Offer more, honestly · Every business
Service Packages and Bundles Customers Actually Choose
A good package saves the customer from doing arithmetic and from worrying about surprises, and research on how people choose shows that the middle option, the number of options and how often the customer will really use the package matter more than the discount.
At a glance
- A service package is a set of services sold together at one price, either only as a set (pure bundling) or alongside the same services sold separately (mixed bundling), which is the form most small service businesses use.
- Packages sell on optimism; in a study of 7,752 gym members, those who chose a flat monthly fee of over $70 attended 4.3 times a month on average and paid more than $17 per visit, when a 10-visit pass would have cost them $10.
- In an illustrative detailing or cleaning business, three tiers at $120, $180 and $260, with most customers choosing the middle one, raise the average ticket from $135 to $181, about $44,000 a year at 20 visits a week.
- Build the middle package first, keep the menu to three or four packages, price every tier from the same cost per hour and design each package around services the customer will actually use.
Part 1 | Customers buy packages to avoid math and to avoid surprises
The owner's first instinct about packages is usually a discount: Bundle three services and take 10% off. The research on why people choose bundled and flat prices points somewhere else. A study in the Journal of Marketing Research of 10,882 internet customers found many chose a flat rate even when paying per use would have cost less, and the main reasons were a wish to protect themselves from a high bill and the discomfort of watching a meter run, not the savings.
The gym study published in the American Economic Review shows how far that preference can go. Members who chose a flat monthly contract paid, on average, well above what they would have paid visit by visit, because they expected to come more often than they did.
| Payment option | Price per visit |
|---|---|
| Flat monthly contract, average use | more than $17 |
| 10-visit pass | $10 |
That pull is an opportunity and a warning. A package that bundles what the customer would have bought anyway, in one clear price, is easy to say yes to, while a package padded with services the customer won't use sells once and then becomes a cancellation, a refund request or a customer who quietly stops coming.
Part 2 | The middle package does most of the selling, so build it first
Research in the Journal of Marketing Research found that an option becomes more attractive when it sits between other options in a set, a pattern the researchers called extremeness aversion; earlier work in the Journal of Consumer Research found that adding an option clearly worse than an existing one can raise the share choosing the better option. For a small business, the practical reading is to design the package most customers should buy, make it the middle of three, then build an entry package with less and a top package with more, each a real option someone would sensibly choose.
The number of packages matters less than many owners fear. A meta-analysis in the Journal of Consumer Research of 50 experiments with 5,036 participants found an average choice-overload effect of virtually zero, with large differences between studies; three or four packages, each with a plain name and a one-line description of who it is for, keeps the choice easy without hiding anything.
| Average ticket before packages (Assumption) | $135 |
|---|---|
| Essential package price, share choosing it (Assumption) | $120, 25% |
| Complete package price, share choosing it (Assumption) | $180, 55% |
| Complete Plus package price, share choosing it (Assumption) | $260, 20% |
| Average ticket with packages (Calculated (25% × $120 + 55% × $180 + 20% × $260)) | $181 |
| Visits per week, weeks per year (Assumption) | 20, 48 |
| Added revenue per year (Calculated (($181 − $135) × 20 × 48)) | $44,160 |
Illustrative example; replace every assumption with your own numbers, and track the real mix for a month before trusting the result.
Part 3 | Price every tier from the same cost per hour, and check the margin before the menu goes up
A package that looks generous can quietly earn less per hour than the services sold one by one. The safest check is to cost each tier with the same labor rate and compare what each one leaves per hour of work, so that a customer choosing any tier pays for the business at the same rate.
Then design for use. Research on pricing and consumption summarized by Harvard Business School found that customers who pay for a bundle up front feel the cost of any single visit less, so they skip more, and that health club members who pay in full at the start of the year use the club heavily for a month or two before their attendance drops. For a service business, that argues for packages tied to a visit the customer has already booked, or to a schedule the business manages, such as a spring and fall visit set on the calendar at the time of sale, rather than prepaid credits that sit unused.
How you compare
- Your mix: after a month, more than half of customers choosing the middle package suggests the tiers are set well; most customers choosing the entry package suggests the middle one is priced too high or described too vaguely.
- Your menu size: the research suggests three or four packages are plenty, and owners with more can usually merge the least chosen ones.
- Your margin per hour: if one tier earns noticeably less per hour than the others, fix its price or its contents before promoting it.
Questions to ask this week
What do most customers buy together already? Pull the last three months of tickets and look for the services that appear side by side most often; that pair or trio is the middle package.
Who is each package for? Write one line per tier that names the customer, such as "for a yearly refresh" or "for a home being listed for sale."
Will the customer actually use everything in it? Remove anything most buyers would skip.
Does every tier earn the same per hour? Run the contribution check in Exhibit 3 with your own labor cost.
The next step is to export last quarter's tickets, find the three most common combinations and cost them as Essential, Complete and Complete Plus.
About this research: This article draws on studies of tariff choice in the Journal of Marketing Research, gym contracts in the American Economic Review, choice context and decoy options in the Journal of Marketing Research and the Journal of Consumer Research, a meta-analysis of choice overload in the Journal of Consumer Research, a synthesis of bundling strategy in the Journal of Marketing and Harvard Business School's summary of research on pricing and consumption. The worked examples are illustrative.
Sources
- DellaVigna, S. and Malmendier, U. Paying Not to Go to the Gym. American Economic Review 96(3), 2006. 7,752 members over three years.
- Lambrecht, A. and Skiera, B. Paying Too Much and Being Happy About It: Existence, Causes, and Consequences of Tariff-Choice Biases. Journal of Marketing Research 43(2), 2006. 10,882 customers.
- Simonson, I. and Tversky, A. Choice in Context: Tradeoff Contrast and Extremeness Aversion. Journal of Marketing Research 29(3), 1992.
- Huber, J., Payne, J. W. and Puto, C. Adding Asymmetrically Dominated Alternatives: Violations of Regularity and the Similarity Hypothesis. Journal of Consumer Research 9(1), 1982.
- Scheibehenne, B., Greifeneder, R. and Todd, P. M. Can There Ever Be Too Many Options? A Meta-Analytic Review of Choice Overload. Journal of Consumer Research 37(3), 2010. 50 experiments, 5,036 participants.
- Stremersch, S. and Tellis, G. J. Strategic Bundling of Products and Prices: A New Synthesis for Marketing. Journal of Marketing 66(1), 2002.
- Harvard Business School Working Knowledge. Use the Psychology of Pricing to Keep Customers Returning. Interview on research with Gourville, J. T. and Soman, D., 2002.
Related reading: Good, Better, Best: How to Present Three Options in a Quote · Memberships That Work for Med Spas, Barbershops and HVAC Companies · How to Offer an Add-On Without Sounding Pushy · Price Endings, Round Numbers and Charm Pricing: What the Research Shows
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