Description
Digital marketing is marketing that makes use of electronic devices such as computers, tablets, smartphones, cellphones, digital billboards, and game consoles to engage with consumers and other business partners. Internet Marketing is a major component of digital marketing.
CASE STUDY ON MARKETING OF DIGITAL
PRODUCTS
ABSTRACT:-
My dissertation comprises of three essays that theoretically and empirically
investigate the marketing of digital products, which are information products such as
newspapers and books sold in both physical and electronic form.
In the first essay, we study product form bundling, defined as marketing two or
more forms of the same product as a package. We show experimentally that, regarding
information products, the usage situations communicated to consumers moderate the
effect of the availability of bundle discount on the purchase likelihood for the product
form bundle. We also compare the effect of different pricing strategies for information
products. When no bundle discount is offered, the likelihood of buying both forms of an
information product, holding the sum of their prices constant, can be increased by pricing
the electronic form lower than the print form rather then pricing both at the same level.
In the second essay we compare two product strategies that can be used in
marketing digital products. Under standard mixed bundling companies offer full content
in print and electronic form and the bundle of the two, while under content unbundled
mixed bundling companies offer full content in print form, unbundled content in
electronic form, and the bundle of the two. Which strategy is more attractive for a
company to pursue? We model the profits under these two strategies and outline
conditions in which one or the other leads to higher profit. We apply our analytical
framework to data from a field experiment implemented on the website of a book
publisher.
The third essay investigates the attractiveness of complete product lines of items
such as books and newspapers. We employ a choice experiment in which a sample of
consumers is presented with hypothetical product scenarios asked to make a choice. The
data is used to develop a profit-maximizing configuration of products and prices. Similar
approaches to the product line pricing problem have been employed for conventional
products, but not when bundling of different forms of a product is an option, and not
when the different products may be complements rather than substitutes.
ii
TABLE OF CONTENTS
List of Tables ......................................................................................................................v
List of Figures ...................................................................................................................vii
Chapter I: Dissertation Overview ....................................................................................... 1
Chapter II: Essay One. Product Form Bundling - Implications for Marketing Digital
Products............................................................................................................................... 4
Abstract ................................................................................................................... 4
Introduction............................................................................................................. 5
Research Background ............................................................................................. 9
Study Objectives ................................................................................................... 13
Theoretical Framework and Hypotheses .............................................................. 14
Study 1 .................................................................................................................. 25
Study 2 .................................................................................................................. 29
Discussion ............................................................................................................. 38
Managerial Implications ....................................................................................... 40
Conclusion ............................................................................................................ 42
Chapter III: Essay Two. Bundling and Pricing Strategies for Digital Products ............... 44
Abstract ................................................................................................................. 44
Introduction........................................................................................................... 45
Research Background ........................................................................................... 47
Bundling Model .................................................................................................... 49
Data and Estimation Procedure............................................................................. 59
Results................................................................................................................... 64
iii
Discussion ............................................................................................................. 69
Managerial Implications ....................................................................................... 72
Conclusion ............................................................................................................ 73
Chapter IV: Essay Three. Bundling and Unbundling of Electronic Content.................... 75
Abstract ................................................................................................................. 75
Introduction........................................................................................................... 76
Research Background ........................................................................................... 78
Theoretical Background........................................................................................ 82
Methodology ......................................................................................................... 86
Study Design and Data Collection........................................................................ 87
Results................................................................................................................... 90
Discussion ........................................................................................................... 102
Managerial Implications ..................................................................................... 106
Conclusion .......................................................................................................... 107
References........................................................................................................................131
iv
LIST OF TABLES
Table 1: Purchase Probabilities for Bundle: Product, Discount and Usage Conditions . 109
Table 2: Perceived Appropriateness of Generated Usage Situations.............................. 110
Table 3: Study 2 - Mean Percentage of Points Allocated to Bundle .............................. 111
Table 4: Study 2 ANOVA Results.................................................................................. 112
Table 5: Profit Comparison under CUMB and TMB Strategies..................................... 113
Table 6: Actual Purchase Rates under the Two Mixed Bundling Strategies.................. 114
Table 7: Estimation Results - Content Unbundled Mixed Bundling .............................. 115
Table 8: Estimation Results - Traditional Mixed Bundling............................................ 116
Table 9: Simulation Results - Profit under the Two Mixed Bundling Strategies. ......... 117
Table 10: Conjoint Design and Price Levels .................................................................. 118
Table 11: Random Parameters Logit Model Results (conjoint choice experiment)....... 119
Table 12: Book Category - Market Simulation Results ................................................. 120
Table 13: Newspaper Category - Market Simulation Results........................................ 121
Table 14: Book Category - Market Simulation Results (Incomplete Product Line)...... 122
Table 15: Newspaper Category - Market Simulation Results (Incomplete Product Line)
......................................................................................................................................... 123
Table 16: Book Category - Market Simulation Results (Incomplete Product Line, No
Bundle Discount) ............................................................................................................ 124
v
Table 17: Newspaper Category - Market Simulation Results (Incomplete Product Line,
No Bundle Discount) ...................................................................................................... 125
Table 18: Book Category - Forms' Attribute Perceptions. ............................................. 126
Table 19: Newspaper Category - Forms' Attribute Perceptions..................................... 127
vi
LIST OF FIGURES
Figure 1: Study 2 Results................................................................................................ 128
Figure 2: Optimal Price and Total and Marginal Revenue from Electronic Chapters.... 129
Figure 3: Optimal Price and Total and Marginal Revenue from Full Electronic Book.. 130
vii
CHAPTER I: DISSERTATION OVERVIEW
Marketing digital products is appealing because of several reasons: 1) the
marginal cost of reproducing and distributing them is almost zero (Bakos and
Brynjolfsson, 1999), 2) they can be easily organized, searched and stored, and 3) the
whole buying experience trough Internet can be more interactive and tailored to the
specific needs and preferences of the customer (Peterson et al., 1997). Although many
publishers make available content online, others (e.g. marketers of full length books,
reference materials, music and video) are still cautious in distributing content in digital
form over the Internet (Kannan and Jain, 2003). There are good reasons for this cautious
approach, such as piracy of content and bandwidth constraints. However, less valid
reasons also prevent managers from offering digital content, such as uncertainty about
what product and pricing strategies to utilize.
How should companies market digital products? What product, pricing and
communication strategies should they employ? My dissertation attempts to tackle these
interesting and practically relevant questions. It comprises of three essays organized as
follows.
In Essay 1 we focus on consumer reactions to bundling of information products,
and contrast these with consumer reactions to bundling of conventional products. In
particular, we concentrate on communication and pricing strategies that might enhance
the viability of selling the information goods as a bundle. We show experimentally that
communicating different possible usages for the product forms may increase the
likelihood of buying the items as a bundle. We also investigate consumer reactions to
1
alternative pricing plans for product forms. Our respondents readily accept bundle
discounts on conventional items that can be inventoried, but are generally unresponsive
to bundle discounts on different forms of information goods that have the same content.
However, emphasizing different uses for the forms does increase their responsiveness to
bundle discounts. We conclude that communicating the appropriateness of different
forms for different usage situations can be a key to a successful bundling strategy for
information goods; further, it is more beneficial for companies to price the electronic
form lower than the print form instead of offering bundle discounts.
In Essay 2 we model the profits under two strategies a content provider may
employ: traditional mixed bundling, in which the product line consists of print book, PDF
book and the bundle of the two, and content unbundled mixed bundling, which is selling
print book, PDF chapters and the combination of the two. While appealing because of
low marginal costs and the likely catering to emerging consumer needs, offering
electronic products may lead to additional revenue generation but can also result in
product cannibalization. Our results suggest that offering unbundled PDF chapters is
more profitable than offering only the full PDF books under certain conditions. We
empirically support our predictions with actual data gathered in an online experiment
executed on the website of a publisher of academic books. We present interesting insights
on how customers from different subject domains react to electronic products and how
they are likely to behave when different product and pricing schemes are employed.
In Essay 3 we further extend the previous essays and investigate the attractiveness
of complete product lines of information good. For example, the publisher of Wall Street
Journal can offer the following product line of subscription options: print WSJ, WSJ
2
online, separate sections of WSJ online (e.g. Money & Investment, Technology), print
WSJ and online WSJ bundle, and print WSJ and online section bundle. We employ a
choice experiment in which a sample of consumers is presented with hypothetical product
offerings at various prices and asked to make a choice. The data is used to develop a
profit-maximizing configuration of products and prices. Similar approaches to the
product line pricing problem have been employed for conventional products, but not
when bundling of different forms of a product is an option, and not when the different
products may be complements rather than substitutes.
3
CHAPTER II: ESSAY ONE. PRODUCT FORM BUNDLING - IMPLICATIONS FOR
MARKETING DIGITAL PRODUCTS
Abstract
In this paper we study product form bundling, defined as marketing two or more
forms of the same product as a package. Although we are primarily interested in
information products (e.g. Wall Street Journal: print and online forms), we contrast
consumer reactions to bundling these products with reactions to bundling conventional
products (e.g. margarine: stick and tub forms). We show experimentally that the usage
situations communicated to the consumers moderate the effect of the availability of
bundle discount on the purchase likelihood for the product form bundle. Our subjects
readily accept bundle discounts on conventional items that can be inventoried, but are
generally unresponsive to bundle discounts on bundles of information products that have
the same content. However, emphasizing different uses for the information product forms
does increase the responsiveness to bundle discounts. Also, we examine the impact of
different relative prices for the forms within the information bundle on the bundle
purchase likelihood, and compare this to offering discounts. Our study provides useful
insights into the conditions under which the marketer is better off pricing the forms
differentially than pricing them equally and offering bundle discounts.
4
Introduction
It is a common practice in consumer packaged goods categories to market
products in different forms, for example, margarine (stick and tub forms) and soap (bar
and liquid forms). In marketing different forms of the same product the focus has been on
offering forms appropriate for various usage situations. For example, margarine is sold in
both stick and tub form and customers can choose the form that better suits their needs
and usage situations. Recently, marketers of information products have been applying
similar strategies as well by making the information products available in electronic form
in addition to the print/traditional form. Specifically, newspapers (e.g., Wall Street
Journal) market print and electronic forms of their content, publishers (e.g., US
Government Printing Office) offer print books and reports as well as the corresponding
electronic versions, and recording companies (e.g., EMI Recorded Music) have started
offering online music in addition to music in traditional forms (CDs, tapes, etc.) all
catering to the diverse needs of customers.
While bundling different forms of the same product is occasionally seen in the
consumer packaged goods market (e.g. bundling Eucerin body cream and lotion; Dial
liquid soap and Dial soap bars), one would generally not expect similar bundling
strategies in the information goods market as the content being sold in the different forms
is generally the same. However, newspapers such the Wall Street Journal not only offer
the print and electronic forms separately as single products, but also as a bundle of
different forms. Likewise, publishers of scholarly content such as National Academies
Press have started to offer bundles of print and PDF forms in addition to offering them
separately. Many scholarly journals also market subscriptions of both print and electronic
5
forms. New formats introduced by dualdisc.com provide the capability to sell music
content in CD format as well as DVD-Audio or surround sound as a bundle on the same
disk (Business Week, 2004).
