Bundling for consumers? Understanding complementarity and its effect on consumers’ preferences and satisfaction Erika Knutsson Umeå School of Business Umeå 2011 This work is protected by the Swedish Copyright Legislation (Act 1960:729) ISBN: 978-91-7459-300-6 ISSN: 0346-8291 Studies in Business Administration, Series B, No. 79 Cover: Print & Media Electronic version available at http://umu.diva-portal.org/ Printed by: Print & Media, Umeå University Umeå, Sweden 2011 Acknowledgements When I was accepted as a PhD student some years ago I set of on a long journey. If I ever thought the journey would follow a straight road towards a predefined desti- nation, I was wrong. Along the road I have explored a number of alternative tracks and sidetracks. At times I have made tough uphill climbs while at other times enjoyed straight stretches in tailwind. And this is it. This is the end of my PhD journey. However, I have not been alone on this trip. Many people have accompanied me and supported me along the way. To them I am gratefully indebted. First of all I would like to express my deepest gratitude to Agneta Marell and Helena Renström. To Agneta for making this journey possible by taking me on as a PhD student and being there for me all the way – thank you! Your expertise and enthusiasm is always a great source of motivation and inspiration. Helena, thank you for always having time for me. You have helped me tremendously by paying attention to the details while always keeping in mind and helping me to see the big picture. I would also like to direct a warm thank you to Tommy Gärling, for his expertise and outstanding helpfulness in designing the experiments and analyzing data. Others who have helped me in my work are Kiflemariam Hamde, Margareta Friman, Johan Jansson, and Tomas Blomquist when taking on the role as opponents at different times in the process and providing valuable feedback. Colleagues and friends at work - what would this journey have been without you? More difficult and definitely less fun, that’s for sure. For all the discussions, help, and laughter over the years - Therese Hedlund (especially for the pep talks towards the end of the process), Anna Thorsell, Anna-Carin Nordvall, Elin Nilsson, Sofia Isberg, Galina Biedenbach, Philip Roth, Helena Lindahl, Thommie Burström, Niklas Brinkfeldt, Fredrik Gärling, Louise Eriksson – thank you! I appreciatively acknowledge the help from Jan Wallanders och Tom Hedelius Stiftelse, Nordeas Norrlandsstiftelse, and Stiftelsen J C Kempes Minnes Stipendiefond for financially supporting parts of this dissertation. There are many people outside the academic world that I would like to thank for supporting me and reminding me about what life is all about. To my parents, Lars- Erik and Britt-Marie, thank you for believing in me and always supporting my decisions. To my brothers and sisters with families, Fredrik and Samantha; Jenny, Alexander, My, and Lea; Kristin and Andreas; and Kristoffer, thank you for discussions, laughs, and sibling parties. Thanks also to my family in law for being there in thick and thin. Louise Tetting, Therese Karpberg, and all the “SMS-ladies” for chats about work and for everything that is not work related. Finally, to my family: Johan, Joel, and Agnes. No words can describe how much you mean to me. The love and joy you give me is invaluable. You let a crazy scientist woman occupy the apartment so that afternoons and weekends had to be spent outdoors. The crazy scientist woman thanks you with all her love .Forever. Stockholm, October 2nd 2011 Erika Knutsson Abstract It is a common market practice to offer two products in a package, so called bundling. While much research investigate how companies can use bundling to increase sales and profit, less is known about how bundling can be beneficial for consumers. There are many advantages with bundling for consumers, as bundles often are offered at a reduced price and provide convenience and reduced risk. But there are also major drawbacks, for example reduced freedom of choice and increased risk of over-consumption. In the present study, the general aim is to increase the understanding of how consumers’ perceive bundle value. To achieve this, focus is turned to bundle composition, more specifically the complementarity between bundle products, as a source of value for consumers. By exploring what complementarity is, how it influences consumer preferences for and satisfaction with bundles and how it interacts with bundle discount insights about the overall value of bundles for consumers is gained. In five scenario-based experiments, the influence of different kinds and different degrees of complementarity on consumers’ perceptions of bundle value is studied and compared to evaluations of separate