The Bundling Bias

Although the bundling bias is able to somewhat negate the effects of the sunk-cost fallacy, we will later explain, it is not always in our best interest. While it may allow us to make decisions based on how we feel in the moment instead of based on past costs that we won’t recover, it also makes us unlikely to obtain the full value of a bundled purchase, which means that we are wasting our money.

The price for a bundled package often seems attractive because it is a good deal, all else being equal. However, it is only cheaper if we actually use each of the items in the package. If we only use up a few items in a bundle, we may actually be spending more per item than we would if we had bought the items individually.

For example, imagine that the price of a ticket for an individual movie is $10, but the movie theatre also offers a package that includes five movie tickets for $45, which all have to be used in a month. That is $5 less than what it would cost you to buy the individual tickets. For the bundled package to be worth it, you actually have to use all five tickets. However, the bundling bias indicates that we are less likely to use up all the tickets, so one might only attend four movies out of five. If that is the case, one would spend $5 more than it would have cost to individually buy tickets for four movies.

As this example demonstrates, the bundling bias can make us susceptible to spending more money than is necessary and not getting the full value of a bundle. This demonstrates that we are not fully rational with our economic decisions and that companies can take advantage of our biases to make us spend more money.

Companies and businesses benefit from the bundling bias, which usually is an indication that consumers are losing out. By creating bundled packages that people do not fully take advantage of, businesses are getting more money than they usually would and reap a greater profit.

Even though bundles are marketed at a discounted price, businesses are generally making more because we don’t end up using all the items. Using the movie-theatre example, the cinema receives $45 regardless of whether we come to each individual show, and it is only a bargain for us if we attend all five shows. If we only attend four, which is likely according to the bundling bias, we’ve actually paid $5 more than we would have by purchasing items individually.

While service-based businesses may lose out on purchases made on-site when consumers don’t attend all events, they can sell more tickets by predicting that not everyone will show up every time. When it comes to products sold in bundles, the company has no stake in whether or not we use the items; they have the money regardless.

The systemic effects of the bundling bias are therefore that consumers lose out because producers take advantage of a cognitive bias, all whilst marketing bundles as deals. Consumers are manipulated and spend more than necessary as a result.

The bundling bias is believed to occur because bundling leads to a decoupling of transaction costs and benefits. What this means is that bundling items together makes the cost of each individual item less obvious, so you are less likely to feel like you are wasting money by not using up one of the items.¹

Essentially, the bundling bias occurs because we are less influenced by another cognitive bias, the sunk-cost fallacy. The sunk-cost fallacy describes our tendency to follow through on an endeavor if we have already invested money into it, even though we wouldn’t recover the cost of purchase if we didn’t follow through. For example, if we have previously bought a concert ticket, we are likely to go to the concert on the day of even if we no longer feel like it, because if not we feel like we are wasting our money.³

However, if we buy concert tickets in a bundle, we are less likely to feel the effects of the sunk-cost fallacy because we don’t attribute our lost costs to each specific item. When we are making the decision about whether or not to follow through on our purchase, we pay less attention to the costs associated with that ticket and more attention to whether we actually feel like going.

Additionally, the bundling bias may be a result of the projection bias. The projection bias describes our tendency to make decisions on our current preferences in the belief that we will feel the same long-term. For example, we may buy a bundled package of five concert tickets believing that we will want to go to all five shows because of our current beliefs. However, when the time comes, our preferences may have changed and we don’t feel like going to the last concert. This shows how the projection bias can lead to the bundling bias because our short-term purchasing decisions often do not reflect our long-term behavior.

The bundling bias indicates that we often lose out on the full value of a bundled package because we don’t use each item in that bundle. That means that when we spend our money on a bundled package, we are not necessarily making the most rational decision because we base our purchasing decision on the overall value of the bundle, not the value of each individual item.

The bundling bias describes a wasteful economic tendency, that benefits business but hinders consumers. For consumers, it often means wasted money, whereas businesses thrive on using our cognitive biases to our advantage. We need to be hyper-aware of cognitive biases that affect our spending so as not to allow ourselves to be taken advantage of, and instead, spend our money in rational and logical manners.

Most biases are deeply ingrained in the way that our minds work, which makes them difficult to completely avoid. However, awareness of the bundling bias may help us be less susceptible to it, since drawing our attention back to the costs of each individual item may allow us to negate the effects of the bundling bias.¹

When we buy a bundle, we should remind ourselves of the individual costs of each item in that bundle. When the time comes to use those items, if we associate each individual item with a cost, we are more likely to follow through on the purchase because we don’t want to be wasteful. It can also draw our attention to how many of the items we actually have to use to make the package worth it, so we can make a more informed decision when buying the bundle.

For companies, awareness of the bundling bias can also help them avoid its effect. The bundling bias occurs because consumers do not associate the costs to each individual item. If companies physically unbundle the items, such as tickets, that are included in the package, consumers may more readily understand the cost associated with each one and therefore are less likely to fall victim to the bundling bias.¹

The bundling bias was first examined by Dilip Soman, a professor at the University of Toronto business school, and John Gourville, an important American economist, in a study in 2001.³

Soman and Gourville identified that whilst a lot of research had been conducted on how price bundling impacted consumer’s decision to purchase, not enough research had been conducted on post-purchase consumption behavior. In other words, they wanted to see whether buying items in a bundle affected how much consumers used those items. They hypothesized that when people buy items in a bundle, we are more dissociated from the individual cost and benefit of each item. This makes us less likely to be influenced by the sunk cost fallacy.

Soman and Gourville asked 80 undergraduate students to imagine that they were on a four-day ski trip that they had pre-purchased lodging and lift tickets for. All students were told that the total cost of the trip was $560, but depending on which group participants were in, they were told a different breakdown of the price.

