PRICING STRATEGY
Antonette E. