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

Author

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  • Sanjiv Erat

    (Rady School of Management, University of California, San Diego, La Jolla, California 92093)

  • Sreekumar R. Bhaskaran

    (Cox School of Business, Southern Methodist University, Dallas, Texas 75275)

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.

Suggested Citation

  • Sanjiv Erat & Sreekumar R. Bhaskaran, 2012. "Consumer Mental Accounts and Implications to Selling Base Products and Add-ons," Marketing Science, INFORMS, vol. 31(5), pages 801-818, September.
    • Handle: RePEc:inm:ormksc:v:31:y:2012:i:5:p:801-818
    DOI: 10.1287/mksc.1120.0731
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    References listed on IDEAS

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    Cited by:

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    2. Vishal V. Agrawal & Atalay Atasu & Koert van Ittersum, 2015. "Remanufacturing, Third-Party Competition, and Consumers' Perceived Value of New Products," Management Science, INFORMS, vol. 61(1), pages 60-72, January.
    3. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 0. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 0, pages 1-19.
    4. Guofang Nan & Xingtao Li & Zan Zhang & Minqiang Li, 2018. "Optimal pricing for new product entry under free strategy," Information Technology and Management, Springer, vol. 19(1), pages 1-19, March.
    5. Marco Savioli & Lorenzo Zirulia, 2020. "Does add-on presence always lead to lower baseline prices? Theory and evidence," Journal of Economics, Springer, vol. 129(2), pages 143-172, March.
    6. Aaron Baird & Chadwick J. Miller & T. S. Raghu & Rajiv K. Sinha, 2016. "Product Line Extension in Consumer Software Markets in the Presence of Free Alternatives," Information Systems Research, INFORMS, vol. 27(2), pages 282-301, June.
    7. Vishal V. Agrawal & Stylianos Kavadias & L. Beril Toktay, 2016. "The Limits of Planned Obsolescence for Conspicuous Durable Goods," Manufacturing & Service Operations Management, INFORMS, vol. 18(2), pages 216-226, May.
    8. Jang, Seongsoo & Chung, Jaihak, 2021. "What drives add-on sales in mobile games? The role of inter-price relationship and product popularity," Journal of Business Research, Elsevier, vol. 124(C), pages 59-68.
    9. Małgorzata Niklewicz-Pijaczyńska & Elżbieta Stańczyk & Anna Gardocka-Jałowiec & Zofia Gródek-Szostak & Agata Niemczyk & Katarzyna Szalonka & Magdalena Homa, 2021. "A Strategy for Planned Product Aging in View of Sustainable Development Challenges," Energies, MDPI, vol. 14(22), pages 1-20, November.
    10. Krishnamurthy, Anup & Kumar, S. Ramesh, 2018. "Electronic word-of-mouth and the brand image: Exploring the moderating role of involvement through a consumer expectations lens," Journal of Retailing and Consumer Services, Elsevier, vol. 43(C), pages 149-156.
    11. Janina Garbas & Sebastian Schubach & Martin Mende & Maura L. Scott & Jan H. Schumann, 2023. "You want to sell this to me twice!? How perceptions of betrayal may undermine internal product upgrades," Journal of the Academy of Marketing Science, Springer, vol. 51(2), pages 286-309, March.
    12. Bhattacharya, Shantanu & Robotis, Andreas & Van Wassenhove, Luk N., 2019. "Installed base management versus selling in monopolistic and competitive environments," European Journal of Operational Research, Elsevier, vol. 273(2), pages 596-607.

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