Effect of Consumers' Purchase Plans on the Evaluation of Bundle Offers

Rajneesh Suri, University of Illinois, Urbana-Champaign
Kent B. Monroe, University of Illinois, Urbana-Champaign
[ to cite ]:
Rajneesh Suri and Kent B. Monroe (1995) ,"Effect of Consumers' Purchase Plans on the Evaluation of Bundle Offers", in NA - Advances in Consumer Research Volume 22, eds. Frank R. Kardes and Mita Sujan, Provo, UT : Association for Consumer Research, Pages: 588-593.

Advances in Consumer Research Volume 22, 1995      Pages 588-593

EFFECT OF CONSUMERS' PURCHASE PLANS ON THE EVALUATION OF BUNDLE OFFERS

Rajneesh Suri, University of Illinois, Urbana-Champaign

Kent B. Monroe, University of Illinois, Urbana-Champaign

Bundling of more than one product has been a strategy used by retailers and manufacturers for decades in both consumer and industrial markets (Nagle 1984). The hardware and software packages offered by computer manufacturers, vacation packages offered by the various travel agencies, a shaving foam sold along with razors are a few commercial examples of bundling. There are two main forms of bundling -pure bundling (where the products or services are available only in bundle form) and mixed bundling (where the consumer has an option to purchase the products or services individually or as a bundle). However, mixed bundling, has been a popular strategy followed by marketers and is the focus of this study.

Despite the widespread use of bundling in marketing, most investigations in this area have been based on the economics literature, focussing on issues such as sellers' incentive to bundle, consumer welfare, and the effect on competition (Adams and Yellen 1976; Dansby and Conrad 1984; Schmalensee 1984; Stigler 1961). There have been very few studies exploring the individual's behavior in response to bundling. The three recent behavioral studies in this area are the studies by Gaeth et al. (1990), Yadav and Monroe (1993) and Chakravarti et al. (1994). Gaeth et al. (1990) showed how the overall evaluation of the bundle is affected by the individual items in the bundle, while the study by Yadav and Monroe (1993) explored how buyers perceived the savings when evaluating bundle offers. Chakravarti et al. (1994) explored the effects of segregation of information about the bundle item on the evaluation of the bundle. In this study we extend the behavioral research on bundling by exploring how consumers' perceptions of the savings on the bundle offers is influenced by their purchase plans, a contextual variable. Previous research has implicitly assumed that consumers are willing or planning to purchase individual items of the bundles. Such a scenario, however, might be only one of the possible options.

CONCEPTUAL DEVELOPMENT

Behavioral research on bundling has explored how sellers should present price information to buyers to promote bundle offers. Buyers' perceptions of savings on the bundle has been shown to be the sum of the perceived savings on the individual items if purchased separately and the additional savings when the items are bought together as a bundle (Yadav and Monroe 1993). This finding is consistent with Thaler's (1985) argument that segregation of multiple gains, instead of integration, leads to higher perceptions of overall gains. Hence, the segregation of gains (vis a vis integration) should be a preferred method of framing multiple gains. Also Thaler (1985) proposed that the overall utility of single item transactions could be decomposed into acquisition utility and transaction utility. (Even though Thaler developed the construct of transaction and acquisition utility for single item transactions, it can be extended to bundle offers as well.) Though both these utilities affect the formation of the overall utility of a bundle, we limit our focus to the influence of the purchase plans on the transaction utility of the bundle offers, i.e., the perceived savings on the bundle offer.

More often than not, consumers do carry with them a mental or a physical note of what they plan to buy during their trips to the stores. Undoubtedly for items like tours/ travel packages or for a purchase of a "high ticket item" like computers or any white or brown goods (e.g., TV or an Audio system), consumers do have a plan to purchase a particular product or service. However, consumers may then be confronted with a situation where at least one (or none!) of the items of a bundle offer is the product or service planned for purchase.

