Grouping different items together for sale under single price, also known as kit or bundled pricing, seems straightforward enough. But, when the items themselves could be bundled, more than one of the same item could be included, or different items can be substituted to create multiple versions of the same bundle – that’s when things get interesting.
Now, not all of these bundled pricing variations need to be used, but many industries dictate how bundled pricing should be implemented. Here are a few examples of how kit and bundled pricing can impact your decision making in multiple different industries:
Retail Bundled Pricing
In retail, one common use of bundled pricing is in grocery stores, where primals (read: an entire side of beef) are comprised of multiple different cuts that can be bundled different ways. In this case, each cut of meat is priced separately and can vary by current market conditions, competitive pricing, seasonality and other factors. But, all of the components bundled together represent the overall primal price, which can be used as the cost of goods to the grocery store. As you can imagine, optimizing the overall yield by analyzing different cuts and bundled pricing options based on market conditions is extremely complex. And, when you take into account cuts that include lead time for things like maturation, curing and peaks in seasonal demand, the complexity of bundled pricing becomes even higher.
Do-It-Yourself retailers have another need for bundled pricing, as well: For example, products are often sold in customer-centric bundles. Take a paint project, for example – this might consist of all the things necessary for different sized projects, including paint, brushes, ladders, drop cloths and other paint-related items. Any of these things may be priced individually, but, together, the bundled pricing of project items can create a competitive aggregate price, particularly for a seasonally promoted projects. Once localized and competitive price positioning is complete, a top-down approach must then be applied to ensure minimum margins are maintained.
Large-scale Retail Bundled Pricing
Another retail example of bundled pricing is white goods, such as refrigerators or dishwashers. Bundled pricing, also known as kit pricing, in this case, includes the actual product cost, the cost of installation and different warranty and service cost options bundled together under one overall price. This variation creates different versions of the same item, where only the length and quality level of the service contract varies.
Ultimately, the original equipment manufacturer (OEM) will provide the warranty pricing, since they will have the failure rate data over the life of the good for statistical analysis, optimizing profitability over the life of the good and the associated recommended service contract options. This is the rare case where the industrial goods equivalent, like drivetrains, CAT Scan machines, and other complex equipment with deep Bills of Material, may be simpler to model and price.
As telematics, embedded sensor devices and Internet of Things (IoT) data collection becomes more common, component failure predictions improve, and earlier failure notifications can trigger service events before they even happen. The advent of IoT data collection and analytics in highly complex industrial goods like multi-million dollar medical, industrial, construction, and agriculture equipment may be the predecessor to monitoring and providing 100% availability of everyday household goods, as well.
Industrial Goods Bundled Pricing
An industrial goods equivalent is automotive repair. Independent after-sales retailers face a similar bundled pricing challenge, for instance the way brake jobs and common repairs need to be priced. These projects are often comprised of the individual service items priced separately, such as brake pads, rotors, and other components, coupled with the price of labor.
Once these itemized pieces are rolled up to an overall job price, caps must be considered to ensure the overall price is below competitive equivalents, as well as below consumer budgetary constraints and psychological price points used heavily by retailers. In this case, the overall job needs to be closer to $250, $500, $1k or other perceived consumer budget points, rather than ending numbers like $.49, $.99 and other ending number rulesets. Labor hours and cost per hour may then be adjusted to achieve budget break points, but only to a point.
As more and more technology is used in cars, trucks, aircrafts and other industrial goods, even the simplest repairs include many small electrical components and labor hours to repair and replace. Telematics and other IoT data collection devices are only adding to the complexity of bundled pricing and bill of materials.
Complex Bills of Material and the Value of Uptime
Modeling and aggregating the pricing of complex bills of material – ones that include items and labor – has been done for a long time in the aerospace and defense industries to optimize service contract pricing with defined equipment uptime and Service Level Agreements (SLAs). These are often referred to as “power by the hour,” and are being adopted in other industrial goods verticals. Cadillac’s BOOK and Porsche’s Passport programs offer similar flexible ownership models that guarantee a certain level of product availability, making product IoT monitoring and predictive maintenance forecasting even more important to OEMs to maintain margins.
It is not too hard to imagine manufacturers offering similar ownership models for refrigerators, dishwashers and other common household appliances as their monitoring and understanding of equipment usage improves over time. Demand shaping to optimize inventory, supply chain, pricing and forecasting together will not be enough in the future – at some point, IoT data collection, analysis, and optimization will need to be included to understand failure rates, proactively predict failures, provide alerts and service maintenance and influence better inventory and pricing decisions.
Ultimately, bundling of items together for pricing seems like a simple concept, but it has many variations and uses across industries. Unique pricing processes can leverage these bundles, but the key is using them to achieve financial goals as you move beyond simple pricing methodologies.
Contact Syncron today to learn more bundled pricing models and how to take your price management processes beyond the status quo. And, stay tuned for more pricing insights as we head to PPS next week to dive deeper into what pricing success means today.
Want to hear more from Cliff? Register now for the Professional Pricing Society’s Spring Workshops and Conference on May 1-4 in Chicago, where Cliff will be presenting on the topic of Uptime: The Most Disruptive Change in Pricing History.
With an increasing emphasis on maximum product uptime, or using predictive analytics to proactively repair products before they break down, manufacturers must ensure their service supply chains remain efficient and optimized. This revolution in service creates a powerful and unique opportunity for pricing departments. This rapidly transforming landscape will push pricing professionals to change what they are pricing – evolving to selling subscription-based uptime service contracts over individual service parts. This introduces a new lever for pricers to pull – the sense of urgency – which can have a major impact on a pricing department’s contribution to profit margins.