While different forms of products such as margarine and soap may have roughly
the same production costs, information products are unique in that the marginal cost of
reproducing and distributing the electronic form is often much lower than the one of the
print form. Consequently, it is not surprising that marketers are interested in selling
bundles of electronic and print forms, as it implies significant additional revenue. As
broadband service penetration increases, similar opportunities in selling bundles of
streaming videos and DVDs, and music bundles (mp3 form, CD, mobile tunes) become
possible. In order to realize this additional revenue potential, however, companies need a
clear understanding of how to market, communicate and price product form bundles. It is
in this context that we present our research.
In this paper, we first focus on consumers' reactions to alternative forms of
information products, and examine conditions under which they are more likely to
purchase the product form bundle. In particular, we concentrate on communication and
pricing strategies that might enhance the viability of selling the information goods as a
product form bundle. We replicate our study in the consumer packaged goods category to
establish a comparative baseline. It is well known that there are different types of utility a
good may provide - elementary (or basic), place, form, time, and possession (Macklin
1922). In our study we distinguish between content utility (similar to elementary or basic)
- utility provided by the product itself - and form utility - utility provided by the
specific form in terms of convenience, ease of use and the like - of the product forms that
6
play a critical role in how the bundle is viewed. Content utility tends to be duplicated
across different forms of an information product, making it less attractive to buy them as
a bundle. From this viewpoint, the content utility of either of the information forms or the
bundle is the same in magnitude. However, in the conventional packaged goods
categories, the content utility of the bundle is generally more than that of either of the
individual forms.
While content utility remains the same in the case of an information product
bundle making it less attractive to purchase, extant research would suggest that suitability
of different forms of an information product for use in different situations will decrease
the perceived similarity between them (Ratneshwar and Shocker 1991) and that bundles
composed of complements have a higher purchase intent versus bundles of similar
products (Estelami 1999), thus making the information bundle appealing. However, we
find experimentally that communicating different possible usage situations for the forms,
in and of itself, is not sufficient to increase the probability of selling the bundle of
information product forms. Yet, for conventional packaged goods categories, such
communication strategies are effective in increasing the bundle purchase probabilities. In
investigating consumer reactions to alternative pricing plans for different forms of
information products and different forms of conventional products, we find that our
experimental subjects readily accept bundle discounts on conventional items that can be
inventoried, but are generally unresponsive to bundle discounts on different forms of
information products that have the same content. It is only when different uses for the
forms are emphasized along with bundle discount that respondents' bundle purchase
probabilities of information product forms increase significantly. This suggests that
7
emphasizing the appropriateness of the forms for different usage situations is as
important as bundle discounts in successfully marketing bundles of information products.
Finally, we examine the impact of different relative prices for the forms within the
information bundle on the purchase of information bundle, and compare this to offering
discounts. Our study provides useful insights into the conditions under which the
marketer is better off pricing the different forms differentially than pricing them the same
and offering bundle discounts.
The contribution of the paper is three-fold. First, our study offers a useful
approach in terms of examining product forms and the attractiveness of information
product bundles under bundle discounts, differential pricing of the forms, and usage
situation communication from the perspective of content and form utilities. We are not
focusing on the effect of the above factors per se but on their interaction effect in
influencing consumer choice. Second, our study complements the findings in extant
literature on bundling by providing insights into conditions under which those findings
are directly applicable to product forms and instances where those results may not hold.
Specifically, our study extends the findings to situations where items of bundles (forms)
can be perceived as substitutes as well as complements across different consumers. Third,
our paper provides substantive insights in an area of emerging importance - bundling of
information products - by providing guidelines for communication and pricing strategies
for increasing the attractiveness of information bundles and expanding revenue
opportunities for marketers. This is managerially very relevant given that the consumer
spending for online content in the US grew to $853 million in 2004, an increase of 14
percent over the same period last year (Online Publishers Association Report, 2004).
8
The paper is structured as follows. First, we define and discuss product form
bundling in the context of extant literature and position our study. Second, we present a
theoretical framework and derive hypotheses. Third, we discuss two experiments that
were designed to empirically test our hypotheses. Finally, we highlight the implications
of our study and suggest areas for future research.
Research Background
Product Form Bundling
Extant literature defines bundling as selling goods in packages (Adams and
Yellen 1976), marketing products as a package at a special price (Guiltinan 1987), and
selling products at a single price (Yadav and Monroe 1993). Distinction is also made
between price bundling, defined as the sale of two or more separate products in a package
at a discount without any integration of the products, and product bundling, which is the
integration and sale of two or more separate products or services at any price (Stremersch
and Tellis 2002). We define product form bundling as marketing two or more forms of
the same product as a package.
In the context of product categories, we make a distinction between information
product form bundles in which the same information is presented in different forms and
the forms are bundled together (e.g. electronic book and print book), and conventional
product form bundles consisting of different physical forms of the same product (e.g.
stick of margarine and margarine tub). Information bundles have some unique
characteristics: the marginal cost of producing the electronic form after producing the
print is negligible, consumers have reasonable knowledge of this cost structure, and, in
9
some cases, the individual products are perishable (e.g. after reading the news online
consumers do not benefit from the print version of the newspaper to read the same news).
With respect to conventional bundles, the cost structure is different - the marginal costs
associated with the forms are positive - and the products usually are not immediately
perishable and can be stockpiled.
From a conceptual point of view, product form bundling seems similar to other
types of bundling discussed in extant literature. On one hand, it could be viewed as a
special case of product bundling - that is, the integration and sale of two or more separate
products, the separate products being different forms of the same product; on the other
hand, it is a type of price bundling - the sale of two or more separate products in a
package at a discount. However, there are two important distinctions in the case of
product form bundling. First, the product forms can range from being perceived as
substitutes to being perceived as complements to each other and degree of heterogeneity
across consumers on this dimension is much higher than what is encountered in other
bundling situations. As an illustration, consider the bundling of print and electronic forms
of newspaper subscriptions. The Wall Street Journal has been recently promoting the two
forms of the newspaper as a bundle. The ads suggest that people might use the two forms
for different purposes and/or situations (e.g. keeping up with the daily news versus doing
research). If customers perceive WSJ Online as a substitute to WSJ, they will subscribe to
one of them; if they view the two form of the journal as complementing each other, they
may be willing to subscribe to both. Second, in the case of information product bundles,
the marginal cost of producing one form after producing the other form is close to zero,
which is quite different from the scenarios encountered in the extant bundling literature.
10
Offering different forms of a product is also similar to having more than one
package of the same item available. Packaging of items explicitly sold at retail into a
small and a large package, for example, can be viewed as commodity bundling and thus
as a mechanism for price discrimination, or it can be viewed as a mechanism for
providing different levels of distribution services through the shifting of distribution costs
across market boundaries (Betancourt 2004). The small package provides a high level of
the distribution service assurance of product delivery in the desired form bundled with
the items explicitly sold that are contained in the small package (Betancourt 2004).
Offering a print and an electronic form of a product can be considered as two different
levels of the distribution service assurance of product delivery in the desired form, and
each level is bundled with the content of the product. The difference between offering
different product forms and offering different product packages is in the cost structure
associated with the two offers. While the marginal costs of producing the different
packages are positive and similar to each other, this is not necessarily true with respect to
the different product forms - the marginal cost of the electronic form, for example, is
close to zero. Consequently, the implications of offering different product forms can be
different from the implications of offering different types of packaging both from buyers'
and sellers' point of view. Because of the cost structure the buyers are likely to expect a
relatively lower electronic form price as compared to the print form price, and it may be
profitable for the sellers to charge relatively lower price for the electronic form. In sum,
offering different forms of a conventional product is the same as offering different
packaging types, while offering different forms of an information product is not
necessarily the same as offering different packaging types because of the associated cost
11
structure. Thus, we use the term product forms as it is more general. Also, our focus is on
bundling product forms (or types of packaging in the case of conventional products), and
not on bundling an item with the specific service level it provides.
While there is extensive literature focusing on conditions favorable for bundling -
negative correlations in consumer reservation prices (Stigler 1963; Schmalensee 1984),
complementarity in consumption (Telser 1979), uncertainty in the valuations of the
quality of the goods (Kenney and Klein 1983) - contingent valuation of interrelated
products in the bundle is very relevant for product form bundling. Contingent valuations
have been examined at both conceptual (e.g. Guiltinan 1987) and analytical (e.g.
Venkatesh and Kamakura 2003 (VK) levels. Under assumptions of homogeneous degree
of contingency or complementarity, VK find that moderate to strong substitutes should be
offered as separate products; the same is applicable for complements if the marginal costs
are moderate relative to the market's maximum willing to pay. They also find mixed
bundling to be optimal for weak substitutes/complements if the marginal costs are not too
high (Venkatesh and Kamakura 2003). It is not clear to what extent these results will hold
given the heterogeneity in customer perceptions of the product forms as being substitutes
or complements (contingency) or under the case of very low marginal costs. Thus, our
study on bundling product forms might complement the above findings. In addition, the
heterogeneity in consumer contingency/ complementarity perceptions may also suggest
that consumers may be amenable to suggestions from marketers in manipulating such
perceptions.
Extant research based on mental accounting and related framing effects have
provided interesting insights into consumer reaction to bundling (Thaler 1985; Johnson
12
1999). The findings relevant for relative pricing of the product forms and its impact on
bundle choice suggest that (1) in terms of evaluation process, there is evidence that
buyers use anchoring and adjustment (Yadav 1994), (2) the evaluation of a bundle
depends on the price leader as well (Yadav 1995), and (3) savings offered on the bundle
have a greater relative impact than savings offered on the individual items (Yadav and
Monroe 1993). In the context of information products, the price of the form that
consumers are more familiar with - print - could form an anchor against which other
forms are evaluated. Also, given the marginal cost of one form (say, an e-book) is close
to zero, the relative pricing of the forms may have to account for consumers' expectations
regarding the relative prices of product forms.
Study Objectives
Our study objectives are as follows. First, we examine the concept of product
form bundling from the viewpoint of content utility and form utility with the objective of
answering the questions faced by a manager marketing information product form bundles
- how can he/she increase consumers' choice of bundles through appropriate
communication to impact consumers' perception of complementarity? And how should
he/she price the individual product forms and the bundle? We contrast information
product form bundles with conventional product form bundles to gain better insights into
consumers' reactions to bundling. Our second objective is to explain our findings in the
light of extant literature in bundling and highlight the similarities and variances that help
us better understand product form bundling. Given that most of the behavioral studies so
far focus on bundles composed of complements (e.g. computer and printer), on
investigating how consumers evaluate such bundles, and on the optimal strategies for
13
price and discount information presentation, the fact that we study bundle items for which
marketers can influence the degree of contingency/complementarity should provide
results that complement extant findings. Thus, our overall focus is not only on
understanding how the bundling of interrelated products influences consumers' purchase
decisions but also on how these decisions can be affected through marketing
communication and differential pricing.
