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Dave Hosick
IU Kelley School of Business Indianapolis

Last modified: Wednesday, December 16, 2009

Study by Kelley School professor answers the question: Are promotional bundles a good idea?

Dec. 16, 2009

INDIANAPOLIS -- The best things in life aren't free, especially for companies trying to lure customers by offering sweet deals on two complementary products.

Alexander Fedorikhin

Alexander Fedorikhin

Print-Quality Photo

Marketers traditionally have relied heavily in their sales promotions on free and reduced offers for bundled products (two items packaged together). Prior research has shown the "free" item suffers in perceived value among consumers when it is paired with another product.

A recent study co-authored by a faculty member at the Indiana University Kelley School of Business Indianapolis goes further, demonstrating a "freebie devaluation effect" lowering the perceived value of the focal item as well.

Alexander Fedorikhin, an associate professor of marketing at Kelley, co-authored the study along with Michael A. Kamins of New York's Stony Brook University and Valerie S. Folkes of the University of Southern California Los Angeles.

"Promotional Bundles and the Consumers' Price Judgments: When the Best Things in Life Are Not Free," was published in the December 2009 edition of the Journal of Consumer Research.

"Marketers use these methods all the time, for good reason. People like getting things for free," Fedorikhin said. "But our research has shown 'free' offers can devalue your products. You have to be careful how you use freebies."

The negative inferences possibly formed from these offers could result in consumers deciding to pay less for the items in the future or not to purchase them at all. Sellers' hopes for immediate gains from freebie bundle sales might result in reduced long-term profits.

"If a free product is needed to coax a sale, consumers may conclude that the focal product must be worth less than they thought," the study indicated.

The authors conducted three experiments from 2005-2007. The first involved 180 eBay auctions of an 1865 Indian penny and a less valuable 1901 penny. The coins were sold individually and in pairs, with the freebie of the 1901 penny proving to bring down the prices of the 1865 penny when the latter was sold individually.

Subsequent studies were conducted in a laboratory setting using bottles of shampoo and conditioner. The second study noted definitive freebie devaluation for bundles of two identical items. The third study showed freebie devaluation effect of bundles depends on the extent to which consumers dedicate effort to processing information about the bundle and on whether or not an alternative non-negative reason for the promotion is provided to them.