Consider a simple scenario of a bundle containing two items A and B. Consumers then may have either of the following possible purchase plans:

(a) Plan 1: purchase product A only.

(b) Plan 2: purchase product B only.

(c) Plan 3: purchase neither product A nor B.

(d) Plan 4: purchase both product A and B.

The item (service or product) which a consumer has planned to purchase will be termed the "planned purchase" while the item for which no purchase plan exists will be the "unplanned purchase". For example, in purchase plan 1, item A is the planned purchase while B is an unplanned purchase. The research issue now is, how do these purchase plans affect the consumers' perceptions of savings on the bundle offers?

Past research (Yadav and Monroe 1993; Chakravarti et al. 1994) has shown that a target bundle was evaluated more favorably and chosen more often when its components were presented in segregated (separate price tags) versus consolidated (single, equivalent tag) fashion, a notion consistent with mental accounting predictions (Thaler 1985) based on prospect theory (Kahneman and Tversky 1976).

Chakravarti et al. (1994) further argued that, segregation changes the locus of consumers' attention and influences the salience of bundle features. For instance, savings on the focal products may anchor the bundle evaluation (Gaeth et al. 1991; Yadav and Monroe 1993) and may even influence the perceived value of the components (Kaicker, Bearden, and Urbany 1993). Similarly consumers' predetermined plan (purchase plan) to buy a particular item during their visit to a store (or a service provider), may also provide a context which causes a shift in the locus of attention to the planned purchase in the bundle. In the following sections we will elaborate on our propositions under each purchase plan.

When Purchase of Only One Item in the Bundle Had Been Planned (i.e., Plan 1 or Plan 2)

Yadav (1990) proposed that in order to evaluate a bundle, the buyer will follow a sequential "step by step" structure using the anchoring and adjustment heuristic (Tversky and Kahneman 1974). "Anchoring and adjustment" heuristic suggests that (a) an arbitrarily chosen reference point (anchor) will significantly influence value estimates, and (b) value estimates will be insufficiently adjusted away from the reference point towards the value of the object of estimation. Tversky and Kahneman (1974) suggested that the anchoring and adjustment process occurs even if someone is not supplied an anchoring value, and people implicitly generate and use an anchoring value at the start of an estimation process, even if the task does not explicitly require one.

Given that the buyer has a plan to buy a particular item, that item would become salient and hence would act as an anchor in the evaluation of the bundle. The perception of savings on the bundle is based on the amount needed to purchase (i.e., sale price) the items (of a bundle) separately, which then acts as a reference price for evaluating the bundle price and the regular prices of individual items in the bundle (Yadav and Monroe 1993). Also since consumers are more likely to attend to the savings on the bundle first and then the savings on the individual items (Yadav and Monroe 1993), it can be argued that consumers first anchor on the sale price (or the sum of the sale prices) of the individual items to evaluate the bundle price, to be followed by the evaluation of the regular price (or the sum of the regular prices) of each item. Thus, in a situation where the consumer has a plan to buy only one item in the bundle, the sale price of the planned purchase would act as a reference (anchor) to evaluate the bundle price. The difference between the sale price of planned purchase and the bundle price would then be used as a reference to evaluate the price of the unplanned purchase. Thus:

Hypothesis 1(a): Given that the consumer has planned to purchase only one item (i.e., purchase plan 1 or 2) in the bundle, the perceived savings on the bundle offer would be evaluated as a comparison of sale price of the unplanned purchase with the additional amount one pays (over and above the sale price of the planned purchase) to buy the bundle.

Thus the difference between the sale price of the planned purchase and the bundle price would be used as a reference (or anchor) to evaluate the savings on the unplanned purchase. Following the "anchoring and adjustment" heuristic (Tversky and Kahneman 1974), this subsequent evaluation of the unplanned purchase item would lead to an adjustment of the evaluation of the anchor (planned purchase), resulting in an adjustment in the evaluation of the bundle itself. Thus, if the evaluation of the second, unplanned item, is more (less) favorable than the evaluation of the planned anchor item, then the evaluation for the bundle would be more (less) favorable than the evaluation of the anchor (Chakravarti et al. 1994; Yadav 1994).