Theoretical Framework and Hypotheses
Perceived Complementarity
From the firm's point of view, complementarity is traditionally defined by
referring to the sign of the cross-product elasticity of demand - if the sign is positive,
products are substitutes; in the opposite case they are complements (Sarvary and Parker
1997). If different forms are substitutes, the purchase of one item lowers the value of
alternative forms (contingent valuation), and therefore makes bundling the items less
attractive. If different forms are complements, bundling becomes more attractive because
the consumer is in effect purchasing a system of products that enable and enhance the
functionality of each other (Estelami 1999). Consumers may perceive a high degree of
complementarity based on economies of time and effort in purchasing the bundled items
together (search economies), improved satisfaction because of the bundle, and/or
improved total image of the bundle (Guiltinan 1987; Simonin and Ruth 1995). With
regard to the attractiveness of bundling to firms, complementarity between products can
cause bundling to be profitable (Telser 1979) and bundles composed of complements
have higher purchase intent versus bundles of similar or unrelated products (Harlam et al.
1995). There is evidence that complementarity positively affects bundle reservation
14
prices as well (Gaeth et. al 1990).
Applied to product form bundling, we would expect a positive relationship
between the degree of perceived complementarity between the bundle components and
the purchase likelihood for the bundle. On one hand, if consumers believe that the
individual product forms can be used interchangeably, they would buy only one of the
forms and not the product form bundle. On the other hand, if consumers think that there
is additional utility in having both product forms versus just one of them, they would
choose the product form bundle, ceteris paribus.
Hypothesis 1: There is a positive relationship between the degree of perceived
complementarity between the product forms in a bundle and the purchase likelihood for
the product form bundle.
We use the above hypothesis as a baseline and build on it to explain how exactly
communicating different usage situations influences consumers' complementarity
perceptions and thus consumer choice. We elaborate more on this in the discussion
section of Study 1.
Usage Situation
Usage situations correspond to activities and conditions for which products are
created and marketed (Fennell 1978). In order to analyze the effect of usage situations on
the acceptance of product form bundles, we draw upon extant literature (Macklin 1922)
to make a distinction between V
C
, the utility of the content (material in a book, the
margarine or soap itself), and V
F
, the utility that the specific form adds to the content
15
(print or electronic form of a book, stick or tub form of margarine)
1
.
A consumer's utility of a product form of an information product is not
independent of whether the consumer also buys another form. This is because the
consumer obtains the same content when buying the two product forms and she does not
get extra utility from having the same content twice. For example, if a consumer buys a
reference book bundle, she gets the same content twice, but receives content utility only
once. However, the consumer can read the print edition while traveling by metro/train,
and search the electronic edition if looking for some specific information. Consequently,
she can derive two separate form utilities from the bundle - that is, the incremental utility
from acquiring the second form together with the first is positive. How great this
incremental utility is depends on whether the alternative forms are viewed as
complements.
In our framework, the consumer's purchase decision for an information product
that comes in two formats can be represented as follows: choose the maximum of
Value of Product Form i: V
C
+ V
Fi
- P
i
Value of Product Form j: V
C
+ V
Fj
- P
j
Value of Bundle: V
C
+ V
Fi
+ V
Fj|Fi
- (1 - d)*(P
i
+ P
j
),
where d is the bundle discount, and V
Fj|Fi
is incremental form utility of Form j given that
Form i is purchased.
2
Note that V
C
is counted only once in valuing the bundle because the
same content is shared by both forms. Let Form i be the form that provides the highest
value to the consumer (e.g., V
Fi
- P
i
> V
Fj
- P
j
). Then the bundle will be chosen if V
C
+
V
Fi
+ V
Fj|Fi
- (1 - d)*(P
i
+ P
j
) > V
C
+ V
Fi
- P
i
, or if V
Fj|Fi
+ d(P
i
+ P
j
) > P
j
. If there are two
1
We assume that V
C
and V
F
are independent and additive for expositional purposes, without any loss in
generality.
2
Specifically V Fj|Fi = V
Fi
+
Fj
- V
Fi
, where V
Fi
+
Fj
is form utility from buying both items.
16
items in the bundle, and at least one of them has a positive valuation, we can state a
general condition under which a consumer would buy both items if there were no
discount:
(1a) Prob
INFO
= Prob (V
Fj|Fi
> P
j
),
where j is the item that provides less value, i is the item that provides more value, and
Prob refers to probability that a consumer will buy both items. The incremental form
utility of the second item must exceed its price if it is to be purchased along with the first.
If there is a bundle that is offered at a discount, the condition for buying the bundle
becomes:
(2a) Prob
INFO
= Prob (V
Fj|Fi
+ d (P
i
+ P
j
) > P
j
) = Prob (d > (P
j
- V
Fj|Fi
)/(P
i
+ P
j
)).
The consumer will buy the bundle only if the discount is large enough to overcome the
fact that she only receives form utility for the less preferred item. If V
Fj|Fi
> P
j
she would
buy this item without a discount, as shown in Equation 1a.
While information bundles suffer a redundancy of content, this is ordinarily not
the case for conventional bundles. In the case of conventional bundles, consumers
normally derive content utility from both product forms because they can first use Form i
and then Form j.
3
For example, if a consumer buys a bundle consisting of a pack of four
sticks of margarine and a margarine tub, she can first use the sticks, store the tub, and
then use the tub. Consequently, she derives two content values. In terms of form value,
the consumer can use the margarine stick for baking purposes, while the tub for spreading
margarine on bread or bakery, thus deriving form utility from both product forms
3
We assume here that conventional products do not deteriorate in quality as they are stocked. For example,
rapidly perishable items can be an exception to this. As one example, large containers of soft drinks can be
thought of as a bundle (they are a multiple of smaller sizes). A consumer might not value these highly
because most of the contents may become flat before the consumer has a chance to consume a high
proportion of the contents of the container.
17
(positive marginal utility from acquiring the second product form together with the first).
For conventional bundles, the value of the bundle becomes 2V
C
+ V
Fi
+ V
Fj|Fi
- (1 -
d)*(P
i
+ P
j
), while the values of individual items remain as above
4
. Using the notation
defined above, the probability of buying both forms if there were no discount becomes:
(1b) Prob
CONV
= Prob (V
C
+ V
Fj|Fi
> P
j
).
By comparing to 1b to 1a, the probability of buying the conventional product form
bundle even when there is no discount will tend to be higher than for the information
product form bundle. Similarly, as shown in Equation 2b below, the discount needed to
induce consumers of the conventional products to buy a bundle will tend to be smaller
because of the opportunity to obtain more content.
(2b) Prob
CONV
= Prob (V
C
+ V
Fj|Fi
+ d(P
j
+ P
i
) > P
j
) = Prob (d > (P
j
- V
C
- V
Fj|Fi
)/(P
i
+ P
j
))
Hypothesis 1a: Because both forms of a conventional product form bundle provide
content utility, consumers are more likely to select a conventional bundle than an
information bundle at a given discount level.
By directly comparing consumers' reactions to the two types of product form
bundles at specific discount levels we intend to show that the conventional and
information bundles are valued differently by consumers because of the different content
utility they provide (single or double).
Usage Situation and Bundle Discount
When consumers are suggested usage situations in which the two product forms
are differentially appropriate (one form is more appropriate for some situations, and the
4
For sake of exposition, we assume that the different forms of the conventional product have equivalent
content and each provide the same content value V
c
. Also, we assume that the content utility of the bundle
is the sum of the content utilities of the individual forms, with marginal utility remaining the same
whatever be the stage of consumption. These simplifying assumptions do not affect our general results.
18
other form is more appropriate for other situations), consumers are more likely to view
them as complements. Consequently, by manipulating different possible usages for the
two forms in the bundle, the form utility of one or both product forms can be changed.
Specifically, if communications succeed in convincing consumers that different forms are
appropriate for different uses of the product, and therefore more complementary, the
value of V
Fj|Fi
can be increased to, say, V*
Fj|Fi
. As can be seen from equations 1 and 2 this
increases the value of the bundle in all cases.
Numerous brand management teams apply usage-oriented advertising campaigns
to expand the use of their products, for example "Eat Campbell's Soup with formal
family dinners or for breakfast" (Wansink and Ray, 1996). In our study we go beyond
this conceptually and consider not the number (we keep it constant) but the nature of the
usage situations presented to the consumers. We elaborate on this in the stimuli
development section.
>
The probabilities of buying the information and conventional product form
bundles subject to usage situations and level of discount are presented in Table 1. With
respect to information bundles, we expect the usage situations considered when making a
purchase decision to moderate the effect of bundle discount on purchase likelihood.
Specifically, when consumers regard the two product forms as equally appropriate for the
same usage situations, the forms will be substitutes and V
Fj|Fi
÷ 0. The bundle will be
relatively unattractive and there will be no significant difference in their purchase
19
likelihood for the bundle whether a bundle discount is offered or not.
5
The discount itself
does not motivate consumers to buy the bundle because they are paying for the same
content twice and the marginal utility they receive from the second form together with the
first is very low or even zero.
On the other hand, when consumers are considering different possible usages for
the product forms, the likelihood of buying the bundle should be significantly higher in
the discount as compared to the no discount case. Specifically, when consumers regard
the two product forms as appropriate for different usage situations, the forms will be
perceived as more complementary than in the previous case and V
Fj|Fi
÷ V
Fj
. The bundle
discount can motivate consumers to buy the bundle in this case - not only the marginal
utility they get from the second form together with the first is positive but also the money
outlay is lower. In the absence of a discount consumers are likely to find the bundle
unattractive because it does not increase content utility (see Equation 1a). The bundle
discount can compensate for this (see Equation 2a).
Hypothesis 2 (information product form bundles): a) When consumers are suggested
different usage situations for the product forms, the purchase likelihood for the bundle
when bundle discount is offered is significantly higher than when bundle discount is not
offered.
6
b) There is no effect of availability of bundle discount when consumers are
suggested same usage situations for the two product forms.
With respect to conventional product form bundles the predictions on the effect of
5
In our experiments we have chosen to test a 25% level of bundle discount because this level is commonly
used in practice (e.g., Buy a pair of shoes and get the second pair at 50% off). As shown in Equations 2a
and 2b, the choice of a bundle is sensitive to the size of the discount, and this conclusion may not hold for
very deep discounts.
6
As can be seen from Equation 2a, the appropriateness of this hypothesis is conditional on the discount
being large enough to compensate for the bundle not offering an increase in content utility.
20
usage situation and bundle discount on purchase likelihood for the bundle are different -
we expect a main effect of both usage situation and bundle discount but no interaction.
Because consumers receive more content utility when acquiring the bundle, their
willingness to pay for the bundle is higher than that for each individual item. If a bundle
discount were offered, consumers would perceive the bundling of product forms as a
quantity discount, and thus be more likely to buy the product form bundle. If they are
suggested to use the two forms in different usage situations (versus same usage
situations) V
Fj|Fi
may still increase because the items could be viewed as more
complementary. Thus, consumers may perceive positive marginal utility from owning
Form j together with Form i, and consequently, be more likely to buy the product form
bundle.
Hypothesis 3 (conventional product form bundles): a) Consumers are more likely to buy
the product form bundle when they are suggested different usage situations for the two
product forms as compared to when they are suggested the same usage situations for the
two product forms. b) Consumers are more likely to buy the product form bundle when
they are offered bundle discount as compared to when they are not offered bundle
discount.
