The Risks of Unbundled Pricing

From time to time I’m asked to help companies create a new product or service or build on an existing one. And in that work’ the inevitable (and necessary!) discussion of price comes up. It needs to happen, of course, and it can take a lot of work to consider and finally decide.

One of the trends I see in many businesses when it comes to pricing is the concept of unbundled prices. While unbundled prices may have their place in some situations, they are generally a problem in business and I’d like to warn you against them.

When businesses compete, they often compete on price. And when two businesses compete on price, the lower priced product wins (obviously!). When companies slash their prices to razor thin margins, and their competitors do the same, they are left with the inability to lower prices any more. So then they unbundle. Soon, they can offer the lowest conceivable price, but then they tack dollars back onto the price once the customer is in the store.

Car manufacturers are notorious for this: Advertising low priced cars until you sit down with the salesperson to discover that there are a handful of “mandatory options” you have to pay for, including undercoating, delivery tax, key tax, and other silly items. Dealerships have lost the respect of the consumer because of this practice. Everyone knows that the advertised price is half as much as the real price once you add on the additional charges.

Rental car companies, hotels, and airlines are three other groups that are notorious for this. They unbundle prices to offer customers the lowest price (and a sub-par offering) and then when the customer is paying they swoop in with the add-ons: damage insurance, minibar, extra luggage, all cost something. An example of just how ridiculous it has become is Ryanair, which has publicly stated that they are trying to charge people to use the bathrooms on their airplanes. I don’t think this problem is specific to the travel industry (although we see it there frequently because that’s a very budget-conscious service).

Here’s why it’s a problem: When you trade on price, you turn your product or service into a commodity. You’re essentially saying to your customers: we’re as low as we can go. And you’re inviting the competition to participate in an unbundled price war that no one will win.

Not only that, you’re starting on the road to bad customer service. Customers want low prices, but they would rather have reasonable prices and value. And handing someone a car but telling them that the keys are extra might be the lowest price but it isn’t a value offering.

By avoiding the practice of unbundling, you might take a hit in the short term because of your competition, but it’s a long-term play that will win out in the end.

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