The dilemma of mixed bundles: The effects of price, brand, andcontent preferenceon music CD bundle choices

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The dilemma of mixed bundles: The effects of price, brand, and content

preference on music CD bundle choices

Hsiao-Ching Lee

a,n

, Dung Chun Tsai

b,1

, Ming-De Wu

c

a

Department of International Business, National Kaohsiung University of Applied Sciences, 415 Chien-Kung Road, Kaohsiung 807, Taiwan, ROC

b_{Department of Transportation and Communication Management, National Cheng Kung University, Tainan, 1 University Road, Tainan 701, Taiwan, ROC} c

Institute of International Business, National Cheng Kung University, Tainan, 1 University Road, Tainan 701, Taiwan, ROC

a r t i c l e

i n f o

Available online 13 July 2011 Keywords: Price framing Mixed bundle Price discount Brand preference Content preference Bundle choices

a b s t r a c t

Most of the studies on bundling have focused on pure bundles; the literature has paid little attention to mixed bundles, in which the bundle item could be bought separately. Our research fills the literature gap by conducting a field study and a computer interactive experimental design. The results show that the prices of the focal item and the tie-in item have asymmetric effects on consumers’ purchase intentions in regard to the whole bundle. Specifically, a price discount on the focal item is more effective in enhancing purchase intentions than on the tie-in. Also, a high priced tie-in may result in bundle choice deferral. Finally, when consumers choose the tie-in, content preference is more important than brand preference in CD bundle choices. The findings suggest that CD retailers should offer a high price discount on the focal item rather than on the tie-in, in their pricing and product strategies for bundling promotion.

1. Introduction

In one scenario, Mary plans to buy a new CD of the 2010 Grammy Nominees. In the store, she notices that they are offering a bundle promotion. That is, if she buys a popular CD with a red-tag (i.e., the focal item), she has the option to purchase a less popular CD with a green-tag (i.e., the tie-in) and she will enjoy a price discount on the focal item. After picking up the new CD of the 2010 Grammy Nominees (i.e., the red-tag CD) that she had planned to buy, she looks at green-tag CDs with different prices, brands and content in order to ﬁnd one to form a bundle and thereby get the price discount. However, as she could not ﬁnd a green-tag CD she likes, she falls into a buying dilemma. Finally, she gives up the bundle discount in her reluctance to buy the red-tag CD without the discount.

This scenario illustrates a situation where a mixed bundle may result in a negative outcome (i.e., choice deferral). Unlike the traditional pure bundle in which the bundle items are mandatory and are decided by the ﬁrm, the mixed bundle provides various tie-ins for consumers to choose (Stremersch and Tellis, 2002). Given the mixed bundle, Mary faced the choice of whether or not to buy the whole bundle, as well as how to choose a tie-in from a variety of alternatives. A number of relevant questions arise. How

do the prices, brands and product contents inﬂuence the tie-in choices? From a ﬁrm’s viewpoint, determining how to price the focal item and the tie-in is important to establish an effective bundle strategy. But is there any negative effect induced by this bundling strategy? This study intends to address these uncharted questions.

Bundling strategy has been prevalent in the marketplace for decades. It is an effective marketing strategy that provides retailers with the opportunity to increase both sales and profits (Sheng and Pan, 2009). Thus, it has been an interesting topic in economic and marketing literature for more than forty years, from Stigler’s (1963) pioneering research until now. Guiltinan (1987, p. 74)broadly defined it as ‘‘the practice of marketing two or more products and/or services in a single package for a special price.’’ Many firms adopt such a strategy to market their products. Research in economics focuses more on consumer welfare and its effect on competition (Adams and Yellen, 1976; Dansby and Conrad, 1984), and the optimality of bundle pricing and product components (Guiltinan, 1987;Hanson and Martin, 1990). Market-ing research shows an interest in questions related to bundle pricing and bundling evaluation (Yadav, 1994,1995; Yadav and

Monroe, 1993). Despite the plethora of previous research on

bundling issues, most of them investigate various issues of pure bundles instead of mixed bundles, such as buy two get the third free and buy one get the second at half-price.