Relative Price of Print vs. Electronic Forms
Another factor that might influence the purchase likelihood for the product form
bundle is the relative price of the two product forms. The more interesting case is the one
of the information product form bundle. In this case, because consumers receive just one
content utility from the two different forms, the marginal utility having Form j together
21
with Form i is relatively low and sometimes close to zero. Second, electronic information
products are unique in that the marginal cost of reproducing and distributing them is often
much lower than the cost of the print form, even close to zero (e.g. Bakos and
Brynjolfsson 2000). In our empirical work we examine the purchase likelihoods for the
bundle when the information product forms are priced differentially and compare the
following cases: Case 1 - price of the two forms is equal, and Case 2 - price of the print
form is higher than price of the electronic form. Note that the bundle prices are kept
constant.
To establish a benchmark, assume that the prices of the two forms are equal: P
i
=
P
j
= P
A
, so the price of the bundle is (1-d)*(2 P
A
), where d is the discount. Then the
bundle will be chosen if V
C
+ V
Fi+Fj
- (1 - d)*(2 P
A
) > Max (V
C
+ V
Fi
- P
A
, V
C
+ V
Fj
-
P
A
), where V
Fi
+
Fj
= V
Fi
+ V
Fj|Fi
is form utility from buying both items (see footnote 1). If
V
Fi
> V
Fj
it follows that the bundle is chosen if V
Fj|Fi
> (1-2d)P
A
, or if the incremental
value of j exceeds its incremental cost. A similar condition can be worked out for the case
in which V
Fj
> V
Fi
. Adding the conditional probabilities of these two cases gives the
probabilities of bundle choice expressed in conditions 5 and 6 in Table 1, panel B
(condition 5 expresses the special case of d = 0).
Let the price of item i increase by kP
A
, and the price of item j decrease by an
equal amount, so that the sum of the prices of the two items is still 2P
A
. Now, because of
the shift in relative price, i is more attractive only if V
C
+ V
Fi
- (1 + k) P
A
> V
C
+ V
Fj
- (1
- k) P
A
, or if V
Fi
- 2kP
A
> V
Fj
. If this condition holds, the bundle will be chosen if V
C
+
V
Fi+Fj
- (1 - d)*(2P
A
) > V
C
+ V
Fi
- (1 + k) P
A
, which reduces to: V
Fj|Fi
> (1 - k - 2d)P
A
. A
similar expression can be worked out for the case in which j is more attractive (V
Fi
-
22
2kP
A
< V
Fj
). Adding conditional probabilities of these two cases gives the probabilities of
bundle choice expressed in conditions 7 and 8 in Table 1, panel B (condition 7 expresses
the special case of d = 0).
Comparison of the conditions in panel B of Table 1 leads to predictions about the
effects of discounts and relative prices on the acceptance of the bundle. First, because it
lowers the incremental cost of the less preferred item, the discount makes condition 6 > 5
and 8 > 7, and there should be a main effect of discount.
7
Whether a change in relative
prices will lead to increased purchases of the bundle depends on how the relative
valuation of the two items varies across consumers. As shown in conditions 7 and 8,
when V
Fi
- 2kP
A
> V
Fj
the probability of buying both items increases because the less
valued item becomes cheaper, and it can also be shown that the probability of buying the
bundle will increase as long as V
Fi
- kP
A
> V
Fj
.
8
If this condition does not hold, the
bundle becomes less attractive when there are different relative prices, and the net effect
of changes in relative price on bundle choice depends on the distribution of consumer
valuations.
9
Given that most consumers employ the print versions of books and
newspapers, it seems reasonable to assume as a maintained hypothesis that most
consumers place a relatively high valuation on the print version.
7
To compare conditions 6 and 5, let F
j|i
(V') represent the density of consumer valuations V
Fj|Fi
between 0
and V', and F
i|j
(V') be a similar density for V
Fi|Fj
. Then the share of consumers who would buy the bundle with
a discount, but not otherwise, is (F
j|i
(P
A
)- F
j|i
((1-2d)P
A
))(S) + (F
i|j
(P
A
)- F
i|j
((1-2d)P
A
))(1-S), where S is the
share of consumers for whom V
Fi
>V
Fj
. A similar condition can be worked out for comparison of 8 & 7.
8
Let 0 < V - V < 2kP , in which case the bundle is chosen if V
Fi Fj A Fi|Fj = V
Fi+Fj
- V
Fj
> (1+k-2d)P
A
. Let V
Fi
-
V
Fj
=c, so V
Fi+Fj
- V
Fi
+c> (1+k-2d)P
A
, or V
Fj|Fi
= (1+k-2d)P
A
- c. If c> kP
A
, the incremental value of i
exceeds its cost, and the bundle becomes more attractive relative to the case of equal prices. If c< kP
A
, the
incremental value of i is not sufficient to cover its cost.
9
To compare conditions 7 and 5, use the same notation for the density of consumer valuations as in
footnote 5, let S' be the share of consumers with valuations V
Fi
- V
Fj
> kP
A
, S* be the share of consumers
with valuations 0 < V
Fi
- V
Fj
< kP
A
, and 1- S' - S* be the share with valuations V
Fj
> V
Fi
. Then the share of
consumers who would buy the bundle compared to the case of equal relative prices is (F
j|i
(P
A
)- F
j|i
((1-
k)P
A
))(S') - (F
j|i
((1+k)P
A
)- F
j|i
(P
A
))S*- (F
i|j
((1+k)P
A
)- F
i|j
(P
A
))(1-S'- S*). A similar comparison between 8
and 6 could be obtained from subtracting 2d P
A
from the price terms. Since 8 vs. 6 involves different parts
of the price distribution compared to 7 vs. 5, the two comparisons need not give the same results.
23
Hypothesis 4 (information product form bundles): a.) Across both discount conditions, if
the preference for the traditional (print) version (i) over the electronic version (j) is
sufficiently large (V
Fi
- V
Fj
> kP
A
), consumers are more likely to buy the product form
bundle when the traditional print product is priced at a premium and the electronic
product is priced at a discount as compared to when the products are priced at the same
level. b.) Consumers are more likely to buy the bundle when a discount is offered.
The intuition behind Hypothesis 4a is straightforward. The more item prices
match consumer valuations, the easier it is to induce consumers to buy both items. If V
Fi
is very high relative to V
Fj
, setting equal prices will make j unattractive, but leave the
consumer a surplus on i. It becomes difficult to induce the consumer to buy both items.
Conversely if V
Fi
is only slightly higher than V
Fj
, setting a high price on i will make it
unattractive, but will leave the consumer with a surplus on j. If V
Fi
is very high relative to
V
Fj
, offering different relative prices can have the same effect as offering a bundle
discount (compare conditions 6 and 7 in Table 1). However, as they extract more surplus,
different relative prices will bring more revenue.
We can also present an alternative intuition for Hypotheses 4 from the perspective
of consumers' evaluation process. Recall that under the no discount case, the price of the
bundle is the same across the same price (case 1) and differential price (case 2)
conditions. Given that consumers have higher preference for the print version, it becomes
the anchor for evaluating the bundle (see Yadav 1993). Under the same price condition,
consumers have a "gain" on the anchor form (print) in the bundle, while they have a
"loss" on the less preferred form (electronic), as the individual prices of the different
forms could act as reference points in evaluating the bundle. Since perceived loss has a
24
greater impact than the perceived gain (Kahneman and Tversky 1979), the bundle is still
evaluated negatively overall. In the differential price case, the prices are more in line with
consumers' expectations (driven by their valuation) and there is no significant gain/loss
on the anchor form and the other form. Thus, the bundle is evaluated more favorably. We
argue that the price level of the less preferred form relative to consumer valuation in case
1 (same prices) heightens the poor evaluation of the form and the bundle, while the lower
price in case 2 does not have such an effect on the bundle evaluation. Giving a price
discount for the bundle can help overcome the negative evaluations and improve the
evaluation and purchase of the bundle.
In the following sections we present the results of two studies designed to test the
hypotheses outlined above.
Study 1
The main objective of this study is to test Hypothesis 1. Additionally, we
introduce a bundle discount variable and investigate whether the level of bundle discount
affects the purchase likelihood for the product form bundle. Specifically, we are
interested in whether the bundle discount per se motivates consumers to buy the bundle.
Method
Subjects. Subjects were 80 undergraduate students enrolled in an introductory
marketing course. They were awarded extra course credit for their participation.
Product categories and materials. We used two information product categories
and two conventional product categories, specifically books (print and electronic) and
journal subscriptions (print and electronic), and margarine (stick and tub) and soap (bar
25
and liquid). Advertisements for fictitious brands were developed to describe these
products.
Design and procedure. We employed a 2 (level of discount: 0%, 25%) by 2
(category type: information, conventional) between subjects design with 2 product
replicates. The order of presentation of the product categories was counterbalanced
within each category type. The prices were presented in absolute values (price of form 1,
price of form 2, bundle price).
Every subject evaluated two product advertisements for either book and
newspaper, or margarine and soap. Subjects reviewed each ad and stated their likelihood
of purchasing the three options (the bundle and the two individual product forms).
Purchase likelihood was measured in two different ways: by allocating 100 points
between the three options
10
, and by indicating how likely they would be to buy the three
options (1 = "very unlikely," 9 = "very likely"). Next the subjects were asked to rate the
perceived complementarity of the two product forms using a 3-item Likert scale
11
(1 =
"strongly disagree," 7 = "strongly agree"). Finally, several control measures were taken
including attitude towards the ad (bad/good, unpleasant/pleasant, worthless/valuable, and
unfavorable/ favorable; MacKenzie and Lutz 1989; Mick 1992) and demographics (e.g.
gender and computer usage).
Results
10
We do not include the "buy nothing" option in the 100-point allocation among the different product
forms because we are interested in which form(s) our subjects are going to choose after they have decided
to buy the product. Thus we try to control for other factors that may influence the product purchase
decision and are not of specific interest in this study.
11
"It would be more useful to have both the paperback book and the electronic book than just the
paperback book", "There is additional value in having both the paperback book and the electronic book as
compared to having only one of them" and "It would be more useful to have both the paperback book and
the electronic book than just the electronic book."
26
The reliabilities of the perceived complementarity scales are between 0.81 and
0.92 in the four categories (N = 40 per category). The mean levels of perceived
complementarity (after averaging the three items of the scale) between the product forms
are as follows: X
BOOK
= 3.21 (St. Dev. =1.67), X
NEWS
= 3.17 (1.62), X
MARG
= 3.56 (1.81)
and X
SOAP
= 4.19 (2.10).
To test Hypothesis 1 we use linear regression in which the independent variable is
the perceived complementarity between the product forms in the bundle, and the
dependent variables are the points allocated to the bundle and the likelihood of buying the
bundle (separate model for each product category and each dependent variable). Our
regression results indicate that in the book, margarine and soap categories there is a
positive relationship between the degree of perceived complementarity and the purchase
likelihood for the bundle (Likelihood of buying the bundle: b
BOOK
= 0.535, b
MARG
=
0.746, b
SOAP
= 0.731, all p's0.44).
27
A discount of 25% does not make consumers more likely to buy information bundles.
The perceived incremental value of the second form must therefore be less than 50% of
the value of the first form. This is to be expected since both forms have the same content
with its utility derived in one form or the other, but not in both. In the margarine and soap
categories the situation is different - in both categories respondents are more likely to
buy the bundle and allocate more points to the bundle in the discount versus the no
discount conditions (Likelihood of buying the bundle: X
MARG/HIGH
= 4.90 versus
X
MARG/LOW
= 2.74, F
1,38
=6.20, p
Digital marketing is marketing that makes use of electronic devices such as computers, tablets, smartphones, cellphones, digital billboards, and game consoles to engage with consumers and other business partners. Internet Marketing is a major component of digital marketing.
