The Psychology of Pricing: To Bundle or not to Bundle

The way a price is perceived is as important, if not moreso, than the price itself. Prevailing theories as to effective pricing are widely varied, and startups aiming to monetize must choose which is the most appropriate fit for their product or service.

A study published in 2006 entitled "The Framing Effect of Pricing" by Marco Bertini (London Business School) and Luc Wathieu (Harvard Business School) addresses this topic. Amongst their conclusions is the belief that the psychology of price as it perceived by consumers is, in fact, much more complex than anticipated by standard economic principles.

A much debated issue within pricing is that of partitioning or, conversely, bundling the total price to include all subject fees to make the good or service more attractive to potential consumers. It has been argued that partitioning prices increases customer demand by reflecting an affordable base price, while anticipating that consumers will insufficiently adjust for remaining charges.

The opposite has also been argued. Some researchers have posited that mental accounting principles dictate that multiple losses are perceived as more punishing than a single loss of equal value. If correct, this theory implies that a single price is inherently more effective than a partitioned one.

"The Framing Effect of Pricing" concludes that price partitioning can have both positive and negative effects, but, more importantly, that the decision to partition or to bundle will impact the way a product's multiple dimensions are processed. In other words, it will cause consumers to adjust the method they use to evaluate a service. Ultimately, it is recommended that companies who wish to focus on differentiating a primary attribute of the offering while de-emphasizing secondary attributes will most effectively reach their target audience by employing an all-inclusive price. Firms who wish to distinguish their product/service by its secondary features might find more success with partitioned pricing, as it also serves as a disctraction from any weaknesses in the primary service offering.