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When to Use Multi-part Pricing | Strategic Pricing Solutions

Earlier this month there was an article in the Wall Street Journal, Why Gadget Warranties Are (Almost) Never Worth It, pointing out the disadvantageous math behind most extended warranties and chastising sellers for offering them.  From my perspective extended warranties are good examples of when multi-part pricing makes sense, and they can be a win for both buyers and sellers.   Conversely there are times when the better option for your pricing strategy is to create a bundled price, and it is worth discussing when each option makes sense.

The idea behind multi-part pricing is to capture additional money from customers when there is a wide range of value to customers for certain complementary products or services.  In addition to extended warranties, examples of multi-part pricing include parking fees at concerts and sports venues, premium fees for exit row seats on airlines, travel insurance on vacations, and fees to drive in the fast lane on a highway.  Multi-part pricing is most logical when there is significant competition on the base product resulting in fairly low margins, a limited supply of the complementary item like parking spots or exit row seats, and a wide range of value by customers for the complementary items.

In the sports and concert examples, there tend to be clearly defined demand curves.  The higher the price of the base ticket, the fewer attendees in each section.  When deciding to buy tickets, the potential attendees pay the most attention to the ticket price, and less attention to parking, food, etc.  Typically parking is limited, so some customers will carpool, and walk a long way to minimize cost, while others will pay a premium to be close.  Multi-part pricing enables the venue to capture the value from those who value parking and other extras most, and allocates limited supply.

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When to Use Multi-part Pricing.

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