CASE STUDY ON MARKETING OF DIGITAL
PRODUCTS
ABSTRACT:-
My dissertation comprises of three essays that theoretically and empirically
investigate the marketing of digital products, which are information products such as
newspapers and books sold in both physical and electronic form.
In the first essay, we study product form bundling, defined as marketing two or
more forms of the same product as a package. We show experimentally that, regarding
information products, the usage situations communicated to consumers moderate the
effect of the availability of bundle discount on the purchase likelihood for the product
form bundle. We also compare the effect of different pricing strategies for information
products. When no bundle discount is offered, the likelihood of buying both forms of an
information product, holding the sum of their prices constant, can be increased by pricing
the electronic form lower than the print form rather then pricing both at the same level.
In the second essay we compare two product strategies that can be used in
marketing digital products. Under standard mixed bundling companies offer full content
in print and electronic form and the bundle of the two, while under content unbundled
mixed bundling companies offer full content in print form, unbundled content in
electronic form, and the bundle of the two. Which strategy is more attractive for a
company to pursue? We model the profits under these two strategies and outline
conditions in which one or the other leads to higher profit. We apply our analytical
framework to data from a field experiment implemented on the website of a book
publisher.
The third essay investigates the attractiveness of complete product lines of items
such as books and newspapers. We employ a choice experiment in which a sample of
consumers is presented with hypothetical product scenarios asked to make a choice. The
data is used to develop a profit-maximizing configuration of products and prices. Similar
approaches to the product line pricing problem have been employed for conventional
products, but not when bundling of different forms of a product is an option, and not
when the different products may be complements rather than substitutes.
ii
TABLE OF CONTENTS
List of Tables ......................................................................................................................v
List of Figures ...................................................................................................................vii
Chapter I: Dissertation Overview ....................................................................................... 1
Chapter II: Essay One. Product Form Bundling - Implications for Marketing Digital
Products............................................................................................................................... 4
Abstract ................................................................................................................... 4
Introduction............................................................................................................. 5
Research Background ............................................................................................. 9
Study Objectives ................................................................................................... 13
Theoretical Framework and Hypotheses .............................................................. 14
Study 1 .................................................................................................................. 25
Study 2 .................................................................................................................. 29
Discussion ............................................................................................................. 38
Managerial Implications ....................................................................................... 40
Conclusion ............................................................................................................ 42
Chapter III: Essay Two. Bundling and Pricing Strategies for Digital Products ............... 44
Abstract ................................................................................................................. 44
Introduction........................................................................................................... 45
Research Background ........................................................................................... 47
Bundling Model .................................................................................................... 49
Data and Estimation Procedure............................................................................. 59
Results................................................................................................................... 64
iii
Discussion ............................................................................................................. 69
Managerial Implications ....................................................................................... 72
Conclusion ............................................................................................................ 73
Chapter IV: Essay Three. Bundling and Unbundling of Electronic Content.................... 75
Abstract ................................................................................................................. 75
Introduction........................................................................................................... 76
Research Background ........................................................................................... 78
Theoretical Background........................................................................................ 82
Methodology ......................................................................................................... 86
Study Design and Data Collection........................................................................ 87
Results................................................................................................................... 90
Discussion ........................................................................................................... 102
Managerial Implications ..................................................................................... 106
Conclusion .......................................................................................................... 107
References........................................................................................................................131
iv
LIST OF TABLES
Table 1: Purchase Probabilities for Bundle: Product, Discount and Usage Conditions . 109
Table 2: Perceived Appropriateness of Generated Usage Situations.............................. 110
Table 3: Study 2 - Mean Percentage of Points Allocated to Bundle .............................. 111
Table 4: Study 2 ANOVA Results.................................................................................. 112
Table 5: Profit Comparison under CUMB and TMB Strategies..................................... 113
Table 6: Actual Purchase Rates under the Two Mixed Bundling Strategies.................. 114
Table 7: Estimation Results - Content Unbundled Mixed Bundling .............................. 115
Table 8: Estimation Results - Traditional Mixed Bundling............................................ 116
Table 9: Simulation Results - Profit under the Two Mixed Bundling Strategies. ......... 117
Table 10: Conjoint Design and Price Levels .................................................................. 118
Table 11: Random Parameters Logit Model Results (conjoint choice experiment)....... 119
Table 12: Book Category - Market Simulation Results ................................................. 120
Table 13: Newspaper Category - Market Simulation Results........................................ 121
Table 14: Book Category - Market Simulation Results (Incomplete Product Line)...... 122
Table 15: Newspaper Category - Market Simulation Results (Incomplete Product Line)
......................................................................................................................................... 123
Table 16: Book Category - Market Simulation Results (Incomplete Product Line, No
Bundle Discount) ............................................................................................................ 124
v
Table 17: Newspaper Category - Market Simulation Results (Incomplete Product Line,
No Bundle Discount) ...................................................................................................... 125
Table 18: Book Category - Forms' Attribute Perceptions. ............................................. 126
Table 19: Newspaper Category - Forms' Attribute Perceptions..................................... 127
vi
LIST OF FIGURES
Figure 1: Study 2 Results................................................................................................ 128
Figure 2: Optimal Price and Total and Marginal Revenue from Electronic Chapters.... 129
Figure 3: Optimal Price and Total and Marginal Revenue from Full Electronic Book.. 130
vii
CHAPTER I: DISSERTATION OVERVIEW
Marketing digital products is appealing because of several reasons: 1) the
marginal cost of reproducing and distributing them is almost zero (Bakos and
Brynjolfsson, 1999), 2) they can be easily organized, searched and stored, and 3) the
whole buying experience trough Internet can be more interactive and tailored to the
specific needs and preferences of the customer (Peterson et al., 1997). Although many
publishers make available content online, others (e.g. marketers of full length books,
reference materials, music and video) are still cautious in distributing content in digital
form over the Internet (Kannan and Jain, 2003). There are good reasons for this cautious
approach, such as piracy of content and bandwidth constraints. However, less valid
reasons also prevent managers from offering digital content, such as uncertainty about
what product and pricing strategies to utilize.
How should companies market digital products? What product, pricing and
communication strategies should they employ? My dissertation attempts to tackle these
interesting and practically relevant questions. It comprises of three essays organized as
follows.
In Essay 1 we focus on consumer reactions to bundling of information products,
and contrast these with consumer reactions to bundling of conventional products. In
particular, we concentrate on communication and pricing strategies that might enhance
the viability of selling the information goods as a bundle. We show experimentally that
communicating different possible usages for the product forms may increase the
likelihood of buying the items as a bundle. We also investigate consumer reactions to
1
alternative pricing plans for product forms. Our respondents readily accept bundle
discounts on conventional items that can be inventoried, but are generally unresponsive
to bundle discounts on different forms of information goods that have the same content.
However, emphasizing different uses for the forms does increase their responsiveness to
bundle discounts. We conclude that communicating the appropriateness of different
forms for different usage situations can be a key to a successful bundling strategy for
information goods; further, it is more beneficial for companies to price the electronic
form lower than the print form instead of offering bundle discounts.
In Essay 2 we model the profits under two strategies a content provider may
employ: traditional mixed bundling, in which the product line consists of print book, PDF
book and the bundle of the two, and content unbundled mixed bundling, which is selling
print book, PDF chapters and the combination of the two. While appealing because of
low marginal costs and the likely catering to emerging consumer needs, offering
electronic products may lead to additional revenue generation but can also result in
product cannibalization. Our results suggest that offering unbundled PDF chapters is
more profitable than offering only the full PDF books under certain conditions. We
empirically support our predictions with actual data gathered in an online experiment
executed on the website of a publisher of academic books. We present interesting insights
on how customers from different subject domains react to electronic products and how
they are likely to behave when different product and pricing schemes are employed.
In Essay 3 we further extend the previous essays and investigate the attractiveness
of complete product lines of information good. For example, the publisher of Wall Street
Journal can offer the following product line of subscription options: print WSJ, WSJ
2
online, separate sections of WSJ online (e.g. Money & Investment, Technology), print
WSJ and online WSJ bundle, and print WSJ and online section bundle. We employ a
choice experiment in which a sample of consumers is presented with hypothetical product
offerings at various prices and asked to make a choice. The data is used to develop a
profit-maximizing configuration of products and prices. Similar approaches to the
product line pricing problem have been employed for conventional products, but not
when bundling of different forms of a product is an option, and not when the different
products may be complements rather than substitutes.
3
CHAPTER II: ESSAY ONE. PRODUCT FORM BUNDLING - IMPLICATIONS FOR
MARKETING DIGITAL PRODUCTS
Abstract
In this paper we study product form bundling, defined as marketing two or more
forms of the same product as a package. Although we are primarily interested in
information products (e.g. Wall Street Journal: print and online forms), we contrast
consumer reactions to bundling these products with reactions to bundling conventional
products (e.g. margarine: stick and tub forms). We show experimentally that the usage
situations communicated to the consumers moderate the effect of the availability of
bundle discount on the purchase likelihood for the product form bundle. Our subjects
readily accept bundle discounts on conventional items that can be inventoried, but are
generally unresponsive to bundle discounts on bundles of information products that have
the same content. However, emphasizing different uses for the information product forms
does increase the responsiveness to bundle discounts. Also, we examine the impact of
different relative prices for the forms within the information bundle on the bundle
purchase likelihood, and compare this to offering discounts. Our study provides useful
insights into the conditions under which the marketer is better off pricing the forms
differentially than pricing them equally and offering bundle discounts.
4
Introduction
It is a common practice in consumer packaged goods categories to market
products in different forms, for example, margarine (stick and tub forms) and soap (bar
and liquid forms). In marketing different forms of the same product the focus has been on
offering forms appropriate for various usage situations. For example, margarine is sold in
both stick and tub form and customers can choose the form that better suits their needs
and usage situations. Recently, marketers of information products have been applying
similar strategies as well by making the information products available in electronic form
in addition to the print/traditional form. Specifically, newspapers (e.g., Wall Street
Journal) market print and electronic forms of their content, publishers (e.g., US
Government Printing Office) offer print books and reports as well as the corresponding
electronic versions, and recording companies (e.g., EMI Recorded Music) have started
offering online music in addition to music in traditional forms (CDs, tapes, etc.) all
catering to the diverse needs of customers.
While bundling different forms of the same product is occasionally seen in the
consumer packaged goods market (e.g. bundling Eucerin body cream and lotion; Dial
liquid soap and Dial soap bars), one would generally not expect similar bundling
strategies in the information goods market as the content being sold in the different forms
is generally the same. However, newspapers such the Wall Street Journal not only offer
the print and electronic forms separately as single products, but also as a bundle of
different forms. Likewise, publishers of scholarly content such as National Academies
Press have started to offer bundles of print and PDF forms in addition to offering them
separately. Many scholarly journals also market subscriptions of both print and electronic
5
forms. New formats introduced by dualdisc.com provide the capability to sell music
content in CD format as well as DVD-Audio or surround sound as a bundle on the same
disk (Business Week, 2004).
