Tuesday, July 22, 2008

The Perfect Storm for a BBQ: Economics of the Combo Meal

My friend Dan twittered the other day about an interesting bundle on amazon.com if you purchased the book the Perfect Storm you could get the BBQ Bible along with it for a discount. Amazon does this with every book making an offer of an additional book at a discounted, although usually the two books are generally closer in themes.

So why bundle goods? A simple example with the Perfect Storm and the BBQ Bible (the numbers aren’t meant to be exact). Suppose people like Dan would pay $20 for the BBQ Bible and $5 for the Perfect Storm. Now suppose people like me would pay $20 for the Perfect Storm and $5 for the BBQ Bible. If Amazon sells either book for $20 they will sell only one of each copy and collect $40. If they sell each book for $5 we each buy both books and Amazon collects $20. But if Amazon offers us both books together for $25 we buy the bundle and Amazon gets $50. As long as it costs Amazon less than $5 to get a copy of either book they make more money selling books in bundles.

This is the same reason when you go to McDonalds you can order a combo meal. How much each of us is willing to pay for burgers, fries, and cokes varies. But, McDonalds can get us to buy more if they offer it as a bundle.

However, we can’t bundle everything or every purchase would be like late night TV and come with a set of steak knives. Typically bundles are for similar goods like books and combo meals.

But, Dan was confused by this bundle, since they were both books but they share little in common.

I think I found the explanation. In some Amazon listing the DVD is listed as The Perfect Storm (with BBQ Book) (see here). That probably made the Amazon computers bundle the books. Although the listing does make sense.

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Steve said...

McDonald's also knows people tend to have value things relative to one another. The value meals at McDonald's basically cost as much as a burger and fries or a burger and a drink--so you get the drink or fries "for free" so it must be a better deal.

Seth Gitter said...


good point. All three (burgers, soda, fries) are complements to each other. So that makes bundeling easier.