products. The results show that bundles generally are not preferred over separate products and that they only exceptionally provide more satisfaction. However, the results also highlight the influence of bundle composition on consumer evaluations. Generally, bundle complementarity has a positive effect on preferences and satisfaction, especially when combined with a discount. The results also illustrates that complementarity is a multifaceted concept. Many kinds of relations between bundle products are considered complementary and the degree of complementarity may vary within and between different types of complementarity. Based on the results it is suggested that the notion of complementarity is closely related to consumers’ everyday practices and the value bundles provides in use. When consumers understand the value that bundle products provide in use, the perceived complementarity increases and preferences and satisfaction is positively influenced. It is suggested that bundling can be used as a strategic tool by companies to increase value for customers. By considering their customers’ needs and practices companies can compose bundles that are perceived as complementary and offer value-in-use. Keywords: Bundling, value, consumer decision making, complementarity, preferences, satisfaction, experiments Table of Contents Introduction 1 What is a bundle? 1 Positive effects of bundling for companies 2 Positive effects of bundling for consumers 3 Negative effects of bundling 4 Problem area 5 How perceptions of bundle value are formed 7 The effect of contextual factors on perceived bundle value 9 The effect of individual factors on perceived bundle value 10 The effect of composition on perceived bundle value 10 Main purpose and sub-purposes 12 Definitions and Delimitations 14 The concept “bundle” 14 Different kinds of bundles 15 Bundling in this dissertation 16 Value 16 Preferences 19 Satisfaction 19 Complementarity 20 Disposition 20 Theoretical foundations: value, complementarity, preferences, and satisfaction 21 Complementarity 26 Definitions of complementarity 27 Complementarity in previous bundling research 30 Preferences 31 The process of forming preferences 34 Categorization 35 Categorization of complementary versus unrelated bundles 36 Consumer preferences for bundles 38 The effect of bundle complementarity on preferences 39 Satisfaction 41 The effect of bundling on satisfaction 44 The effect of discount on consumer preferences and satisfaction 46 Discount and complementarity 48 Discount and product price level 49 Summing up – theoretical framework 50 Research method 53 Consumers as rational actors? 53 Research approach 54 Choice of research technique 57 The experiments 60 Design of questionnaires 61 Measures 64 Measures used in both bundle and separate product evaluations 65 Measures used exclusively in evaluations of separate products 69 Measures used exclusively in evaluations of bundles 70 How the measures relate to perceived customer value 71 Choice of products 73 Participants and data collection 74 Licentiate versus dissertation 75 Empirical investigations 78 Experiment 1 – bundle and separate product evaluations 78 Method 79 Participants 79 Design 80 Material 80 Procedure 81 Results 82 Comparison between bundles and separate products 83 The effect of complementarity on bundle evaluations 86 Summing up Experiment 1 88 Experiment 2 – adding purchase plans 89 Method 90 Participants 90 Design 91 Material 91 Procedure 91 Results 92 Comparison between bundle evaluations and anchor product evaluations 94 Bundle evaluations 94 Summing up Experiment 2 97 Comparison between Experiments 1 and 2 98 Experiment 3 – exploring findings from previous experiments 100 Method 101 Participants 101 Design 101 Material 102 Procedure 103 Manipulation check 104 Results 104 Bundle evaluations 105 Summing up Experiment 3 108 Experiment 4 – investigating satisfaction 108 Method 110 Participants 110 Design 110 Material 111 Procedure 112 Results 113 Manipulation check 113 Information processing 114 Preferences for bundles 116 Satisfaction with bundles 118 Summing up Experiment 4 120 Information Processing 120 Pre-Purchase Evaluations 121 Post-Purchase Evaluations 122 Experiment 5 – the effect of bundle discount 122 Method 124 Participants 124 Design 124 Materials 125 Procedure 125 Results 126 Effect of complementarity 127 Effect of discount depending on price level of bundle products 130 Summing up Experiment 5 131 Analysis 133 What is complementarity? 133 Types of complementarity 134 Degrees of complementarity 137 Distinctiveness, prevalence, and completeness 138 The effect of complementarity on consumers’ perception of value 140 Preferences for bundles and separate products 140 Bundle complementarity and consumer preferences 141 Type