While different forms of products such as margarine and soap may have roughly
the same production costs, information products are unique in that the marginal cost of
reproducing and distributing the electronic form is often much lower than the one of the
print form. Consequently, it is not surprising that marketers are interested in selling
bundles of electronic and print forms, as it implies significant additional revenue. As
broadband service penetration increases, similar opportunities in selling bundles of
streaming videos and DVDs, and music bundles (mp3 form, CD, mobile tunes) become
possible. In order to realize this additional revenue potential, however, companies need a
clear understanding of how to market, communicate and price product form bundles. It is
in this context that we present our research.
In this paper, we first focus on consumers' reactions to alternative forms of
information products, and examine conditions under which they are more likely to
purchase the product form bundle. In particular, we concentrate on communication and
pricing strategies that might enhance the viability of selling the information goods as a
product form bundle. We replicate our study in the consumer packaged goods category to
establish a comparative baseline. It is well known that there are different types of utility a
good may provide - elementary (or basic), place, form, time, and possession (Macklin
1922). In our study we distinguish between content utility (similar to elementary or basic)
- utility provided by the product itself - and form utility - utility provided by the
specific form in terms of convenience, ease of use and the like - of the product forms that
6
play a critical role in how the bundle is viewed. Content utility tends to be duplicated
across different forms of an information product, making it less attractive to buy them as
a bundle. From this viewpoint, the content utility of either of the information forms or the
bundle is the same in magnitude. However, in the conventional packaged goods
categories, the content utility of the bundle is generally more than that of either of the
individual forms.
While content utility remains the same in the case of an information product
bundle making it less attractive to purchase, extant research would suggest that suitability
of different forms of an information product for use in different situations will decrease
the perceived similarity between them (Ratneshwar and Shocker 1991) and that bundles
composed of complements have a higher purchase intent versus bundles of similar
products (Estelami 1999), thus making the information bundle appealing. However, we
find experimentally that communicating different possible usage situations for the forms,
in and of itself, is not sufficient to increase the probability of selling the bundle of
information product forms. Yet, for conventional packaged goods categories, such
communication strategies are effective in increasing the bundle purchase probabilities. In
investigating consumer reactions to alternative pricing plans for different forms of
information products and different forms of conventional products, we find that our
experimental subjects readily accept bundle discounts on conventional items that can be
inventoried, but are generally unresponsive to bundle discounts on different forms of
information products that have the same content. It is only when different uses for the
forms are emphasized along with bundle discount that respondents' bundle purchase
probabilities of information product forms increase significantly. This suggests that
7
emphasizing the appropriateness of the forms for different usage situations is as
important as bundle discounts in successfully marketing bundles of information products.
Finally, we examine the impact of different relative prices for the forms within the
information bundle on the purchase of information bundle, and compare this to offering
discounts. Our study provides useful insights into the conditions under which the
marketer is better off pricing the different forms differentially than pricing them the same
and offering bundle discounts.
The contribution of the paper is three-fold. First, our study offers a useful
approach in terms of examining product forms and the attractiveness of information
product bundles under bundle discounts, differential pricing of the forms, and usage
situation communication from the perspective of content and form utilities. We are not
focusing on the effect of the above factors per se but on their interaction effect in
influencing consumer choice. Second, our study complements the findings in extant
literature on bundling by providing insights into conditions under which those findings
are directly applicable to product forms and instances where those results may not hold.
Specifically, our study extends the findings to situations where items of bundles (forms)
can be perceived as substitutes as well as complements across different consumers. Third,
our paper provides substantive insights in an area of emerging importance - bundling of
information products - by providing guidelines for communication and pricing strategies
for increasing the attractiveness of information bundles and expanding revenue
opportunities for marketers. This is managerially very relevant given that the consumer
spending for online content in the US grew to $853 million in 2004, an increase of 14
percent over the same period last year (Online Publishers Association Report, 2004).
8
The paper is structured as follows. First, we define and discuss product form
bundling in the context of extant literature and position our study. Second, we present a
theoretical framework and derive hypotheses. Third, we discuss two experiments that
were designed to empirically test our hypotheses. Finally, we highlight the implications
of our study and suggest areas for future research.
Research Background
Product Form Bundling
Extant literature defines bundling as selling goods in packages (Adams and
Yellen 1976), marketing products as a package at a special price (Guiltinan 1987), and
selling products at a single price (Yadav and Monroe 1993). Distinction is also made
between price bundling, defined as the sale of two or more separate products in a package
at a discount without any integration of the products, and product bundling, which is the
integration and sale of two or more separate products or services at any price (Stremersch
and Tellis 2002). We define product form bundling as marketing two or more forms of
the same product as a package.
In the context of product categories, we make a distinction between information
product form bundles in which the same information is presented in different forms and
the forms are bundled together (e.g. electronic book and print book), and conventional
product form bundles consisting of different physical forms of the same product (e.g.
stick of margarine and margarine tub). Information bundles have some unique
characteristics: the marginal cost of producing the electronic form after producing the
print is negligible, consumers have reasonable knowledge of this cost structure, and, in
9
some cases, the individual products are perishable (e.g. after reading the news online
consumers do not benefit from the print version of the newspaper to read the same news).
With respect to conventional bundles, the cost structure is different - the marginal costs
associated with the forms are positive - and the products usually are not immediately
perishable and can be stockpiled.
From a conceptual point of view, product form bundling seems similar to other
types of bundling discussed in extant literature. On one hand, it could be viewed as a
special case of product bundling - that is, the integration and sale of two or more separate
products, the separate products being different forms of the same product; on the other
hand, it is a type of price bundling - the sale of two or more separate products in a
package at a discount. However, there are two important distinctions in the case of
product form bundling. First, the product forms can range from being perceived as
substitutes to being perceived as complements to each other and degree of heterogeneity
across consumers on this dimension is much higher than what is encountered in other
bundling situations. As an illustration, consider the bundling of print and electronic forms
of newspaper subscriptions. The Wall Street Journal has been recently promoting the two
forms of the newspaper as a bundle. The ads suggest that people might use the two forms
for different purposes and/or situations (e.g. keeping up with the daily news versus doing
research). If customers perceive WSJ Online as a substitute to WSJ, they will subscribe to
one of them; if they view the two form of the journal as complementing each other, they
may be willing to subscribe to both. Second, in the case of information product bundles,
the marginal cost of producing one form after producing the other form is close to zero,
which is quite different from the scenarios encountered in the extant bundling literature.
10
Offering different forms of a product is also similar to having more than one
package of the same item available. Packaging of items explicitly sold at retail into a
small and a large package, for example, can be viewed as commodity bundling and thus
as a mechanism for price discrimination, or it can be viewed as a mechanism for
providing different levels of distribution services through the shifting of distribution costs
across market boundaries (Betancourt 2004). The small package provides a high level of
the distribution service assurance of product delivery in the desired form bundled with
the items explicitly sold that are contained in the small package (Betancourt 2004).
Offering a print and an electronic form of a product can be considered as two different
levels of the distribution service assurance of product delivery in the desired form, and
each level is bundled with the content of the product. The difference between offering
different product forms and offering different product packages is in the cost structure
associated with the two offers. While the marginal costs of producing the different
packages are positive and similar to each other, this is not necessarily true with respect to
the different product forms - the marginal cost of the electronic form, for example, is
close to zero. Consequently, the implications of offering different product forms can be
different from the implications of offering different types of packaging both from buyers'
and sellers' point of view. Because of the cost structure the buyers are likely to expect a
relatively lower electronic form price as compared to the print form price, and it may be
profitable for the sellers to charge relatively lower price for the electronic form. In sum,
offering different forms of a conventional product is the same as offering different
packaging types, while offering different forms of an information product is not
necessarily the same as offering different packaging types because of the associated cost
11
structure. Thus, we use the term product forms as it is more general. Also, our focus is on
bundling product forms (or types of packaging in the case of conventional products), and
not on bundling an item with the specific service level it provides.
While there is extensive literature focusing on conditions favorable for bundling -
negative correlations in consumer reservation prices (Stigler 1963; Schmalensee 1984),
complementarity in consumption (Telser 1979), uncertainty in the valuations of the
quality of the goods (Kenney and Klein 1983) - contingent valuation of interrelated
products in the bundle is very relevant for product form bundling. Contingent valuations
have been examined at both conceptual (e.g. Guiltinan 1987) and analytical (e.g.
Venkatesh and Kamakura 2003 (VK) levels. Under assumptions of homogeneous degree
of contingency or complementarity, VK find that moderate to strong substitutes should be
offered as separate products; the same is applicable for complements if the marginal costs
are moderate relative to the market's maximum willing to pay. They also find mixed
bundling to be optimal for weak substitutes/complements if the marginal costs are not too
high (Venkatesh and Kamakura 2003). It is not clear to what extent these results will hold
given the heterogeneity in customer perceptions of the product forms as being substitutes
or complements (contingency) or under the case of very low marginal costs. Thus, our
study on bundling product forms might complement the above findings. In addition, the
heterogeneity in consumer contingency/ complementarity perceptions may also suggest
that consumers may be amenable to suggestions from marketers in manipulating such
perceptions.
Extant research based on mental accounting and related framing effects have
provided interesting insights into consumer reaction to bundling (Thaler 1985; Johnson
12
1999). The findings relevant for relative pricing of the product forms and its impact on
bundle choice suggest that (1) in terms of evaluation process, there is evidence that
buyers use anchoring and adjustment (Yadav 1994), (2) the evaluation of a bundle
depends on the price leader as well (Yadav 1995), and (3) savings offered on the bundle
have a greater relative impact than savings offered on the individual items (Yadav and
Monroe 1993). In the context of information products, the price of the form that
consumers are more familiar with - print - could form an anchor against which other
forms are evaluated. Also, given the marginal cost of one form (say, an e-book) is close
to zero, the relative pricing of the forms may have to account for consumers' expectations
regarding the relative prices of product forms.
Study Objectives
Our study objectives are as follows. First, we examine the concept of product
form bundling from the viewpoint of content utility and form utility with the objective of
answering the questions faced by a manager marketing information product form bundles
- how can he/she increase consumers' choice of bundles through appropriate
communication to impact consumers' perception of complementarity? And how should
he/she price the individual product forms and the bundle? We contrast information
product form bundles with conventional product form bundles to gain better insights into
consumers' reactions to bundling. Our second objective is to explain our findings in the
light of extant literature in bundling and highlight the similarities and variances that help
us better understand product form bundling. Given that most of the behavioral studies so
far focus on bundles composed of complements (e.g. computer and printer), on
investigating how consumers evaluate such bundles, and on the optimal strategies for
13
price and discount information presentation, the fact that we study bundle items for which
marketers can influence the degree of contingency/complementarity should provide
results that complement extant findings. Thus, our overall focus is not only on
understanding how the bundling of interrelated products influences consumers' purchase
decisions but also on how these decisions can be affected through marketing
communication and differential pricing.