Differing from the pure bundle, the mixed bundle may involve price complexity and choice difﬁculty issues. First, the choice-making process of the mixed bundle is a sequential choice Contents lists available atScienceDirect

journal homepage:www.elsevier.com/locate/jretconser

Journal of Retailing and Consumer Services

n

Corresponding author. Tel.: þ886 7 381 4526x6121; fax: þ886 7 3830697. E-mail addresses: hclee@cc.kuas.edu.tw (H.-C. Lee),

tsai46@mail.ncku.edu.tw (D.C. Tsai).

1_{Tel.: þ886 6 2757575x53231; fax: þ 886 6 2753882.}

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(i.e., whether to purchase the focal item and which bundle item to add) rather than a one-shot choice (i.e., a single decision of whether to purchase the whole bundle). In a sequential choice context, the attributes of one item affect the purchase of another item (Dhar and Simonson, 1999). Therefore, the gap in examining the mixed bundle needs to be ﬁlled.

Second, the mixed bundle allows consumers to choose the bundle items separately. In this context, consumers will be forced to ﬁnd other items to compose a bundle in order to get the discount. The price salience theory (Wathieu et al., 2004) denotes that price salience may increase price sensitivity and attention paid to the price attribute. Also, when consumers cannot ﬁnd the tie-in they prefer, they might use the unneeded promotion as a reason to give up buying the product they were pre-determined to buy (Simonson et al., 1994). Although the de-motivating effect of the mixed bundle is interesting and important for sellers, there is little previous study investigating this bundling issue.

The final motivation of this research is that previous literature on bundle evaluation focuses on using either non-price attributes (e.g., the bundle context) (Yadav, 1994) or price information (e.g., bundle and item prices) (Yadav and Monroe, 1993). BothYadav and Monroe (1993)andYadav (1994)call for future research to examine the joint effect of price and non-price information in bundle evaluations. Thus, this research examines the joint effect. The next section introduces the characteristics of a special mixed bundle, called red–green pair, and then delineates the research hypotheses. Subsequent sections present two research studies. Study 1, the field study, attempts to preliminarily under-stand how consumers evaluate the mixed bundle and what factors influence their purchase intentions. Then, in a lab experi-ment (Study 2), we further examine the influences of price and non-price information on consumers’ purchase intentions for the mixed bundle. Finally, we discuss our empirical results and implications for practitioners and future researchers.

2. Literature review and hypotheses development 2.1. The introduction of the red–green pair

In the Asian market, there is a popular and unique type of CD bundle, the so-called red–green pair, which is one kind of mixed bundle. Consumers can buy two CD items either separately or together. The choosing process may result in one of three out-comes: (1) buy the whole bundle, (2) buy the focal item only, or (3) choice deferral. This bundle is similar to, but more complex than, the buy two get the 3rd free and buy one get the 2nd at half-price. The focal item of the red–green pair has a discount price explicitly shown on a red-tag, whereas the tie-in only has the selling price on a green-tag.

Compared to the pure bundles examined in previous studies (Harlam et al., 1995; Johnson et al., 1999; Yadav and Monroe, 1993; Yadav, 1995), the red–green pair has two unique charac-teristics. First, consumers have the option of choosing bundle items for the red–green pair, whereas the bundle items are usually pre-determined by the sellers for pure bundles. Second, customers could be explicitly aware that the price discount is on the focal item. However, in traditional pure bundles, consumers do not know exactly which component product is discounted. These differences and an example are shown inTable 1.

2.2. Price framing effect

Research on price framing has revealed that consumers often exhibit non-rational behavior and are highly sensitive to con-textual factors (Grewal et al., 1996;Sinha and Smith, 2000). For

example,Janiszewski and Cunha (2004)andYadav (1995)show that an equivalent price discount on different bundle items may entail differing attractions to consumers.Yadav (1994)proposes the anchoring and adjustment model, which posits that consu-mers evaluate the bundle items sequentially, ﬁrst considering the most important or favorite item, and then adjusting the evalua-tion of the remaining item(s).Yadav (1995)further indicates that consumers’ evaluations of the whole bundle tend to be biased toward the favorite item. This explanation was subsequently called the weighted additive model byJaniszewski and Cunha