Hypothesis 1(b): Given that the consumer has planned to purchase only one item of the bundle, the consumer's perception of the deal would be directly related to the savings on the unplanned purchase.

Tversky and Kahneman (1974) also argued that the adjustment under the "anchoring and adjustment" heuristic tends to be insufficient, and the final evaluation is biased in the direction of the initial anchor evaluation. Empirical support for this argument has been observed in spouse's evaluations of new products (Davis et al. 1986), realtors' determination of fair market value of residential properties (Northcraft and Neale 1987), and in auditors' evaluations of fraud estimates (Joyce and Biddle 1981). Recently, Yadav (1994) found that subjects readily adjusted the bundle evaluation downwards when faced with an excellent anchor and a moderate add on while the tendency to adjust upwards was considerably less.

Thus the impact of the savings on the unplanned purchase on the perception of savings of the bundle offers would be greater when the price of the planned purchase is lower than the price of the unplanned purchase. Thus:

Hypothesis 1(c): Given that the consumer has planned to purchase only one item in the bundle, the unplanned purchase will influence the consumer's perception of the savings on the bundle, more when the planned purchase price is lower than when it is higher than the unplanned purchase.

When Both Items in the Bundle Are Unplanned Purchases

Yadav and Monroe (1993) observed that buyers who intend to purchase the bundle may first attend to savings offered directly on the bundle itself and subsequently notice the savings on the individual items. However, under a scenario where there is no plan to buy either item in the bundle (i.e., purchase plan 3), the consumers while attempting to evaluate the savings on the bundle will try to minimize their cognitive effort (Beach and Mitchell 1978; Payne, Bettman and Johnson 1988). Thus we propose that the transaction value or the savings on the bundle would be evaluated by anchoring on the sum of the sale prices of individual items, which is then compared with the bundle price.

Hypothesis 2: Given that the consumer has not planned to purchase either of the items in the bundle (i.e., Purchase Plan 3), the consumer's evaluation of the savings on the bundle would be influenced by the comparison of the bundle price with the sum of the sale prices of the items if bought separately.

When Both Items in the Bundle Are Planned Purchases

Yadav and Monroe's (1993) study implicitly assumed that the buyers had plans to purchase both items in the bundle (i.e., Purchase Plan 4), and hence showed that the bundle' transaction utility would be the sum of the perceived savings on the individual items if bought separately and the additional savings when the items are bought as a bundle. Since we do not examine the evaluations of bundle offers within the context of purchase plan 4, we do not provide specific hypothesis.

RESEARCH METHOD

To examine the effects of the three purchase plans, 205 undergraduate students at a state university in the mid-west participated in a laboratory experiment for extra credit. As in the study by Yadav and Monroe (1993), two luggage items (garment bag and a duffle bag) were selected as the product stimuli. These items were selected because subjects are reasonably knowledgeable about the products as well as their prices (Yadav and Monroe 1993). In this study the regular price of the garment bag and duffle bag were $120 and $60 respectively.

Design

A 2 (savings on unplanned purchase) x 3 (purchase plans) x 3 (bundle price) between subjects design was used to create the alternative price scenarios for understanding the impact of the purchase plans. The two levels of savings on the unplanned purchase were $0 and $10, while the bundle prices were $120, $130 and $140. Three different vignettes were used to create the manipulation for the three purchase plans.

Procedure

Each response booklet introduced the subject to a vignette which was basically a manipulation for the purchase plan. Then, the subjects examined a print advertisement featuring the garment bag and the duffle bag along with their retail and sale prices and also a price (bundle price) if both items were bought together as a bundle. After examining the advertisement, subjects responded to 11 scales focussing on perceptions of the two savings in the bundle offer:

Item Transaction Value (4 items): The perception of savings associated with purchasing all bundle items separately.

