What is Bundling?

ECO550

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Problem Set 3 Handout

These problems will serve as the basis for the Week 8 quiz. These problems are the background you will use on the quiz, but please note you will NOT be provided with this document in the quiz, and the questions here may not exactly be replicated on the quiz. Doing the problems will build your understanding.

Begin working on this Problem Set Handout in Week 6 to prepare for the quiz in Week 8.

1) Tying as a Bundling Strategy

Ginnie has observed that her signature item, the Satisfying Smoothie, is very popular with the late evening crowd at the gym, but it is not so popular with the early crowd. The early and late crowds have only slightly different preferences for her Hydration Power Drink. The gym has a very large clientele, and Ginnie can’t always tell who has the late-crowd preference and who has the early-crowd preference.

In her graduate MBA class, they have been studying tying as a bundling strategy. Ginnie asked her professor, “Would bundling work for my business?”

Her professor said, “I think you told me that the marginal costs for you two products differ significantly, so first I would recommend that you look at the contribution margin for each. Sometimes low prices may be more profitable, and sometimes high price will be more profitable, especially when there are large differences in the price elasticities of demand. Second, think about the example of the Happy Meal. People are really there for the hamburger, and the company is leveraging that one item to sell other parts of the menu. What is your lead product, the item customers can’t get elsewhere?”

The MC for the Hydration Power Drink is $1.00. The MC for the smoothie is $4.00.

a) What is the contribution margin at each price for each product?

Hydration High Price contribution margin is

Hydration Low Price contribution margin is

Smoothie High Price contribution margin is

Smoothie Low Price contribution margin is

Ginnie's Gym Refreshment Bar Hydration Power Drink Satisfying Smoothie

Early 7.00 5.00 Late 6.00 10.00

ECO550

© 2020 Strayer University. All Rights Reserved. This document contains Strayer University Confidential and Proprietary information and may not be copied, further distributed, or otherwise disclosed in whole or in part, without the expressed written permission of Strayer University.

Page 2 of 2

b) Which bundle price will maximize profit?

c) What profit would Ginnie make if she used her smoothie to leverage her other products and created a mixed bundle?

2) You have developed a self-study certification system for those who need credit hours for recertification by your state’s social welfare office. The system operates at virtually no cost, i.e., there is no marginal cost. A marketing research team has assembled the following sale information:

You are researching the options for pricing the courses. Your goal is to achieve maximum revenue to establish funding to maintain and update the system to reflect annual policy changes in licensing requirements.

Complete the calculations for Total Revenue:

a) At what individual price would revenue be maximized for the Certification in Online Counseling?

b) At what individual price would revenue be maximized for the Certification as a Group Home Counselor?

c) What is the maximum revenue for individual pricing?

d) If you employed pure bundling what would be the maximum total revenue?

Hydration Power Drink Satisfying Smoothie Bundle Price Net Profit Early 7.00 5.00 Late 6.00 10.00

Online Self Study Certifications for Social Work License Certification Certification Bundle

Customers in Online Counseling as a Group Home Counselor TR Counseling TR Group Home TR Bundle

Segment 1 1000 $190 $70 $260

Segment 2 1000 $150 $90 $240

Segment 3 1000 $95 $160 $255

Segment 4 1000 $35 $195 $230