Tuesday, February 9, 2010

Bundling Vs à la carte marketing of services

James Surowiecki has an interesting article that analyzes cable television companies marketing strategy of bundling a group of channels into a package instead of promoting individual channel based offerings.

Consumer advocates point to the rising prices of these packages and oppose this pricing strategy. They claim that offering consumers the option to buy channels individually, or a system of the so-called "à la carte" programming, will be more beneficial and cost-effective for consumers.

It is undeniable that bundling with a flat-price has a cross-subsidy dimension that enables some of the less popular channels to survive at the expense of the popular ones. However, as Surowiecki illustrates, bundling is a fundamental characteristic of many markets - magazines, newspapers, television channels, gym memberships, Disneyworld passes, holiday packages, and so on. The pricing strategy in the market for journals and their individual articles (the individual articles get sold for a substantial premium than when purchased as part of the journal) is another example of consumers being better off with a flat-price bundle than selective purchases.

He also points to the "option value" of cable packages - "you may never watch those sixty other channels, but the fact that you could if you wanted to is worth something"; and the popular perception that bundles are bargains - "getting a bunch of things for one price feels like a deal, even when it’s not". Bundling also eliminates transactions costs and uncertainty for everyone - consumers, cable companies and television channels.

In many respects, cable television and other similar markets closely resemble insurance markets. Experience from across the world shows that financing health care by purchasing individual services has been found to be so expensive as to make them unaffordable to the vast majority of patients. In contrast health insurance keeps administration and other transaction costs, and thereby premiums, at a minimum by offering a basic minimum coverage for diseases and aggregating the widest possible risk pool of customers. The insurance package would contain coverage for health conditions, irrespective of whether the customer would need it or not, to be availed of if and when the need arises.

Interestingly, the success of cable television and journals with bundled product offerings could provide lessons to those who feel that the cost-effective approach to health care is by purchasing individual components as the need arises. In other words, universal health insurance sceptics could take a leaf out of cable television businesses while opponents of bundling could learn from the successes of universal health insurance in many countries!

In the same theme, Uwe Reinhardt has a fascinating analogy between the piece rate model of remunerating doctors and service providers followed in the US health insurance market, and Universities with piece-rate compensation based pedagogic profit centers, each with its own fee schedules and ownership patterns. This would mean professors renting office space from the university; charging students course-wise, even lecture-wise, for thesis advice, and for evaluating their tests; students paying for laboratory and library use, even book-wise fee for borrowing from library; hourly rate for computer use and so on.

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