The reason unbundling raises revenue and lowers trust
Splitting one price into a base plus additions raises the total collected and makes comparison harder. Buyers notice the second effect and attribute it to the seller.
Filed by The Archivist 2 min read
Intuition test — answer before you read on
Splitting a fare into a base plus add-ons raises the average collected. What are the two mechanisms?
Correct answer: B
Morwitz and colleagues found partitioned prices lower perceived total cost and raise demand at an equal sum. Ellison and Ellison described the second half: when ranking is on one dimension, cost migrates to the dimensions not being compared.
A fare of a hundred becomes a fare of sixty-nine plus seating, plus baggage, plus a card charge. The average amount collected goes up. The headline price goes down, which is what the comparison site displays, and the buyer who arrives at checkout has a number they did not plan for.
What everyone sees
Unbundling is presented as choice: pay only for what you use. That description is accurate for the minority who genuinely want the base product alone. For everyone else the base price is a component of a total that is only assembled at the end, and the choice offered is between additions rather than between totals.
What is actually happening
Partitioned pricing research, including Morwitz, Greenleaf and Johnson, finds that splitting a price lowers perceived total cost and raises demand relative to an equivalent all-inclusive figure. The base price also becomes the ranking key on comparison sites, which rewards moving cost into components. Ellison and Ellison described the resulting obfuscation strategies in search markets: when comparison is on one dimension, cost migrates to the dimensions not compared.
Why it stays hidden
The trust cost hides from the seller rather than from the buyer. Revenue and conversion are measured, while the diffuse resentment produced at checkout is not attributed to the pricing structure in any dashboard. Each individual charge is also disclosed and justifiable, so the complaint has no single target and arrives as a general impression rather than as a specific objection.
Comparison happens on the compared dimension. Cost moves to wherever nobody is looking, and the total arrives last.
Comparison happens on the compared dimension. Cost moves to wherever nobody is looking, and the total arrives last.
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Comparison happens on the compared dimension. Cost moves to wherever nobody is looking, and the total arrives last.
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Sources & further reading 3
- Morwitz, Greenleaf & Johnson, "Divide and Prosper: Consumers’ Reactions to Partitioned Prices", Journal of Marketing Research, 1998
- Ellison & Ellison, "Search, Obfuscation, and Price Elasticities on the Internet", Econometrica, 2009
- Gabaix & Laibson, "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets", Quarterly Journal of Economics, 2006
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