Total Transaction Value (7 items): The perception of overall savings associated with purchasing the bundle of items as a set.

TABLE 1

IMPACT OF DIFFERENT SAVINGS ON THE TOTAL TRANSACTION VALUE

TABLE 2

BUNDLE PRICE SCENARIO

Subjects were then asked to give thought listings about the process they followed to evaluate the (1) overall savings on the bundle, (2) savings on the garment bag, and (3) savings on the duffle bag. Finally in the last section, classification information (age, sex) and the respondents' estimates of the actual monetary savings on the bundle were obtained. Also the subjects were asked an open-ended question about their perceptions regarding the purpose of the study.

RESULTS

Factor Analysis

The 11 items used in the study were classified into two factors accounting for 73% of the variance (item transaction value 43%; total transaction value 31%). The item loadings varied from .69 to .95 and the Cronbach's alpha (n=205) for the two constructs was >0.80 [item transaction value (0.88); total transaction value (0.908)].

Manipulation Checks

With item transaction value as the dependent variable in the analysis of variance, all levels of the three factors showed significant differences: bundle price (F2,204=3.79, p<0.024, eta2=0.039); purchase plan (F2,204=80.85, p<0.00, eta2=0.464); savings on unplanned purchase (F2,204=3.35, p<0.069, eta2=0.018). Using item transaction value, there was also a significant interaction effect between purchase plan and the savings on unplanned purchase (F2,204=28.19, p<0.00, eta2=0.232).

With total transaction value as the dependent variable in the analysis of variance, only bundle price showed significant differences: bundle price (F2,204=18.22, p<0.00, eta2=0.163); purchase plan (F2,204=0.33, p<0.72, eta2=0.004); savings on unplanned purchase (F2,204=0.86, p<0.356, eta2 = 0.005).

Effect of Different Types of Savings on Total Transaction Value

To determine the impact of the various types of savings i.e., additional savings on the bundle, savings on item A, and savings on item B, we conducted a regression analysis (Table 1).

Open Ended Questions

The three open-ended questions, provided information on the process used by the respondents while determining the savings on the bundle and the individual items. The responses were coded by a single judge, and were categorized into one of the fourteen different frames or processes used by the respondents to evaluate the savings. Of the fourteen frames the seven frames given below were used most often (The frames are in reference to the manipulation shown in Table 2).

TABLE 3

SUMMARY OF THE RESPONSES TO OPEN-ENDED QUESTIONS

Frame 1: Total transaction value is the additional savings on the bundle only ($160 - $140=$20)

Frame 2: Total transaction value is perceived as a comparison of the individual items' regular prices to the bundle price ($180 - $140=$40).

Frame 3: Total transaction value is the combination of the perceived additional savings on the bundle and the perceived savings on both items if bought separately ($20 + $10 +$10=$40).

Frame 5: Total transaction value is perceived as a comparison of B's regular price($60) with the additional amount one pays to buy the bundle over and above the sale price of A ($140- $110=$30) (total transaction value=$60 - $30=$30).

Frame 6: Total transaction value is perceived as a comparison of B's sale price ($50) with the additional amount one pays to buy the bundle over and above the sale price of A ($140 - $110 =$30) (total transaction value=$50 - $30=$20).

Frame 7: Total transaction value is the combination of the perceived additional savings on the bundle and the comparison of B's sale price ($50) with the additional amount one pays to buy the bundle over and above the sale price of A ($140 - $110=$30) (total transaction value=$20 + ($50 - $30)=$40).

Frame 8: Total transaction value is perceived as a comparison of A's sale price($110) with the additional amount one pays to buy the bundle over and above the sale price of B ($140 - $50 =$90) (total transaction value=$110 - $90=$20).

