Pricing Strategies for Hybrid Bundles: Analytical Model and Insights

Retailers are increasingly offering hybrid bundles—products that combine both good(s) and service(s). Some hybrid bundles, such as Lowe's flooring that combines flooring material (good) and flooring installation (service) are sold in traditional stores, while others, such as Best Buy's bundle that includes a computer (good) and tech support (service) are also offered online. The pricing strategy of a hybrid bundle is critical to its success. While pricing strategies for a goods bundle have been well-studied, those for a services bundle have been underexplored. Hybrid bundles, which fundamentally differ from bundles of goods or bundles of services, primarily with regard to quality variability and scalability, have received even less attention. Drawing from the pricing and bundling literatures for both goods and services, we develop an analytic model of optimal pricing for hybrid bundles by a monopolist retailer. We derive and illustrate many useful propositions, several of which are counter-intuitive. Our results show that an increase in quality variability of the service is associated with a higher optimal hybrid bundle price and a lower optimal price of the good, but a lower overall bundle profit. Our findings also reveal that the optimal price of the service (good) in a hybrid bundle is higher (lower) when the good has diminishing unit cost and the service has constant unit cost (i.e., the good is more scalable than the service). Our results also show that higher unit costs incurred to achieve lower service quality variability can result in higher (lower) profits when the cost increase is low (high). We discuss important implications of these insights for researchers and practitioners.