(2004), who reinterpret the decision-making process whereby

consumers assign unequal weights to bundle items, and then use them to total the value of the bundle. However, the above two research studies were conducted with the focus on pure bundles. The key difference between a mixed and a pure bundle is that people can choose to buy only the focal item; the price discount is explicitly shown on the focal items. This research proposes another perspective to explain why price discounting on the focal item is more effective than on the tie-in. A considerable number of studies (Biswas et al., 1999;Grewal et al., 1998;Mayhew and Winer, 1992) provide evidence for the inﬂuence of external reference prices on consumers’ purchase intentions. In the case of the red–green pair, the focal item has a regular price and a discount price, but the tie-in only has a regular price. Therefore, consumers can easily compare the regular price with the discount price on the focal item. The perceived gains on the focal item can induce consumers to buy the whole bundle. On the other hand, since the tie-in may be an unplanned purchase and only has a regular price, there is no external reference price for comparison. Based onGrewal et al. (1998), price reduction is always on the focal item, which enhances the transaction value of the focal item. The same amount of price difference in the tie-in may not be seen as transaction value at all. Thus, even though the equivalent price discount is set on the tie-in, consumers may have difﬁculty in perceiving the price savings. Thus, we arrived at the following hypothesis:

H1. Even when the price discount is equivalent, the price dis-count of the focal item has a stronger effect on bundle purchase intentions than does the price of the tie-in.

2.3. Negative effect of mixed bundle

According toMonroe (2003), consumers’ purchase intentions are influenced by the perceived value of the item(s), which, in turn, is determined by the trade-off between perceived benefits and monetary sacrifices. As for the mixed bundle, compared to buying the focal item only, the total perceived benefits of buying the whole bundle are the amount of monetary saving on the focal item and the benefits gained from the tie-in. In the meanwhile, the perceived monetary sacrifices are the prices paid for the

Table 1

The differences between red–green pair and pure bundles. Characteristics Bundle type

Red–green pair (mixed bundle)

Pure bundle

1. Bundle items

Many alternatives Pre-determined 2. Price

discount

Explicitly on the focal item Not explicitly stated 3. Example A red-tag CD costs $10.99 CD 1 costs $10.99

A green-tag CD costs $7.99 CD 2 costs $7.99 When buying the whole bundle,

the red-tag CD only costs $6, and total price is $13.99

The whole bundle (including CD 1 and CD 2) costs $13.99

H.-C. Lee et al. / Journal of Retailing and Consumer Services 18 (2011) 455–462 456

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tie-in. When the amount of monetary savings and the value of the tie-in are less than the cost of the tie-in, consumers may forsake buying the tie-in. As a result, consumers may consider buying the focal item only.

Moreover, when consumers perceive the tie-in as low in value, they may not only reject buying the tie-in, but also reject buying the focal item. This prediction is motivated by two theories. The ﬁrst is an explanation of the reasons/inferences theory, proposed

by Simonson et al. (1994), namely that the addition of an

unneeded feature or promotion at less or no value might reduce consumers’ purchase intentions even though the added feature does not diminish the value of the brand. They also show that consumers might deem such unneeded features as a reason for rejection of the focal item. Thus, when the tie-in is considered as an unneeded product, consumers may reject buying the whole bundle (i.e., choice deferral).

Second, based on the price salience theory, the salient discount on the focal item causes consumers to pay more attention to, and increases the weight of, the price attribute when the bundle promotion is presented (Wathieu et al., 2004). Therefore, consu-mers will pay more attention to the price of the focal item and may feel that the regular price of the focal item is too high, relative to the discounted price. Furthermore, according to the principle of dual entitlement (Kahneman et al., 1986), consumers’ perceptions of unfairness are governed by the belief that ﬁrms are entitled to a reference proﬁt and consumers are entitled to a reference price. When consumers recognize the large price differences between the regular price and the discounted price of the focal item, the perception of price unfairness may dominate consumers’ feelings.

Xia et al. (2004) indicate that when consumers perceive that

the price is unfair, they will take some action, such as forego the purchase. Thus, we infer that consumers will tend to reject the focal item. Therefore, we propose the following hypothesis: H2. Even when the price discount is equivalent, the price of the tie-in has a stronger effect on bundle choice deferral than does the price discount of the focal item.

