Private Cloud: Customers Will Pay More for Less

Does bundling products together undermine value?

In a study conducted recently at Harvard University (www.hbr.org), researchers found that consumers would spend more for a single expensive item than they would for an expensive item and a less expensive one packaged as a combination purchase.  The question they were asking was: “does bundling products together undermine value?”

Naturally this got me thinking about how all of the new offerings in the Private Cloud space which include a rack full of bundled products. So, I restated the question: by providing a rack, servers, networking and storage equipment in a bundle, were Private Cloud vendors undermining the value of their products?

The net of the research was that the perception most consumers had toward an expensive item changed when that item was bundled with, not necessarily an inferior add on, but a less expensive add on. The researchers used the example of a pricey home gym and found that consumers were less apt to purchase the home gym when bundled with a DVD. When the home gym was offered alone 51% purchased, when bundled with a DVD that number dropped to 35%!

The reason for this, they suspected, was that when you have two products and one is considered inexpensive and the other expensive, we tend to categorize the entire bundle to the level of the less expensive product. The underlying process the researchers suggested was at play is called ‘categorical reasoning’. Their findings supported this across several different products, supporting the idea that this would hold up in the wild.

Is this a new phenomenon? Not exactly. And you likely encounter it frequently and maybe did not know it. The same researchers found that adding a side salad to a cheeseburger helped to lower the perceived calorie count of the entire meal. I have known people to eat a candy bar with a diet soda thinking the calories in the candy bar were negated by the zero calorie soda – no kidding.

When I purchased a new Nikon recently there was an option to buy the body, lens, case, etc. separately or to buy them in a bundle. The bundle included a less expensive generic brand case and off-brand memory card; I have to admit this made me think twice about what I was getting.

Since I knew what I wanted I opted to piece it together by starting with the bundle and upgrading the case and memory card. In effect, what I did was to re-categorize the bundle by eliminating the portions that were of questionable value to me. Raising all of the pieces in the bundle to the same category had a significant effect on the perceived value of that bundle.

So how might this categorical thinking affect the buying decision when it comes to purchasing a pre-configured rack of cloud equipment? The research suggests that if all of the products in the rack are bounded by the same level of quality then the heuristic that a consumer would employ would not take away from that bundle; specifically, if all of the items are considered expensive, to use the researchers terms, then the entire bundle would be considered expensive.

Private Cloud computing vendors need to consider that a single inferior product in their bundled offering may reduce the overall quality of the entire offering.

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