Bundling: Beware Marketing Backfire

We've all seen it over the past few years: admission offices that offer "incentives" (call them "freebies," if you'd like) to families to come to open houses and other admission-focused events. One school I know of (Pat Bassett has it featured at the end of one of his 'road show' PowerPoints) even went to the extreme of offering "free tuition" for the second semester of the current academic year, in order to grow enrollment.

There is a psychology involved with this tactic. Alexander Chernev, associate professor of marketing at Northwestern University's Kellogg School of Management, has done a good deal of research on the concept of "bundling" (a combination of a single expensive item and a cheaper one). His findings, co-authored with Aaron Brough of Pepperdine University, show that the psychology of bundling can backfire: quite often, actually. Schools that are following this tack should pay attention.

Basically, Brough and Chernev's research shows "that bundling expensive and inexpensive products changed what people thought those items were worth. Even when they found both items in a bundle attractive, they were willing to pay less for the bundle than for the more expensive product alone. [They] also found that people were less likely to buy bundles that combined expensive and inexpensive products. [...] This suggests that the popular strategy [I'd call it a tactic] of adding premiums to products can sometimes hurt, rather than increase, sales." (HBR, June 2012, 30).

The underlying driver is a process called categorical reasoning, which holds that "people naturally tend to classify products as either expensive or inexpensive, and this categorization influences how they judge products. When an expensive item is bundled with an inexpensive one, people categorize the bundle as less expensive, and this lowers their willingness to pay for it."

Marketers (this would certainly include admission offices in independent schools that are striving to increase enrollment) follow conventional wisdom, which suggests that bundling products helps to increase sales (tuition dollars). This does hold true in numerous situations, but it does not hold true across the board. "Although categorical thinking is a pervasive tendency, it has boundaries: People categorize along just one dimension at a time. So if you get people to focus on nonprice attributes, the price effect will go away [schools, for example, could focus on values, character, signature programs, and the like]. Our research shows that when customers [families] focus on one of those attributes, they're much less likely to categorize items in terms of their expensiveness and consequently less likely to devalue combinations of items from different price tiers."

Question: when you've got board members who are marketers or work in marketing, what do you think their default position would be, in terms of a school's falling enrollment? Offer something in a bundle, to provide incentives to attract families!

What the marketers are relying on is people's preference "for making simple binary decisions in the face of complex information. [...] People rely on decision short-cuts, or heuristics, that trade accuracy for reduced cognitive effort." What these Chernev and Brough highlight is that such heuristics do not work in all scenarios.

I would submit that independent school admission efforts represent such a scenario in which traditional heuristics don't work along the same lines as they do in other purchasing situations.

Schools that are effective at getting families to focus on nonprice attributes, as listed above, are going to be more successful at breaking through the psychological boundary of "categorization". Schools that are offering really bad bundles (free t-shirts to the first 25 families, or free tuition for one semester followed by full-price the next semester) are doing themselves no favor in attempting to attract families; the probability that their effort will fail is extraordinarily high because they have just placed a significantly inexpensive item in the same bundle as a high tuition, meaning that they've forced families into categorical reasoning. That reasoning will result in families ascertaining that the value of the more expensive product is actually diminished.

Comments

[Schneiderb]

Great post Kevin and I couldn't agree more!

In an independent school setting I really can't think of a scenario that would be positive with regard to bundling.

Another extension also applies to current families who receive incentives for "recommending" the school thereby "cheapening" or eroding genuine word-of-mouth.

Thanks,
Brendan