, or to enjoy a feeling of luxury.
Airlines naturally experience low core differentiation. Everybody boards the same aircraft, no matter the cost of their ticket. The journey begins and ends in the same place and takes the same amount of time. Everybody on the aircraft, no matter where they are sitting, is restricted to the confines of the seats and aisles.
On the aircraft, people in business and first class enjoy larger seats, better meals, priority boarding, and so on. If such benefits were offered to economy passengers, differentiation would be reduced.
"High-end bundling makes the high end more attractive, increasing line differentiation (less intra-line competition) while low-end bundling decreases line differentiation," Moon explains.
So bundling such ancillary services – as well as lounge entry, dedicated check-in counters, limousine transport to and from airports, and so on – at the top level makes sense. It helps to establish an optimal level of differentiation of the core service, the flight from A to B.
'If your core offerings are very similar, you have to bundle more benefits to your high end to increase the difference'
– JIHWAN MOON
When a business already experiences high differentiation of its core product or service, which is the case with hotels and restaurants, then bundling is used to decrease differentiation to the optimal level.
How are hotels and restaurants high differentiation businesses? They exist in different geographic locations and therefore the experience of the stay generally varies between locations (airlines also travel to various locations, but the experience in the air is always the same).
Many hotel brands offer a variety of high, mid and low-end establishments. Hotels also offer a large array of ancillary and differentiating products and services such as room size, breakfast, parking, location in building (and therefore views), web connection, laundry services, entertainment packages, club lounge entry, bottled water, tour offerings, airport pick-ups and more.
By bundling at the lower end – such as offering free breakfasts, complimentary bottled water and internet – the hotels decrease the differentiation of their core products to an optimal level.
"In summary, if your core offerings are very similar, you have to bundle more benefits to your high end to increase the difference," Moon explains.
"If you already have very different core services, then you have to bundle more benefits to the lower end to decrease the differences, to serve the markets better. It is a very simple concept that basically should be applicable to any industry."
'It is very important to know which ancillary service is popular and which is niche'
– JIHWAN MOON
Surprisingly, research has revealed that consumers believe bundled packages provide greater value than the unbundled worth of the products or services, even when their unbundled value is the same.
"When two or more products are bundled, consumers seem more willing to pay for them," Moon says.
"One of the reasons, we have discovered, is that when sellers bundle products with a core offering, it signals the popularity of the bundled, add-on services.
"So, looking at the example of a cruise ship operator bundling escorted shore excursions with the ticket cost, it says to the person purchasing the ticket that the escorted tour is extremely popular. Suddenly they don't want to miss out."
Moon says it is important to differentiate between 'popularity' and 'value'.
The bundled offer may represent extremely good value, and it may not. But the very fact that the extra services are bundled in the first place broadcasts a strong message about their popularity.
"Business managers know their core services extremely well," Moon says. "But along the way they also develop other add-on services. That's often what differentiates them across sellers. The managerial problem with these add-on services is whether the business provides them as a bundle, or unbundled.
"My paper says that if you are confident your add-on services are popular, that they appeal strongly to the general market, then it's good to bundle. However, it could be a very bad idea to do so if the bundled products risk alienating customers."
One example of a bundling error, Moon says, could be top-end bundling of breakfast at a hotel. Depending on location, people who pay for the high-end rooms may be looking forward to going out to local cafes for breakfast, and could therefore be turned off by the idea of paying for something they're unlikely to use.
"It is very important to know which ancillary service is popular and which is niche," Moon says. "If the business has confidence about the broad appeal of the specific service, it's better to bundle it with the core service."