What it means
Package deals are everywhere in business. A software vendor sells a licence, installation and a year of support together, a bank offers a mortgage with a current account and insurance, and a seller of a business transfers buildings, equipment and stock in one transaction.
The buyer gets convenience and often a better price, and the seller gets a larger and more certain sale. The challenge is deciding what each part is worth.
Different parts may be recognised as revenue at different times, such as a licence on delivery and support spread across the year. Accounting standards generally require the total price to be split in proportion to the standalone selling price of each element, which is the price at which it would be sold on its own.
Package deals also appear in mergers and property sales. Buying a company's assets as a bundle means the buyer must allocate the purchase price to each asset, such as land, equipment and intangible assets, which affects depreciation and tax.
How the price is allocated can therefore change the profit reported after the deal. Buyers should compare the package price with the total of the individual prices.
A bundle can include items that the buyer does not need, which makes the discount an illusion. Negotiators sometimes use the package to hide a weak component in an otherwise attractive offer.
From the seller's view, the benefit is higher volume and stickier customers, but the risk is giving away margin on the wrong items. Sellers should model the profit on every element before agreeing the discount.
Contracts for package deals should state the price of each element where possible. Clear pricing helps the seller with revenue recognition and helps the buyer if one element is later returned, cancelled or refunded.
In practice
Real-world examples.
Example
A telecoms provider sells a phone, a data plan and insurance for $85 a month. The finance team splits the $85 across the three items based on their separate prices. The split affects how much revenue is recorded when the phone is handed over.
Example
A buyer purchases a small factory, its machinery and stock for $2,400,000. The accountant allocates the price between the building, equipment and inventory based on valuations. The allocation sets the depreciation charges for the next several years.
Example
A travel company sells flights, hotels and a car for $3,000, compared with $3,600 if bought separately. A customer who does not need the car finds the package no longer a bargain. She buys the flight and hotel as a smaller bundle.
Formula
Calculation
Allocated price for an element = package price x (standalone selling price of the element / total of all standalone selling prices)
A vendor sells a software licence, installation and one year of support as a package for $90,000. Standalone prices are $60,000 for the licence, $20,000 for installation and $40,000 for support, a total of $120,000. The package discount is (120,000 - 90,000) / 120,000 = 25%. Allocation: licence = 90,000 x 60,000 / 120,000 = $45,000, installation = 90,000 x 20,000 / 120,000 = $15,000, support = 90,000 x 40,000 / 120,000 = $30,000.
Reading the result: the three parts add up to 45,000 + 15,000 + 30,000 = $90,000, the package price. The vendor can recognise the $45,000 licence and the $15,000 installation when delivered, and spread the $30,000 support revenue over the year, or $2,500 a month.
A quick check on the discount: the buyer saves 120,000 - 90,000 = $30,000, which is 25% of the separate prices. If the buyer would not have bought the $20,000 installation at all, the real saving falls to 100,000 - 90,000 = $10,000, or 10% of the items actually wanted.Case study
Seen in the real world.
Brightleaf Systems is an illustrative, fictional business software company that began selling a package of software, training and support for $150,000. Salespeople liked the deal, and customers received a 20% discount compared with the separate prices.
The finance team realised that the company had been recognising all $150,000 as revenue when the software was delivered. Under proper allocation, part of the price belonged to training and to a year of support, which should be recognised later.
The standalone prices were $112,500 for the software, $25,000 for training and $50,000 for support, so the controller allocated $90,000 to the software, $20,000 to training and $40,000 to support, and the support revenue was spread over twelve months. This illustrative correction reduced first-quarter revenue but gave a truer picture of when the work was done.
Watch out
Common mistakes.
- Recording the entire package price as revenue on day one, when some parts are delivered later.
- Assuming a package is always cheaper, without adding up the separate prices of what you actually need.
- Allocating the price in equal shares instead of in proportion to standalone selling prices.
Questions
People also ask.
Why does the split matter?
Different parts may be recognised as revenue at different times or taxed differently, so the allocation changes reported profit.
Is a package deal the same as bundling?
They are very similar, as bundling is the sales practice and the package deal is the resulting agreement.
What is a standalone selling price?
It is the price at which a business would sell the item separately to a customer.
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