The Effect of Costs and Economies of Scale on Bundling

Stremersch and Tellis make this proposition in their paper on Strategic Bundling.

P10: The profitability of price bundling is likely to be higher
than that of unbundling (a) the higher the relative contribution
margin and (b) the stronger the economies of scale
or scope.

Relative contribution margin is the ratio of price less variable cost to the price.

Given their condition (a) there are special cases that exist in which unbundling is preferrable

1. The Variable cost is 0 or close to 0
2. The price approaches zero

 For example, in case of newspapers the variable cost of a single article is 0. It is a fixed cost operation. The costs of setting up the reporter network, building distribution and printing newspapers are fixed cost. The variable cost to print the newspaper is independent of the decision to whether or not print any single article. To take this example to the Internet, the variable cost of whether or not to  display an article to a reader is 0.

Sticking with the same example for the second point, when articles are always sold as bundles, the price an individual article can be sold for is 0.  The price approaching 0 does not mean that the customer RP is 0 as well.  When denied access to certain articles, customers may have a non zero RP for certain articles and will be willing to pay for single articles instead of buying the whole subscription.

Given these two conditions, it would be more profitable to unbundle than bundle.

Restaurants Struggling With Increasing Costs

As the price of gas and the prices of raw materials increased at a faster clip in the recent months, restaurants are struggling to make a profit without passing the higher costs through increases prices to their customers.  The price increases were more abrupt than gradual, and hence should be classified as the "Shock" in the economic terms. The price stickiness isn't just due to what economists describe as menu costs.

In economics, menu costs are the costs to firms of updating menus, price lists, brochures, and other materials when prices change in an economy. Because this transaction cost exists, firms sometimes do not change their prices when the economy puts pressure on it, leading to price stickiness.

Restaurants face declining customers due to slowing economy and concerns about the future. So they are unsure of how the price increases would affect sales.  Some restaurants are resorting to cost cutting through substitutions and downgrading ingredients.  Restaurants have another option than looking for lower quality ingredients that risk eroding their brand, unbundle their offerings and price them accordingly.  For instance,

1. Make the price reflect just the core offering
   
2. Identify the extras and list them separately
3. Price the service separate from the product

In the coming weeks I will discuss these options and operationalizing these in practice without alienating the customers.