53 Pages Posted: 12 Dec 2009 Last revised: 20 Mar 2012
Date Written: March 19, 2012
Firms in a variety of industries offer addon products to consumers who have previously purchased a base-product. We posit that consumers, in making their decision whether to purchase an addon that complements the base-product, find a greater need for the value offered by the addon when the “unrecovered” value (i.e., price paid minus the benefits obtained so far) associated with the base-product is higher. We conduct experiments that test the proposed hypothesis, and examine the strategic implications of such consumer decision making to a firm who sells base-product addon pairs.
Consistent with our hypothesis, the experiments show that the “unrecovered” value associated with the base-product is positively correlated to a consumer's likelihood of purchasing the addon. Formal modeling of this bias shows that firms may find penetration pricing strategies (such as loss-leader pricing) suboptimal. Furthermore, the identified bias leads to the firm spending more resources toward enhancing the both base-product quality and the quality of the addon, especially so when the addon will be offered before the consumer has a chance to extensively use the base-product. Finally, the effect of competition in the base-product market is also considered.
Suggested Citation: Suggested Citation
Erat, Sanjiv and Bhaskaran, Sreekumar R., Consumer Mental Accounts & Implications to Selling Base-Products and Addons (March 19, 2012). Available at SSRN: https://ssrn.com/abstract=1521923 or http://dx.doi.org/10.2139/ssrn.1521923