Consumer Mental Accounts and Implications to Selling Base Products and Add-Ons

Posted: 24 Oct 2012

See all articles by Sanjiv Erat

Sanjiv Erat

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

Sreekumar R. Bhaskaran

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM)

Date Written: 2012

Abstract

Firms in a variety of industries offer add-on products to consumers who have previously purchased a base product. We posit that consumers, in making their decisions as to whether to purchase add-ons that complement the base products, find a greater need for the value offered by the add-ons when the “unrecovered” value (i.e., price paid minus the benefits obtained so far) associated with the base products is higher. We conduct experiments that test the proposed hypothesis and examine the strategic implications of such consumer decision making to a firm that sells base product add-on pairs.

Consistent with our hypothesis, the experiments show that a consumer's unrecovered value associated with the base product is positively correlated to his likelihood of purchasing the add-on. Formal modeling of this bias shows that firms may find penetration pricing strategies (such as loss leader pricing) suboptimal. Furthermore, the identified bias leads the firm to spend more resources toward enhancing both the base product and the add-on quality, especially so when the add-on 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.

Keywords: consumer behavior, pricing, behavioral decision theory, lab experiments, mental accounting

Suggested Citation

Erat, Sanjiv and Bhaskaran, Sreekumar R., Consumer Mental Accounts and Implications to Selling Base Products and Add-Ons (2012). Marketing Science, Vol. 31, No. 5, 2012; pp. 801-818; DOI: 10.1287/mksc.1120.0731. Available at SSRN: https://ssrn.com/abstract=2163017

Sanjiv Erat (Contact Author)

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

Southern Methodist University (SMU) - Information Technology and Operations Management Department (ITOM) ( email )

Dallas, TX 75275
United States

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