Channel and bundling strategies: Forging a “win-win” paradigm in product and service operations

Abstract

While many companies have benefited from online sales as their sole sales channel with the rapid growth of online retailing, this approach has limitations, especially for products that contain non-digital information and require a complementary service to fully attract customers. Sellers of these types of products are actively considering or have already adopted a multichannel strategy, which includes maintaining the existing online channel and opening physical brick-and-mortar stores. To stimulate sales, the service operator may consider offering a product bundle with the product manufacturer by providing subsidies to them. Decisions on product bundling could potentially facilitate or pose barriers to channel expansion. This study employs a game-theoretic model to explore the optimal pricing, multichannel and bundling strategies for a product manufacturer and a service operator who offer the core products with ancillary services in either bundled or non-bundled format. Our equilibrium analysis yields several insights. First, the manufacturer’s offline expansion allows customers who visit in-store to try and inspect the product, which raises not only the offline price but also the manufacturer’s online price. Interestingly, this price increase is more significant for the bundled format compared to the non-bundled format. Second, the bundling strategy influences the manufacturer’s decision to expand into multichannel operations. Specifically, product bundling incentivises multichannel expansion if the newly added physical stores can attract a significant number of new customers, indicating that demand spillover is significant. Conversely, product bundling may deter multichannel expansion if the online hassle cost is moderate.