It should be noted that frames 1,6 and 8 lead to a response that $20 would be saved, while frames 2,3 and 7 lead to a response that $40 would be saved. Frame 5 leads to a judged savings of $30. It is clear that different ways of processing the information could lead to similar judgements. The number of open ended responses corresponding to these seven frames (for each of the purchase plans) have been summarized in Table 3.

DISCUSSION

The regression coefficient for the various types of savings in Table 1, indicates that the savings on the unplanned purchase (i.e., savings on item A for Plan 2 and savings on item B for plan 1) significantly influences the total savings on the bundle for plan 2 only (beta for savings on A is 0.217; p<0.10). The impact of the savings on the unplanned purchase on the total savings was not significant for purchase plan 1 (beta for savings on B is 0.194; p<0.23). This result indicates support for hypothesis 1(b) for purchase plan 2 only, i.e., when there was a prior intention to purchase an item which had the lower price of the two items in the bundle. This result could be because of an insufficient adjustment by the subsequent evaluation of the low-priced unplanned purchase on the planned purchase, i.e., a high price item (i.e., A), in case of purchase plan 1. On the other hand the evaluation of a low price anchor (i.e., item B in plan 2) is influenced by the subsequent evaluation of the high-priced unplanned item (i.e., A) in case of plan 2, supporting hypothesis 1(c). Overall we observed a significant effect (p<0.05) of the additional savings on the bundle on the evaluation of savings on the bundle (see beta coefficients in Table 1). This finding is consistent with Yadav and Monroe's (1993) argument that, when consumers evaluate the overall savings on bundle offers, the savings on the bundle has a greater effect than the savings on the individual items. Additionally, this study has also shown that the saving on the unplanned purchase has a significant impact on the evaluation of the savings on bundle offers while the saving on the planned purchase item does not (beta coefficients for savings on A under purchase plan 1 and savings on B under purchase plan 2 were not significant).

From Table 3 we conclude that when consumers have an intention to buy only one item in the bundle, they may anchor on the sale price of the planned purchase item to evaluate the bundle price and then evaluate the savings on the unplanned purchase. However, support for such a process mechanism was found only when there was a plan to purchase the higher-priced item of the two item bundle, i.e., purchase plan 1. When the planned purchase was the lower-priced item of the two item bundle i.e., purchase plan 2, there was a greater tendency to evaluate the additional savings on the bundle.

In purchase situations where there was no plan to buy either item in the bundle, the perception of the total savings on the bundle was affected significantly by the additional savings on the bundle (beta=0.43; p< 0.05). The effect of the savings on individual items was not significant. This finding is consistent with the notion that consumers first evaluate the additional savings on the bundle and then look at the savings on individual items in the bundle (Yadav and Monroe 1993). Thus, when there is no plan to buy either item in the bundle, consumers would evaluate the savings on the bundle offers by looking at the additional savings on the bundle, thereby avoiding further processing of savings on the individual items.

In essence our study has shown that prior intentions to purchase an item (i.e., a purchase plan) significantly influences the perception of savings on bundle offerings. Furthermore, the perception of savings and the process used to evaluate the savings on the bundle is further moderated by the price of the planned purchase vis-a-vis the unplanned purchase.

Future Research

The dependent measures used in this study need to be further developed so as to account for all three transaction values indicated in the study by Yadav and Monroe (1993), i.e., bundle transaction value, item transaction value and total transaction value. Despite having borrowed the measures from Yadav and Monroe study, the present study could find only two factors that could explain the item and total transaction value. Furthermore the coding of the results of the open ended questions indicate that the respondents' prior purchase of one of the bundle items or the relevance of the items (stimuli) to the respondents did influence their evaluations of the bundle offers. This suggests a future research possibility of determining the effects of prior experience with the purchase of a product or prior knowledge about an item in the bundle on the evaluation of the bundle offer.

APPENDIX

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