An Economic Decision-Making Framework for Price Bundling of Retail Banking Services (2003)

ABSTRACT Price bundling has become an important and widely used cross-selling tactic in retail banking. Service bundling offers a method of cross-selling that places less of the burden on the bank employee and more on the design and promotion of the product. However, bundle design decisions often appear to be based mainly on cost considerations or matching competitive offerings. The authors present an economic framework that can help bank marketers identify the demand conditions under which bundling is most likely to be an effective cross-selling tactic, and choose the appropriate services and bundling methods to use. INTRODUCTION The bundling of financial services has become one of the most commonly used and effective means for banks to acquire new deposits, build new business and find new opportunities. The practice is pervasive in the banking industry. Bundled accounts have built up so much momentum over the past few years that they have become a dominant focus of the retail operations at many banks. Nevertheless, increased competition in the financial marketplace along with the significant role that the Internet now plays as a delivery channel is once again forcing financial institutions to focus their attention on the role of cross-selling as a way to increase or at least defend their market share. The passage of the Gramm-Leach-Billey Act in November 1999 has brought about greater competition among financial institutions. Once again, it appears clear that financial institutions must be intent on building an organizational structure with a strong and cross-selling mentality. The foundation of this new corporate is based on an approach that takes the basic current account relationship with the customer and develops it into something much more lucrative by selling the customer a wide range of financial products (Britt, 1990, 30). However, the organizational transformation that leads toward routine cross-selling and developing a sales culture remains a demanding challenge for all financial institutions. Nevertheless, one aspect of successful sales-culture banks is an apparent understanding that the key to broadening a customer's relationship is to customize the selection, packaging and functional linkage between products (Moore, 1992, 26). To the extent that bundled products are structured in a manner consistent with a bank's marketing and profit objectives, they represent a powerful technique for selling to existing customers, as well as attracting new customers from competitors. However, there is little evidence that banks are optimizing the potential economic and customer retention benefits from their bundled services. More often, bundle design decisions are based upon short term objectives such as attracting new customers, increasing fee income, or merely matching competitive offerings. The purpose of this paper is to provide an economic rationale for bundling decisions in retail banking, particularly when the objective is cross-selling. The paper provides a framework that can help bank marketers identify the conditions under which bundling is most likely to be an effective cross-selling tactic, and choose the appropriate products and bundling methods to use. BANKS AND PRICE BUNDLING In today's economy, the practice of price bundling is widespread. Sport teams offer season tickets; resorts provide vacation packages that include transportation and meals; fast food restaurants offer meal deals that include more than one product (Soamn & Gourville, 2001). Thus, it is no accident that price bundling of financial services has become a widely practiced marketing tactic at banks and other financial institutions in recent years. There are three reasons why banks are a good example of the type of consumer service business for which price bundling is effective. First, banks are characterized by a high ratio of fixed to variable costs. …