Theoretical Framework and Hypotheses
Perceived Complementarity
From the firm's point of view, complementarity is traditionally defined by
referring to the sign of the cross-product elasticity of demand - if the sign is positive,
products are substitutes; in the opposite case they are complements (Sarvary and Parker
1997). If different forms are substitutes, the purchase of one item lowers the value of
alternative forms (contingent valuation), and therefore makes bundling the items less
attractive. If different forms are complements, bundling becomes more attractive because
the consumer is in effect purchasing a system of products that enable and enhance the
functionality of each other (Estelami 1999). Consumers may perceive a high degree of
complementarity based on economies of time and effort in purchasing the bundled items
together (search economies), improved satisfaction because of the bundle, and/or
improved total image of the bundle (Guiltinan 1987; Simonin and Ruth 1995). With
regard to the attractiveness of bundling to firms, complementarity between products can
cause bundling to be profitable (Telser 1979) and bundles composed of complements
have higher purchase intent versus bundles of similar or unrelated products (Harlam et al.
1995). There is evidence that complementarity positively affects bundle reservation
14
prices as well (Gaeth et. al 1990).
Applied to product form bundling, we would expect a positive relationship
between the degree of perceived complementarity between the bundle components and
the purchase likelihood for the bundle. On one hand, if consumers believe that the
individual product forms can be used interchangeably, they would buy only one of the
forms and not the product form bundle. On the other hand, if consumers think that there
is additional utility in having both product forms versus just one of them, they would
choose the product form bundle, ceteris paribus.
Hypothesis 1: There is a positive relationship between the degree of perceived
complementarity between the product forms in a bundle and the purchase likelihood for
the product form bundle.
We use the above hypothesis as a baseline and build on it to explain how exactly
communicating different usage situations influences consumers' complementarity
perceptions and thus consumer choice. We elaborate more on this in the discussion
section of Study 1.
Usage Situation
Usage situations correspond to activities and conditions for which products are
created and marketed (Fennell 1978). In order to analyze the effect of usage situations on
the acceptance of product form bundles, we draw upon extant literature (Macklin 1922)
to make a distinction between V
C
, the utility of the content (material in a book, the
margarine or soap itself), and V
F
, the utility that the specific form adds to the content
15
(print or electronic form of a book, stick or tub form of margarine)
1
.
A consumer's utility of a product form of an information product is not
independent of whether the consumer also buys another form. This is because the
consumer obtains the same content when buying the two product forms and she does not
get extra utility from having the same content twice. For example, if a consumer buys a
reference book bundle, she gets the same content twice, but receives content utility only
once. However, the consumer can read the print edition while traveling by metro/train,
and search the electronic edition if looking for some specific information. Consequently,
she can derive two separate form utilities from the bundle - that is, the incremental utility
from acquiring the second form together with the first is positive. How great this
incremental utility is depends on whether the alternative forms are viewed as
complements.
In our framework, the consumer's purchase decision for an information product
that comes in two formats can be represented as follows: choose the maximum of
Value of Product Form i: V
C
+ V
Fi
- P
i
Value of Product Form j: V
C
+ V
Fj
- P
j
Value of Bundle: V
C
+ V
Fi
+ V
Fj|Fi
- (1 - d)*(P
i
+ P
j
),
where d is the bundle discount, and V
Fj|Fi
is incremental form utility of Form j given that
Form i is purchased.
2
Note that V
C
is counted only once in valuing the bundle because the
same content is shared by both forms. Let Form i be the form that provides the highest
value to the consumer (e.g., V
Fi
- P
i
> V
Fj
- P
j
). Then the bundle will be chosen if V
C
+
V
Fi
+ V
Fj|Fi
- (1 - d)*(P
i
+ P
j
) > V
C
+ V
Fi
- P
i
, or if V
Fj|Fi
+ d(P
i
+ P
j
) > P
j
. If there are two
1
We assume that V
C
and V
F
are independent and additive for expositional purposes, without any loss in
generality.
2
Specifically V Fj|Fi = V
Fi
+
Fj
- V
Fi
, where V
Fi
+
Fj
is form utility from buying both items.
16
items in the bundle, and at least one of them has a positive valuation, we can state a
general condition under which a consumer would buy both items if there were no
discount:
(1a) Prob
INFO
= Prob (V
Fj|Fi
> P
j
),
where j is the item that provides less value, i is the item that provides more value, and
Prob refers to probability that a consumer will buy both items. The incremental form
utility of the second item must exceed its price if it is to be purchased along with the first.
If there is a bundle that is offered at a discount, the condition for buying the bundle
becomes:
(2a) Prob
INFO
= Prob (V
Fj|Fi
+ d (P
i
+ P
j
) > P
j
) = Prob (d > (P
j
- V
Fj|Fi
)/(P
i
+ P
j
)).
The consumer will buy the bundle only if the discount is large enough to overcome the
fact that she only receives form utility for the less preferred item. If V
Fj|Fi
> P
j
she would
buy this item without a discount, as shown in Equation 1a.
While information bundles suffer a redundancy of content, this is ordinarily not
the case for conventional bundles. In the case of conventional bundles, consumers
normally derive content utility from both product forms because they can first use Form i
and then Form j.
3
For example, if a consumer buys a bundle consisting of a pack of four
sticks of margarine and a margarine tub, she can first use the sticks, store the tub, and
then use the tub. Consequently, she derives two content values. In terms of form value,
the consumer can use the margarine stick for baking purposes, while the tub for spreading
margarine on bread or bakery, thus deriving form utility from both product forms
3
We assume here that conventional products do not deteriorate in quality as they are stocked. For example,
rapidly perishable items can be an exception to this. As one example, large containers of soft drinks can be
thought of as a bundle (they are a multiple of smaller sizes). A consumer might not value these highly
because most of the contents may become flat before the consumer has a chance to consume a high
proportion of the contents of the container.
17
(positive marginal utility from acquiring the second product form together with the first).
For conventional bundles, the value of the bundle becomes 2V
C
+ V
Fi
+ V
Fj|Fi
- (1 -
d)*(P
i
+ P
j
), while the values of individual items remain as above
4
. Using the notation
defined above, the probability of buying both forms if there were no discount becomes:
(1b) Prob
CONV
= Prob (V
C
+ V
Fj|Fi
> P
j
).
By comparing to 1b to 1a, the probability of buying the conventional product form
bundle even when there is no discount will tend to be higher than for the information
product form bundle. Similarly, as shown in Equation 2b below, the discount needed to
induce consumers of the conventional products to buy a bundle will tend to be smaller
because of the opportunity to obtain more content.
(2b) Prob
CONV
= Prob (V
C
+ V
Fj|Fi
+ d(P
j
+ P
i
) > P
j
) = Prob (d > (P
j
- V
C
- V
Fj|Fi
)/(P
i
+ P
j
))
Hypothesis 1a: Because both forms of a conventional product form bundle provide
content utility, consumers are more likely to select a conventional bundle than an
information bundle at a given discount level.
By directly comparing consumers' reactions to the two types of product form
bundles at specific discount levels we intend to show that the conventional and
information bundles are valued differently by consumers because of the different content
utility they provide (single or double).
Usage Situation and Bundle Discount
When consumers are suggested usage situations in which the two product forms
are differentially appropriate (one form is more appropriate for some situations, and the
4
For sake of exposition, we assume that the different forms of the conventional product have equivalent
content and each provide the same content value V
c
. Also, we assume that the content utility of the bundle
is the sum of the content utilities of the individual forms, with marginal utility remaining the same
whatever be the stage of consumption. These simplifying assumptions do not affect our general results.
18
other form is more appropriate for other situations), consumers are more likely to view
them as complements. Consequently, by manipulating different possible usages for the
two forms in the bundle, the form utility of one or both product forms can be changed.
Specifically, if communications succeed in convincing consumers that different forms are
appropriate for different uses of the product, and therefore more complementary, the
value of V
Fj|Fi
can be increased to, say, V*
Fj|Fi
. As can be seen from equations 1 and 2 this
increases the value of the bundle in all cases.
Numerous brand management teams apply usage-oriented advertising campaigns
to expand the use of their products, for example "Eat Campbell's Soup with formal
family dinners or for breakfast" (Wansink and Ray, 1996). In our study we go beyond
this conceptually and consider not the number (we keep it constant) but the nature of the
usage situations presented to the consumers. We elaborate on this in the stimuli
development section.
>
The probabilities of buying the information and conventional product form
bundles subject to usage situations and level of discount are presented in Table 1. With
respect to information bundles, we expect the usage situations considered when making a
purchase decision to moderate the effect of bundle discount on purchase likelihood.
Specifically, when consumers regard the two product forms as equally appropriate for the
same usage situations, the forms will be substitutes and V
Fj|Fi
÷ 0. The bundle will be
relatively unattractive and there will be no significant difference in their purchase
19
likelihood for the bundle whether a bundle discount is offered or not.
5
The discount itself
does not motivate consumers to buy the bundle because they are paying for the same
content twice and the marginal utility they receive from the second form together with the
first is very low or even zero.
On the other hand, when consumers are considering different possible usages for
the product forms, the likelihood of buying the bundle should be significantly higher in
the discount as compared to the no discount case. Specifically, when consumers regard
the two product forms as appropriate for different usage situations, the forms will be
perceived as more complementary than in the previous case and V
Fj|Fi
÷ V
Fj
. The bundle
discount can motivate consumers to buy the bundle in this case - not only the marginal
utility they get from the second form together with the first is positive but also the money
outlay is lower. In the absence of a discount consumers are likely to find the bundle
unattractive because it does not increase content utility (see Equation 1a). The bundle
discount can compensate for this (see Equation 2a).
Hypothesis 2 (information product form bundles): a) When consumers are suggested
different usage situations for the product forms, the purchase likelihood for the bundle
when bundle discount is offered is significantly higher than when bundle discount is not
offered.
6
b) There is no effect of availability of bundle discount when consumers are
suggested same usage situations for the two product forms.
With respect to conventional product form bundles the predictions on the effect of
5
In our experiments we have chosen to test a 25% level of bundle discount because this level is commonly
used in practice (e.g., Buy a pair of shoes and get the second pair at 50% off). As shown in Equations 2a
and 2b, the choice of a bundle is sensitive to the size of the discount, and this conclusion may not hold for
very deep discounts.
6
As can be seen from Equation 2a, the appropriateness of this hypothesis is conditional on the discount
being large enough to compensate for the bundle not offering an increase in content utility.
20
usage situation and bundle discount on purchase likelihood for the bundle are different -
we expect a main effect of both usage situation and bundle discount but no interaction.
Because consumers receive more content utility when acquiring the bundle, their
willingness to pay for the bundle is higher than that for each individual item. If a bundle
discount were offered, consumers would perceive the bundling of product forms as a
quantity discount, and thus be more likely to buy the product form bundle. If they are
suggested to use the two forms in different usage situations (versus same usage
situations) V
Fj|Fi
may still increase because the items could be viewed as more
complementary. Thus, consumers may perceive positive marginal utility from owning
Form j together with Form i, and consequently, be more likely to buy the product form
bundle.
Hypothesis 3 (conventional product form bundles): a) Consumers are more likely to buy
the product form bundle when they are suggested different usage situations for the two
product forms as compared to when they are suggested the same usage situations for the
two product forms. b) Consumers are more likely to buy the product form bundle when
they are offered bundle discount as compared to when they are not offered bundle
discount.
