IDEAS home Printed from https://ideas.repec.org/a/spr/custns/v2y2015i2p133-147.html
   My bibliography  Save this article

Base + Add-on Pricing in Extremely Competitive Categories

Author

Listed:
  • Ruijiao Guo
  • Purushottam Papatla

Abstract

Firms have typically relied on the base + add-on pricing model to stimulate ratings in extremely competitive categories like mobile applications. In most cases, the base is the basic version of the product and is offered for free or at a very low price. Product complements or additional product features serve as the add-ons. The standing assumption seems to be that the low base price encourages acquisition and use of the product followed by purchase of the add-ons. Eventually, this should increase both the valence and volume of ratings posted by consumers and, hence, lead to higher sales. The relationship between prices, valence, and volume of ratings, however, is yet to be formally tested in the literature. This is the focus of our research. Specifically, we investigate the relationships between various combinations of base and add-on prices and the valence and volume of ratings. Our investigation is based on a conceptual framework in which prices play both informative and allocative roles and are also maintained in mental accounts by consumers. The framework leads us to six research questions which we investigate empirically in a setting of over 9,000 mobile apps. Our results suggest that a combination of low base and high add-on prices will lead to high valence and volume of ratings. Interestingly, we find that the widely used combination of low base and low add-on prices will result in low valence and volume of ratings. This pricing option is, therefore, not attractive for firms. Our key finding, therefore, is that the classic low base + high add-on pricing model is the best option to generate high volumes of positive word of mouth from consumers. Firms, therefore, should not rely on lowering both base and add-on prices to stimulate consumer ratings even in extremely competitive categories. We also develop additional pricing implications of our findings for products in extremely competitive categories via a simulation of the effects of switching between price combinations. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Ruijiao Guo & Purushottam Papatla, 2015. "Base + Add-on Pricing in Extremely Competitive Categories," Customer Needs and Solutions, Springer;Institute for Sustainable Innovation and Growth (iSIG), vol. 2(2), pages 133-147, June.
    • Handle: RePEc:spr:custns:v:2:y:2015:i:2:p:133-147
    DOI: 10.1007/s40547-015-0049-9
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s40547-015-0049-9
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s40547-015-0049-9?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    2. Luc Wathieu & Marco Bertini, 2007. "Price as a Stimulus to Think: The Case for Willful Overpricing," Marketing Science, INFORMS, vol. 26(1), pages 118-129, 01-02.
    3. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6, National Bureau of Economic Research, Inc.
    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    5. Mary Tripsas & Giovanni Gavetti, 2000. "Capabilities, cognition, and inertia: evidence from digital imaging," Strategic Management Journal, Wiley Blackwell, vol. 21(10‐11), pages 1147-1161, October.
    6. Rao, Vithala R, 1984. "Pricing Research in Marketing: The State of the Art," The Journal of Business, University of Chicago Press, vol. 57(1), pages 39-60, January.
    7. Peter M. Noble & Thomas S. Gruca, 1999. "Industrial Pricing: Theory and Managerial Practice," Marketing Science, INFORMS, vol. 18(3), pages 435-454.
    8. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1.
    9. Ashok K. Lalwani & Sharon Shavitt, 2013. "You Get What You Pay For? Self-Construal Influences Price-Quality Judgments," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 40(2), pages 255-267.
    10. Peter M. Noble & Thomas S. Gruca, 1999. "Response to the Comments on “Industrial Pricing: Theory and Managerial Practice”," Marketing Science, INFORMS, vol. 18(3), pages 458-459.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Milkman, Katherine L. & Beshears, John, 2009. "Mental accounting and small windfalls: Evidence from an online grocer," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 384-394, August.
    2. Mehmet Karacuka & Asad Zaman, 2012. "The empirical evidence against neoclassical utility theory: a review of the literature," International Journal of Pluralism and Economics Education, Inderscience Enterprises Ltd, vol. 3(4), pages 366-414.
    3. Marek Hudik, 2019. "Two interpretations of the rational choice theory and the relevance of behavioral critique," Rationality and Society, , vol. 31(4), pages 464-489, November.
    4. Pradiptyo, Rimawan & Sahadewo, Gumilang Aryo, 2012. "On The Complexity of Eliminating Fuel Subsidy in Indonesia; A Behavioral Approach," MPRA Paper 40045, University Library of Munich, Germany.
    5. Sarantis Tsiaplias, 2021. "Consumer inflation expectations, income changes and economic downturns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(6), pages 784-807, September.
    6. Chorvat, Terrence, 2006. "Taxing utility," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 35(1), pages 1-16, February.
    7. Yan Lu & Yuqi Zhou & Pengling Liu & Shiyun Zhang, 2022. "A Study on the Influence of the Income Structure on the Consumption Structure of Rural Residents in China," Sustainability, MDPI, vol. 14(16), pages 1-13, August.
    8. Hermansson, Cecilia, 2016. "Relationships between bank customers’ risk attitudes and their balance sheets," Working Paper Series 15/12, Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance.
    9. Dilip Soman & Amar Cheema, 2002. "The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Credibility," Marketing Science, INFORMS, vol. 21(1), pages 32-53, September.
    10. Ashok Chakravarti, 2012. "Institutions, Economic Performance and the Visible Hand," Books, Edward Elgar Publishing, number 14751.
    11. Li, Feng & Du, Timon C. & Wei, Ying, 2020. "Enhancing supply chain decisions with consumers’ behavioral factors: An illustration of decoy effect," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 144(C).
    12. Kai Barron, 2021. "Belief updating: does the ‘good-news, bad-news’ asymmetry extend to purely financial domains?," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 31-58, March.
    13. El Mekkaoui de Freitas, Najat & Oliveira Martins, Joaquim, 2014. "Health, pension benefits and longevity: How they affect household savings?," The Journal of the Economics of Ageing, Elsevier, vol. 3(C), pages 21-28.
    14. Magdalena Zachłod-Jelec, 2008. "Koncepcja bogactwa gospodarstw domowych. Szacunki dla Polski," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 9, pages 19-50.
    15. Qiao Liu & Qiaowei Shen & Zhenghua Li & Shu Chen, 2021. "Stimulating Consumption at Low Budget: Evidence from a Large-Scale Policy Experiment Amid the COVID-19 Pandemic," Management Science, INFORMS, vol. 67(12), pages 7291-7307, December.
    16. Donatella Baiardi & Marco Magnani & Mario Menegatti, 2020. "The theory of precautionary saving: an overview of recent developments," Review of Economics of the Household, Springer, vol. 18(2), pages 513-542, June.
    17. Arenoe, Bjorn & van der Rest, Jean-Pierre I. & Kattuman, Paul, 2015. "Game theoretic pricing models in hotel revenue management: An equilibrium choice-based conjoint analysis approach," Tourism Management, Elsevier, vol. 51(C), pages 96-102.
    18. Nicole Koschate-Fischer & Katharina Wüllner, 2017. "New developments in behavioral pricing research," Journal of Business Economics, Springer, vol. 87(6), pages 809-875, August.
    19. Uros Djuric & Michael Neugart, 2021. "Helicopter money: survey evidence on expectation formation and consumption behaviour," Oxford Economic Papers, Oxford University Press, vol. 73(1), pages 273-294.
    20. Zhang, Jiaping & Zhang, Huirong & Gong, Xiaomei, 2022. "Mobile payment and rural household consumption: Evidence from China," Telecommunications Policy, Elsevier, vol. 46(3).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:custns:v:2:y:2015:i:2:p:133-147. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.