Price Bundling Theory Applied to Retail Banking

Abstract

The current report presents a theoretical and empirical investigation of a pricing method called price bundling and its application in retail banking in Sweden and Finland.

Price bundling was found to be an appropriate model for banks since by price bundling it was possible to reduce selling, marketing and production/delivery costs and therefore to utilise the banks&#39 fixed capacity more efficiently. The greatest potential in price bundling is, however, the way it stimulates demand for additional services. Banks can take advantage of this by introducing new complementary services to the customers since it is likely to reduce customers&#39 uncertainty and to increase their awareness of the bank&#39s services. Price bundling also creates switching costs for the customer which means that their loyalty may increase. From a competetive point of view price bundling was found out to be beneficial since it diminishes competition between the banks and therefore will lead to higher profit potentials in the market.

Retail banks in Sweden and Finland use price bundling extensively. Bundles seemed to be more like a reward system for customers&#39 existing demand rather than introducing new demand. Thereby price bundling would in the first place affect customers&#39 loyalty, and sales only indirectly. Another base model was a bundle around a current account and most cost efficient transaction services to minimise banks&#39 costs.

The author wants to thank Jan Wallanders och Tom Hedelius stiftelse för samhällsvetenskaplig forskning for financing this project.