Saturday, February 7, 2015

The False Economics of Bundling

Are "Bundles" a good deal, or just a way to get you to stop thinking about prices and to get you to buy things you don't want?

A reader asks, "Is it cheaper to buy your car insurance and homeowners insurance from the same company and get a bundle discount?"

Short Answer:  Usually not.   "Bundles" are popular deals these days and they are a marketing gimmick - like coupons.   You can't spend your way to wealth, and false "discounts" applied with "bundled" deals are usually just a smokescreen to keep you from cross-shopping.

Let's take insurance.  As I noted in an earlier post, I used to be "loyal" to State Farm Insurance when I was younger.  Whenever I needed a policy, I called my State Farm Agent and she would take care of it.  I probably would still be with them, but they screwed the pooch by not writing insurance in some areas (irrationally) and thus forced me to shop around.  Bad move State Farm!

And at one time, I had about 17 18 Polices with State Farm:
Autos - Five Policies
RV - One Policy
Boats - Two Policies
Condos - Three Policies
Houses - Two Policies
Life - Three Policies
Umbrella - One Policy
Office Building -  One Policy
TOTAL:  18 Policies.
So you would think I would save a lot with a "bundle" like that, right?   Well, no, not really.  The car policies were slightly discounted since I had homeowners polices with them.  But the Agents added medical and uninsured motorists policies to these, and the underlying liability policy was more costly than, say GEICO, so the "savings" in the auto policies was illusory.   I was paying nearly double what I now pay at GEICO for insurance.

(And if you had asked me at the time, I would have stupidly said, "Gee, I am getting a good deal from State Farm, because of the multi-policy discount bundle!"  Yes, I was an idiot).

For our New York home, I went to a local Independent insurance agent.   I believe we were paying about $1500 a year there and State Farm wanted to raise the premiums.   The Independent agent was able to cut that cost by at least $600, and provide better coverage.  

For our Georgia home (our only home now) we were able to save a whopping $1500 a year on insurance, by going to the Georgia Farm Bureau, which would write a combined wind/fire policy (Nationwide wanted two separate policies, State Farm refused to write at all).   That is a lot of money.

Oh, and since we have no mortgage, we could go to a higher deductible and lower premiums even further.

Of course, I don't look at insurance like buying lottery tickets - hoping I'll "win" by having a horrific accident and collecting.  I want insurance that makes me mostly whole and costs less.  I drive carefully and take the risk I won't be in a horrible accident.   It works well for me, but other folks are too risk-averse to try it.

Folks who are worried about what is parked in their driveway, well, they pay through the nose, all the time.

So bundling really didn't "save" me any money, and it psychologically prevented me from aggressively shopping my policies around.  Only when State Farm refused to write, I started shopping around and realized I had been getting hosed for years.   Thanks State Farm!  I am sure that was not their intention.

We still have one condo policy and one life policy with them.   Pretty soon, maybe just the life policy.

But what about other kinds of bundles?  Telecommunications is another area where the companies want you to use "one stop shopping" so you don't price things aggressively.   And most people think they are getting a "deal" with these bundles.

For example, a friend pays $165 a month for combined internet, cable TV, and cable phone service, as a "bundled" deal.   The provider recently raised it to $185.   When I told her that was a lot of money, the reaction was the same as mine, when I was with State Farm: "But I'm saving all this money with a Bundle!"

I had a "Bundle" with AT&T for a while.  We had a phone line and DSL service.   I think we paid about $60 a month for a while, but then it started going up to $80 and then $100 and then $120.   AT&T helpfully suggested I go to UVERSE service, and said I could "bundle" the phone  with that for "only" $70 a month or so.

Now, this was a "savings" over DSL only because AT&T jacked the price of DSL service on me.   And their phone service was expensive!   UVERSE was OK, but the phone service, with unlimited long distance, was $35 a month.

And of course, AT&T wanted me to get UVERSE television or DISH TV (bundled, of course!) or to "bundle" a new smart phone as part of the deal.  I refused.

The UVERSE service has been OK, but I got socked with a $10 bill for a ten-minute phone call to Canada.  So I switched to NETTALK which is about $30 a year, instead of $35 a month.  And for cell service, we still use GoPhone, for $200 a year for two phones.

(UPDATE 2021:  We ditched landlines and internet service and use our cell phones for Internet.  It isa lot cheaper and more portable.  And we consume less media as a result!).

UVERSE with just internet service is a whopping $46 a month.  But we do get Netflix this way, as well as phone service through NetTalk.  The cost savings this way are substantial - over $400 a year, just on the phone service alone.

And funny thing, when I called AT&T to disconnect my UVERSE phone, they pleaded with me to stay on.  "But you'll lose the bundle!" they said, as if chasing bundles was the greatest way to not only save money but to make it.   When I explained that my new phone service cost less per year than UVERSE phone cost per month, that kind of shut them up.   The response to that wasn't on their script.

Our total annual telecommunications costs are:
UVERSE:  $552
TOTAL: $878  (About $73 a month).
This is less than half what my friend is paying for phone service, cable, and internet, and about 1/3 when you throw in her Cell phone plan.

But of course, I am consuming less as well, which is why there are huge savings.  By buying a la carte, you can select to consume less - whereas the bundles are generally only for top-of-the-line deals.

For example, a lot of folks today are just going without landlines entirely as there seems to be little point to them.  Cell service has improved dramatically in the last decade (our island went from three cell towers to about 20 in the last five years alone).   So why pay for an extra phone number that is just confusing, expensive, and requires you to monitor yet another voicemail?

Similarly, if you decide you don't need cable TV, your blood pressure will drop, you will lose weight, and your brain will gain 25 IQ points.   If you keep it to chase "the bundle" - is that really a good idea?

Now some folks might say, "Well, I need a new smart phone every two years!" and that is fine and all, but you are deciding you need that more than anything else.   Yes, there are a few professionals who use such phones in business - they either get one for free from their employer, or they write off the cost to their own business.

Funny thing, I know more than one person who gets a "free" smart phone from their employer to use in business, and then they go out and buy a second one for personal use.  But I guess they kid themselves they can afford it.

Bundles are marketing gimmicks.  Bear that in mind.   They are designed to offer illusory "discounts" in order to get you to spend more.  "With the bundle savings, it is like getting your phone service for free!" they will chirp.   Whatever it takes to get you not to shop around and to buy things you wouldn't ordinarily buy.

Bundles are usually no real bargain.   But of course, the only way to find out is to shop around and compare plans and figure out what it is you really need, as opposed to what you want, or what the telcom company wants to sell you.   If the best bargain is a bundle, so be it.   But in many cases, it really isn't.