PRODUCTS WITH BRANDED COMPONENTS - AN APPROACH FOR PREMIUM PRICING AND PARTNER SELECTION

An increasing number of products are being sold with components that t hemselves are brand names. Examples are personal computers with Intel microprocessors and diet soft drinks that use the NutraSweet formulati on. Branded com ponents may alter consumers' valuation of the bundle, necessitating changes in the ways firms identify and price such bundle d products. Surprisingly, the existing marketing Literature is silent on this issue. The purpose of our paper is to propose an analytical ap proach that helps marketers of products with branded components make o ptimal pricing and partner selection decisions. Our managerial objecti ves are twofold: (a) To the seller of the bundled product, we suggest the optimal bundled product offering, optimal selling prices of altern ative products, revenues and profits; and (b) to the branded component manufacturers, we indicate the most favorable alliance partner(s), an d payoff gains/losses of aligning with other branded components instea d of unbranded alternatives. Our analytical approach is also likely to be helpful to academics researching bundling and ingredient branding issues. The specific problem modeled assumes the bundled product has t wo components that are consumed jointly. Furthermore, each component c an be either a brand name or ''unbranded.'' In this model, the consume r has no control over the choice of the components in the bundle; the seller decides what form of bundle components (i.e., branded or unbran ded) to offer. We assume that the product that is marketed eventually enjoys a monopoly. Drawing from research in signaling and brand allian ce, we posit each branded component may either enrich or suppress the value of the partnering component in the bundle as perceived by the co nsumers. Our approach has three methodological stages. First, we build an individual level model to assess the valuation of alternative prod ucts and their principal components at the level of a randomly drawn c onsumer. To do so, we rely primarily on the theory of reservation pric es and Weber's theory on price/value changes. Second, we aggregate suc h valuation across consumers to assess the market's overall valuation. For this purpose, we invoke parametric distributions based on integra l transform theory. Third, we develop payoff functions based on market valuation of alternative products and supply-side costs. The manageri al objectives are met based on results from this stage. Our approach w as successfully applied to the context of a university bookstore that intends to sell ''Windows''-based laptop computers. The two principal components of the laptop computer bundle are the microprocessor chip a nd the personal computer platform on which the chip is implanted. The seller may choose either Compaq with ''Intel Inside'' or a simpler bun dle featuring one of these with an unbranded, complementary component, or an entirely unbranded bundle. We used data collected from 192, pot ential consumers via a survey. Included in the survey were measures of consumers' perceptions of functional aspects of the components, and t heir reservation prices for alternative bundled products. The approach identified the most profitable bundle for the seller and its optimal price. It also provided estimates of the revenue impact of the gain or loss for each branded component by partnering the other branded compo nent instead of the unbranded alternative, As such, the model facilita tes the determination of the optimal price, price premium, and profits for products with branded components, as well as the identification o f the ideal partner for each branded component manufacturer. It is apt to caution that products with branded components need not always lead to price premiums or lead to win-win outcomes. Reasons such as incong ruity between the branded components or domination of one of the compo nents over the other may drive potential consumers away, thus hurting profits. Implications of the results to negotiate component prices are discussed in the payer. The study limitations and directions for futu re research are also prcsented.