There were four different groups:

In the “bundled pass” condition, participants were told that they had purchased a four-day ski pass for $160. Half of these participants were also in the “bundled vacation” group and were told they had bought a vacation package consisting of a mountainside lodging costing $400 and their four-day ski pass. The other half was in the “unbundled vacation” group and told that they had paid for their lodging separately from their pass.

In the “unbundled tickets” condition, participants were told that they had purchased four individual ski tickets for $40, still making the total $160. The participants in this condition were then similarly divided into the bundled vacation and unbundled vacation groups.

Participants were then presented with a scenario where they were told they had skied for the first three days of their trip, but on the last day, the weather wasn’t nice. They were told their friend suggested taking an easy day and leaving early to beat the traffic. After being provided with this scenario, all participants were asked how likely they would ski on the last day.

Soman and Gourville found that participants were significantly less likely to ski on the fourth day if they had been told they bought their ski tickets in a bundled pass than when they were told they had bought individual tickets. Participants were also significantly less likely to ski on the fourth day if they were told they bought their vacation as a package. From these results, the researchers concluded that consumer behavior is influenced by price bundling, in terms that people are less likely to consume each item in the bundle than if they individually buy those items.³

Following their initial study that demonstrated the bundling bias, Soman and Gourville were interested to see whether the likelihood of consumption of bundled items was different depending on how the bundle was physically presented.³

Again, participants were asked to imagine they had pre-purchased a ski trip, but this time they were only informed about how they had purchased their lift tickets. Participants were split into three groups. The first group was told that they had bought four single-day ski passes for $40 each, meaning that the tickets were both monetarily and physically unbundled. The second group was told that they had bought four single-day tickets for a total price of $160. These tickets were monetarily bundled but physically unbundled. The last group was told that they had purchased a four-day skiing pass for $160, making their purchase both monetarily and physically bundled.

Participants were then presented with the same scenario as Soman and Gourville’s initial study, where after three days of skiing, the weather conditions weren’t ideal and their friend suggested they leave the vacation early to beat traffic. Participants were then asked to rate how likely they were to go skiing on the last day on a scale of 1-10. ¹ represented definitely not going skiing, whereas 10 represented definitely going skiing.

Soman and Gourville found that participants that had their tickets both monetarily and physically bundled were the least likely to go skiing on the final day, with an average of 3.9 for likelihood of going skiing. On average, the group that had their tickets monetarily bundled but physically unbundled responded with a 5.4 likelihood of going skiing on the last day. Finally, the group that had their tickets both monetarily and physically unbundled responded with an average of 6.74.³

As the average response for participants who had monetarily bundled but physically unbundled students varied from both other groups, Soman and Gourville concluded that the physical bundling of items can also activate the bundling bias, not just the monetary bundling of items.

For most of the scenarios described in this article, the bundling bias causes individuals to miss out on the full value of their purchased bundle. While the economic impact of the bundling bias is negative, the bundling bias may also have negative consequences for our health.

Peter Hussey, the vice-president of RAND Health Care, a company that aims to improve health care policies and systems in the U.S, along with a team of researchers wanted to investigate the effect that bundling had on the utilization of health care services.⁴ After an extensive literature review, the team found that when compared to a cost-based or fee-for-service system, health care facilities that operated on a bundled payment system saw decreased utilization of the services included in the bundle.⁴ If these services are beneficial to our health, this means that bundled payments may actually negatively impact our health.

From the reviewed literature, Hussey concludes that while bundling payments can sometimes create a financial incentive for individuals and allow them access to a greater range of health care services, they also at times can lead to the underuse of effective services within the bundle.⁴ This means that bundled payments may not be the most effective way to ensure that people receive the health care that they need.

What it is

The bundling bias describes the fact that we are less likely to use up all the items that we purchase in a bundle, compared to if we individually purchased those items.

Why it happens

When items are sold as a bundle, consumers are asked to make a decision on what they might want long-term based on their short-term preferences. Often, our long-term desires don’t actually align with our current preferences, known as the projection bias.

Since we may no longer view the item at the same value in the future, we may decide to forego the experience. This is also caused because we decouple the costs from each individual item when it is presented as a package, making us less likely to fall victim to the sunk-cost fallacy.

Example 1 - Physical bundling and monetarily bundling both cause the bundling bias

Most studies concerned with the bundling bias focus on how price bundling affects consumers’ consumption behavior. However, it has been shown that when items are physically bundled, we are also less likely to use each individual item, causing us not to acquire the full value of the bundle. This insight can give companies valuable insight that even if they want to incentive purchase through bundles, physically separating the items can ensure consumers actually get the full value of their purchase.

Example 2 - Bundling payments decrease utilization of health care services

Companies usually use bundled packages in order to incentivize consumers to purchase multiple items at a reduced cost. However, bundled packages only increase the likelihood of purchase, not of consumption. While this can have negative financial impacts on consumers, it is more dangerous when we are speaking of bundled health care packages. According to the bundling bias, people are less likely to use all the services included in their package, meaning that when health care facilities offer a bundled payment, they may actually decrease the utilization of useful health care resources, which may have consequences on people’s health.

How to avoid it

The bundling bias primarily occurs as a result of our inability to conceive of the costs associated with each individual item in a bundle. Since it is a problem of perception, we can use techniques that help us recouple the transaction costs and benefits of each individual item. Before purchasing a package, we should calculate the cost of each individual item, to see how much of the package we would have to use to make our purchase worth it.

Additionally, even if monetary bundling may be helpful for companies, they can keep the items physically separate, to draw consumers’ attention to the individual costs of each item.