Behavioral Economics / Classes of Service / Unbundling

Exposing Revenue Opportunities Through Unbundling

Unbundling need not be an all or nothing option. Just like mixed bundling, a firm can offer mixed unbundling, in other words offering both unbundled and monolith. By unbundling the firm may be able to create a new grade of service while keeping the current service. This will help the firm capture additional customer surplus from those who are willing to pay for certain components without raising the price for the others. This means the firm will deliver “more for more” to some groups and “less for same” for the rest.

Let us take a concrete example to discuss this.

Amazon.com offers multiple shipping options. We had previously established that shpping costs are not unbundled pricing but partitioned pricing. The option we want to focus on is the Amazon free shipping option that is available for orders of $25 or more. Intuitively we can say that Amazon processes orders in the following priority:

  1. Highest priority to next day orders,
  2. Second day shipping orders come next
  3. Standard shipping
  4. Free shipping

It makes no sense to delay processing orders for the first two categories. But the free shipping orders may take a few days to leave Amazon’s distribution centers even when the items are in stock. So a free shipping order may spend idle time before being processed and then mailed through cheapest possible option.

The unbundling opportunity for Amazon is to separate the waiting part from shipping part. It can conceivably offer a new option for those who picked free shipping a shorter or no wait feature for  say $0.99. This level of unbundling could be appealing to those segments that is willing to pay for having their orders processed sooner. There are no additional investments needed as the firm would do this by introducing a new priority rank between 3 and 4 above, pushing  free shipping down further.

If the service has negligible  takers then Amazon will know for sure that most free shipping customers are willing to wait and quite possible have a  $0 as the reference price for shipping. In any case, any additional revenue from this unbundling is pure profit.

Unbundling can thus expose new revenue opportunities.

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3 thoughts on “Exposing Revenue Opportunities Through Unbundling

  1. Pingback: Bundling - Amazon Prime « Unbundling As a Pricing Strategy

  2. Pingback: Next up - No more Free In Flight Toilets « Deliver now! Innovate continuously!

  3. Pingback: Is Unbundled Pricing A Cure All? « Unbundling As a Pricing Strategy

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