2.4. Non-price information comparison

Consumers search for various product cues to evaluate a product before making a purchase. Based on the cue utilization theory, product cues are classiﬁed into intrinsic and extrinsic cues (Olson, 1977;Olson and Jacoby, 1972). For bundle evaluation, the brand preference for bundle items is one of the extrinsic cues that are not part of the physical properties of the product. Further-more,Simonin and Ruth (1995)suggest that consumers’ attitudes toward the component brands affect their evaluation of the bundle. Hence, a tie-in from a reputable brand might enhance consumers’ purchase intentions for the whole bundle. Besides, consumers’ preferences for the contents of a bundle item, intrinsic cues may also inﬂuence their purchase intentions.Goldberg et al.

(1984) suggest that consumers’ preference for a bundle is an

increasing function of the preference for the items of the bundle. In summation, both brand preference and content preference for the tie-in inﬂuence consumers’ product evaluation. However, the question is which has a stronger impact.

Although consumers tend to use both intrinsic and extrinsic cues concurrently to evaluate product quality, intrinsic cues are more important than extrinsic cues in determining the real quality of the products (Richardson et al., 1994). Consumers use the extrinsic cues only when the intrinsic cues are unavailable (Lee and Lou, 1995/96). When both intrinsic cues (i.e., the content preference) and extrinsic cues (i.e., the brand preference) are available, consumers will rely more on intrinsic cues than on extrinsic cues. Thus, we expect that the inﬂuence of the contents

preference of the tie-in will be greater than that of the brand preference when consumers purchase the whole bundle, as we propose in hypothesis 3:

H3. For CD bundles, content preference for the tie-in has a stronger effect on bundle purchase intentions than does the brand preference for the tie-in.

This research conducted two studies to achieve the research goal. Study 1 was a ﬁeld survey and preliminarily investigated consumers’ choice-making processes and their evaluation of the bundle items. Also, we sought to understand how consumers feel about the price of the bundle items. Furthermore, in order to examine the main and interactive effects of the price and non-price information on consumers’ purchase intentions, an experi-mental design was conducted in Study 2. Both studies employed the red–green pair CD as the target product because of its popularity in Asian markets.

3. Study 1

3.1. Methods and procedures

This study was a ﬁeld study conducted in front of a CD chain store. Each ten-minutes, we asked participants who had just ﬁnished shopping in the store to recall their choosing processes and choice of CDs. The participants were told that a study was being conducted to understand consumers’ behavior regarding buying CDs and they were asked to answer a questionnaire.

At first, we asked participants whether they had experienced buying red–green pairs (yes/no). If yes, the participants were asked about the frequency of their buying red–green pair CDs (1¼extremely few; 5 ¼extremely often). Then, we asked them ‘‘how the following factors influenced their intention to buy the whole bundle: (1) price discount of the focal CD; (2) price of the tie-in CD; (3) brand preference for the tie-in CD; (4) content preference for the focal CD; and (5) content preference for the tie-in CD?’’ (1¼no influence at all; 5¼extremely strong). If the answer was no, we also asked participants to point out how the above five factors influence their intention not to buying anything, as well as their final choice after giving up the bundle (1¼only the focal CD; 2 ¼only the tie-in CD; 3¼nothing). Furthermore, we asked the participants about their first choice when considering buying a red–green pair (1¼the focal CD; 2¼the tie-in CD). In addition, participants’ consumer behavior and evaluations of the bundled CD items were questioned. Finally, we collected the participants’ demographic information.

3.2. Results and discussion

One hundred participants were sampled. After checking and deleting the invalid questionnaires, a total of 85 usable ques-tionnaires remained. The results show that 81% of participants had experienced buying red–green pair bundles. Additionally, 87% chose the focal item first, and then decided whether to buy the tie-in. Among the factors that influenced consumers’ purchase intentions, content preference for the tie-in was the most impor-tant factor. When the participants could not find a tie-in CD they wanted, 90% of the participants chose to buy the focal item only and ignored the price discount of the bundle. The other 10% of the participants intended to buy nothing.

Table 2summarizes the effect of price and non-price informa-tion on the inteninforma-tion of buying the whole bundle or nothing using a t-test. When comparing the effects of the two prices (i.e., the price discount of the focal item and the price of the tie-in) on the intention of buying the whole bundle, the difference between

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populations. Thus, caution should be exercised in regard to gen-eralizations made to the population as a whole.

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