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The Theory Behind Hulu's New Price Bundle

Posted by PriceBeam on May 4, 2017


Hulu recently launched a new competitor to the traditional cable TV services, which offers content from both ABC, Fox, NBC, and CBS. It comes at $39.99 per month, which includes the Hulu streaming service, which comes at $7.99 when purchased independently.

This is a classic price bundle. Instead of selling the Cable Service at $32 without the streaming service, these two services are bundled together, allowing Hulu to capture more of the consumer surplus and increase profits.
To demonstrate, let's assume Hulu has two customer segments: Segment A who watch mainly TV shows, news, sports, etc., and Segment B who prefer binge-watching series and movies, but doesn't really care that much for cable services.

Segment A
Willingness to pay for Hulu Cable TV: $40

Willingness to pay for Hulu Streaming Service: $5
Total Willingness to Pay: $45

Segment B
Willingness to pay for Hulu Cable TV: $28

Willingness to pay for Hulu Streaming Service: $14
Total Willingness to Pay: $42

If both services were priced independently, Segment A would buy the cable TV, but not the streaming service, and Segment B would buy the Streaming Service but not the Cable TV. This would yield a total profit of $54. However, when sold in a bundle at $40, this bundle does not exceed the total willingness to pay of either segment, and thus, both would buy the bundle: yielding a total profit of $80.

Alternative to personalized pricing
Hulu knows that they have different segments in their markets with different willingness to pay for both services, but the problem is that they cannot identify which segment each buyer belongs to. If they could, they would, of course, charge Segment A $40 for Cable TV, and $5 for streaming, and charge Segment B $28 for Cable TV and $14 for Streaming (yielding a total profit of $87). But since that is not possible, price bundling is an effective method to obtain higher profits.

Written by PriceBeam

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