Relative Price of Print vs. Electronic Forms
Another factor that might influence the purchase likelihood for the product form
bundle is the relative price of the two product forms. The more interesting case is the one
of the information product form bundle. In this case, because consumers receive just one
content utility from the two different forms, the marginal utility having Form j together
21
with Form i is relatively low and sometimes close to zero. Second, electronic information
products are unique in that the marginal cost of reproducing and distributing them is often
much lower than the cost of the print form, even close to zero (e.g. Bakos and
Brynjolfsson 2000). In our empirical work we examine the purchase likelihoods for the
bundle when the information product forms are priced differentially and compare the
following cases: Case 1 - price of the two forms is equal, and Case 2 - price of the print
form is higher than price of the electronic form. Note that the bundle prices are kept
constant.
To establish a benchmark, assume that the prices of the two forms are equal: P
i
=
P
j
= P
A
, so the price of the bundle is (1-d)*(2 P
A
), where d is the discount. Then the
bundle will be chosen if V
C
+ V
Fi+Fj
- (1 - d)*(2 P
A
) > Max (V
C
+ V
Fi
- P
A
, V
C
+ V
Fj
-
P
A
), where V
Fi
+
Fj
= V
Fi
+ V
Fj|Fi
is form utility from buying both items (see footnote 1). If
V
Fi
> V
Fj
it follows that the bundle is chosen if V
Fj|Fi
> (1-2d)P
A
, or if the incremental
value of j exceeds its incremental cost. A similar condition can be worked out for the case
in which V
Fj
> V
Fi
. Adding the conditional probabilities of these two cases gives the
probabilities of bundle choice expressed in conditions 5 and 6 in Table 1, panel B
(condition 5 expresses the special case of d = 0).
Let the price of item i increase by kP
A
, and the price of item j decrease by an
equal amount, so that the sum of the prices of the two items is still 2P
A
. Now, because of
the shift in relative price, i is more attractive only if V
C
+ V
Fi
- (1 + k) P
A
> V
C
+ V
Fj
- (1
- k) P
A
, or if V
Fi
- 2kP
A
> V
Fj
. If this condition holds, the bundle will be chosen if V
C
+
V
Fi+Fj
- (1 - d)*(2P
A
) > V
C
+ V
Fi
- (1 + k) P
A
, which reduces to: V
Fj|Fi
> (1 - k - 2d)P
A
. A
similar expression can be worked out for the case in which j is more attractive (V
Fi
-
22
2kP
A
< V
Fj
). Adding conditional probabilities of these two cases gives the probabilities of
bundle choice expressed in conditions 7 and 8 in Table 1, panel B (condition 7 expresses
the special case of d = 0).
Comparison of the conditions in panel B of Table 1 leads to predictions about the
effects of discounts and relative prices on the acceptance of the bundle. First, because it
lowers the incremental cost of the less preferred item, the discount makes condition 6 > 5
and 8 > 7, and there should be a main effect of discount.
7
Whether a change in relative
prices will lead to increased purchases of the bundle depends on how the relative
valuation of the two items varies across consumers. As shown in conditions 7 and 8,
when V
Fi
- 2kP
A
> V
Fj
the probability of buying both items increases because the less
valued item becomes cheaper, and it can also be shown that the probability of buying the
bundle will increase as long as V
Fi
- kP
A
> V
Fj
.
8
If this condition does not hold, the
bundle becomes less attractive when there are different relative prices, and the net effect
of changes in relative price on bundle choice depends on the distribution of consumer
valuations.
9
Given that most consumers employ the print versions of books and
newspapers, it seems reasonable to assume as a maintained hypothesis that most
consumers place a relatively high valuation on the print version.
7
To compare conditions 6 and 5, let F
j|i
(V') represent the density of consumer valuations V
Fj|Fi
between 0
and V', and F
i|j
(V') be a similar density for V
Fi|Fj
. Then the share of consumers who would buy the bundle with
a discount, but not otherwise, is (F
j|i
(P
A
)- F
j|i
((1-2d)P
A
))(S) + (F
i|j
(P
A
)- F
i|j
((1-2d)P
A
))(1-S), where S is the
share of consumers for whom V
Fi
>V
Fj
. A similar condition can be worked out for comparison of 8 & 7.
8
Let 0 < V - V < 2kP , in which case the bundle is chosen if V
Fi Fj A Fi|Fj = V
Fi+Fj
- V
Fj
> (1+k-2d)P
A
. Let V
Fi
-
V
Fj
=c, so V
Fi+Fj
- V
Fi
+c> (1+k-2d)P
A
, or V
Fj|Fi
= (1+k-2d)P
A
- c. If c> kP
A
, the incremental value of i
exceeds its cost, and the bundle becomes more attractive relative to the case of equal prices. If c< kP
A
, the
incremental value of i is not sufficient to cover its cost.
9
To compare conditions 7 and 5, use the same notation for the density of consumer valuations as in
footnote 5, let S' be the share of consumers with valuations V
Fi
- V
Fj
> kP
A
, S* be the share of consumers
with valuations 0 < V
Fi
- V
Fj
< kP
A
, and 1- S' - S* be the share with valuations V
Fj
> V
Fi
. Then the share of
consumers who would buy the bundle compared to the case of equal relative prices is (F
j|i
(P
A
)- F
j|i
((1-
k)P
A
))(S') - (F
j|i
((1+k)P
A
)- F
j|i
(P
A
))S*- (F
i|j
((1+k)P
A
)- F
i|j
(P
A
))(1-S'- S*). A similar comparison between 8
and 6 could be obtained from subtracting 2d P
A
from the price terms. Since 8 vs. 6 involves different parts
of the price distribution compared to 7 vs. 5, the two comparisons need not give the same results.
23
Hypothesis 4 (information product form bundles): a.) Across both discount conditions, if
the preference for the traditional (print) version (i) over the electronic version (j) is
sufficiently large (V
Fi
- V
Fj
> kP
A
), consumers are more likely to buy the product form
bundle when the traditional print product is priced at a premium and the electronic
product is priced at a discount as compared to when the products are priced at the same
level. b.) Consumers are more likely to buy the bundle when a discount is offered.
The intuition behind Hypothesis 4a is straightforward. The more item prices
match consumer valuations, the easier it is to induce consumers to buy both items. If V
Fi
is very high relative to V
Fj
, setting equal prices will make j unattractive, but leave the
consumer a surplus on i. It becomes difficult to induce the consumer to buy both items.
Conversely if V
Fi
is only slightly higher than V
Fj
, setting a high price on i will make it
unattractive, but will leave the consumer with a surplus on j. If V
Fi
is very high relative to
V
Fj
, offering different relative prices can have the same effect as offering a bundle
discount (compare conditions 6 and 7 in Table 1). However, as they extract more surplus,
different relative prices will bring more revenue.
We can also present an alternative intuition for Hypotheses 4 from the perspective
of consumers' evaluation process. Recall that under the no discount case, the price of the
bundle is the same across the same price (case 1) and differential price (case 2)
conditions. Given that consumers have higher preference for the print version, it becomes
the anchor for evaluating the bundle (see Yadav 1993). Under the same price condition,
consumers have a "gain" on the anchor form (print) in the bundle, while they have a
"loss" on the less preferred form (electronic), as the individual prices of the different
forms could act as reference points in evaluating the bundle. Since perceived loss has a
24
greater impact than the perceived gain (Kahneman and Tversky 1979), the bundle is still
evaluated negatively overall. In the differential price case, the prices are more in line with
consumers' expectations (driven by their valuation) and there is no significant gain/loss
on the anchor form and the other form. Thus, the bundle is evaluated more favorably. We
argue that the price level of the less preferred form relative to consumer valuation in case
1 (same prices) heightens the poor evaluation of the form and the bundle, while the lower
price in case 2 does not have such an effect on the bundle evaluation. Giving a price
discount for the bundle can help overcome the negative evaluations and improve the
evaluation and purchase of the bundle.
In the following sections we present the results of two studies designed to test the
hypotheses outlined above.
Study 1
The main objective of this study is to test Hypothesis 1. Additionally, we
introduce a bundle discount variable and investigate whether the level of bundle discount
affects the purchase likelihood for the product form bundle. Specifically, we are
interested in whether the bundle discount per se motivates consumers to buy the bundle.
Method
Subjects. Subjects were 80 undergraduate students enrolled in an introductory
marketing course. They were awarded extra course credit for their participation.
Product categories and materials. We used two information product categories
and two conventional product categories, specifically books (print and electronic) and
journal subscriptions (print and electronic), and margarine (stick and tub) and soap (bar
25
and liquid). Advertisements for fictitious brands were developed to describe these
products.
Design and procedure. We employed a 2 (level of discount: 0%, 25%) by 2
(category type: information, conventional) between subjects design with 2 product
replicates. The order of presentation of the product categories was counterbalanced
within each category type. The prices were presented in absolute values (price of form 1,
price of form 2, bundle price).
Every subject evaluated two product advertisements for either book and
newspaper, or margarine and soap. Subjects reviewed each ad and stated their likelihood
of purchasing the three options (the bundle and the two individual product forms).
Purchase likelihood was measured in two different ways: by allocating 100 points
between the three options
10
, and by indicating how likely they would be to buy the three
options (1 = "very unlikely," 9 = "very likely"). Next the subjects were asked to rate the
perceived complementarity of the two product forms using a 3-item Likert scale
11
(1 =
"strongly disagree," 7 = "strongly agree"). Finally, several control measures were taken
including attitude towards the ad (bad/good, unpleasant/pleasant, worthless/valuable, and
unfavorable/ favorable; MacKenzie and Lutz 1989; Mick 1992) and demographics (e.g.
gender and computer usage).
Results
10
We do not include the "buy nothing" option in the 100-point allocation among the different product
forms because we are interested in which form(s) our subjects are going to choose after they have decided
to buy the product. Thus we try to control for other factors that may influence the product purchase
decision and are not of specific interest in this study.
11
"It would be more useful to have both the paperback book and the electronic book than just the
paperback book", "There is additional value in having both the paperback book and the electronic book as
compared to having only one of them" and "It would be more useful to have both the paperback book and
the electronic book than just the electronic book."
26
The reliabilities of the perceived complementarity scales are between 0.81 and
0.92 in the four categories (N = 40 per category). The mean levels of perceived
complementarity (after averaging the three items of the scale) between the product forms
are as follows: X
BOOK
= 3.21 (St. Dev. =1.67), X
NEWS
= 3.17 (1.62), X
MARG
= 3.56 (1.81)
and X
SOAP
= 4.19 (2.10).
To test Hypothesis 1 we use linear regression in which the independent variable is
the perceived complementarity between the product forms in the bundle, and the
dependent variables are the points allocated to the bundle and the likelihood of buying the
bundle (separate model for each product category and each dependent variable). Our
regression results indicate that in the book, margarine and soap categories there is a
positive relationship between the degree of perceived complementarity and the purchase
likelihood for the bundle (Likelihood of buying the bundle: b
BOOK
= 0.535, b
MARG
=
0.746, b
SOAP
= 0.731, all p's0.44).
27
A discount of 25% does not make consumers more likely to buy information bundles.
The perceived incremental value of the second form must therefore be less than 50% of
the value of the first form. This is to be expected since both forms have the same content
with its utility derived in one form or the other, but not in both. In the margarine and soap
categories the situation is different - in both categories respondents are more likely to
buy the bundle and allocate more points to the bundle in the discount versus the no
discount conditions (Likelihood of buying the bundle: X
MARG/HIGH
= 4.90 versus
X
MARG/LOW
= 2.74, F
1,38
=6.20, p