Bundled Products and Revenue Allocation Methods

Learning Objective 6 Understand how bundling of products causes revenue allocation issues and the methods managers use to allocate revenues

• two or more products sold for a single price
• need to allocate revenues to each product in the bundle to evaluate managers of individual products
• the stand-alone method, the incremental method, or the Shapley value method

Revenue allocation issues arise when revenues from multiple products (for example, different software programs or cable and Internet packages) are bundled together and sold at a single price. The methods for revenue allocation parallel those described for common-cost allocations.

Bundling and Revenue Allocation

Revenues are inflows of assets (almost always cash or accounts receivable) received for products or services provided to customers. Similar to cost allocation, revenue allocation occurs when revenues are related to a particular revenue object but cannot be traced to it in an economically feasible (cost-effective) way. A revenue object is anything for which a separate measurement of revenue is desired. Examples of revenue objects include products, customers, and divisions. We illustrate revenue-allocation issues for Dynamic Software Corporation, which develops, sells, and supports three software programs:

1. WordMaster, a word-processing program, released 36 months ago
2. DataMaster, a spreadsheet program, released 18 months ago
3. FinanceMaster, a budgeting and cash-management program, released 6 months ago with a lot of favorable media attention

Dynamic Software sells these three products individually as well as bundled together.

A bundled product is a package of two or more products (or services) that is sold for a single price but whose individual components may be sold as separate items at their own “stand-alone” prices. The price of a bundled product is typically less than the sum of the prices of the individual products sold separately. For example, banks often provide individual customers with a bundle of services from its different departments (checking, safe-deposit box, and investment advisory) for a single fee. A resort hotel may offer, for a single amount per customer, a weekend package that includes services from its lodging (the room), food (the restaurant), and recreational (golf and tennis) departments. When department managers have revenue or profit responsibilities for individual products, the bundled revenue must be allocated among the individual products in the bundle.

Dynamic Software allocates revenues from its bundled product sales (called “suite sales”) to individual products. Individual-product profitability is used to compensate software engineers and product managers responsible for developing and managing each product.

How should Dynamic Software allocate suite revenues to individual products? Consider information pertaining to the three “stand-alone” and “suite” products in 2020:

Just as we saw in the section on common-cost allocations, the two main revenue-allocation methods are the stand-alone method and the incremental method.