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.

Getting The Definitions Right

This is an attempt to get a more precise definition of  Bundling and Unbundling.  To add to the definition mix, there are different two kinds of bundling, Product and Price Bundling. The definitions here are based on "Strategic Bundling of Products and Services" by Stefan Stremersch & Gerard J. Tellis. The definitions are lifted verbatim from their work.

Bundling: Bundling is the sale of two or more separate products in one package.
                  Examples: Opera season tickets, multimedia PC
Price bundling: Price bundling is the sale of two or more separate products as a package at a discount,    without any integration of the products.
                 Examples: Luggage sets, variety pack of cereals
Product bundling: Product bundling is the integration and sale of two or more separate products at any price.
                 Examples: Multimedia PC, sound system
Pure bundling: Pure bundling is a strategy in which a firm sells only the bundle and not (all) the products separately.
                 Examples:Apple Computers (Cannot buy it without the software but you can buy its OS X separately)
Mixed bundling: Mixed bundling is a strategy in which a firm sells both the bundle and (all) the products separately.
                 Examples: Telecom bundles


So what is Unbundling? The literature definition is, "selling all products separately and never as a bundle".  I define unbundling as
" a deliberate pricing strategy to separate  truly optional components in a product/service and price these individually giving customers the option to buy or not"

The key word is "optional". If a component is essential for for the customer to achieve their primary goal then it is unbundling even if priced separately.

Unbundled pricing is a la carte pricing, except that products were always marketed and viewed as a one monolith and not as a bundle of components. For example, until now Airlines never separated out or itemized in-flight meals, baggage service etc. An airline customer never considered they were purchasing a bundle.  What is happening now is unbundling the seemingly monolithic components into their sub-parts and pricing them separately.