Consumer Mental Accounts & Implications to Selling Base-Products and Addons

53 Pages Posted: 12 Dec 2009 Last revised: 20 Mar 2012

Sanjiv Erat

University of California, San Diego (UCSD) - Rady School of Management

Sreekumar R. Bhaskaran

Southern Methodist University (SMU) - Edwin L. Cox School of Business

Date Written: March 19, 2012

Abstract

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

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

Sanjiv Erat

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://www.rady.ucsd.edu/faculty/directory/erat/

Sreekumar R. Bhaskaran (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

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