Anthony Tjan is a venture capitalist at the Boston-based VC firm Cue Ball, but he also blogs for The Harvard Business Review where last week he posted an article about packaged pricing deals in business. The article, The Pros and Cons of Bundled Pricing, points out the differences between bundles and "à la carte" pricing as well as benefits to both customers and businesses. Most Web startups offering an array of services will often bundle features into tiered pricing plans rather than an "à la carte" selection, and here's why.
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Using bundled pricing over "à la carte" pricing isn't just a simple decision of choosing the method that makes more money; bundled pricing can benefit businesses (and their customers) in other ways. While bundled pricing doesn't always necessarily benefit the customer, it can provide them with a better overall experience with the service being sold.
Tjan's example is a 5-star hotel that charges $750 per night, but the bottle of water in the room is an extra $10. To most people, $10 is a lot for a bottle of water and they will make sure they don't crack it open lest they see that extra $10 on their bill. If the hotel chose to instead bundle the cost of the water into the room and charge $760 per night, they could advertise bottled water as a feature. In most cases, someone willing to pay $750 for a hotel room is also willing to pay $760, but they don't know that they're being charged $10 for the water, it's just a hidden cost rolled into the bundle. They get to their room and think, "Wow! Free bottled water!"
The hotel in this example is banking on the percent of people who won't drink the water that they unknowingly paid for in the bundle. As Tjan points out, the same can be said for Web startups and software services.
"Think also of the fact that while most users of software use only a fraction of the available functionality, it is the basic users who are subsidizing the long-tail product development of features used by a relatively small number of advanced users," writes Tjan.
Bundled pricing can be a good and bad thing for both customers and businesses. In the case of the hotel, customers are paying a higher price which is an obvious benefit to the hotel, but in the end, the customers are also enjoying a better experience with the perceived "free" water. The opposite is true in Tjan's alternate example of fast-food restaurant value meals. In this case, the customer benefits from a lower price by bundling a burger with fries and a drink, but the restaurant can also benefit from a more streamlined workflow in preparing the meal.
For customers, there are times when seeing a breakdown of a bundle's pricing is advantageous, but most businesses are cautious about revealing such information. As Tjan points out, the key for businesses in this case is finding the right blend of these two ideas.
"The answer is simple: you should not confuse transparency with a pricing strategy. If you are the seller, focus on the total value provided which is fair for the customer and you," writes Tjan. "Show the list of all activities performed for a service without individually valuing them. Providing individual price breakdown can kill any perceived or real synergistic total value."
Obviously there are exceptions to any rule, and not every bundled pricing situation offers a mutual benefit to both parties. But are there situations when "à la carte" pricing could be beneficial to both customers and businesses? Let us know your thoughts on pricing in the comments.
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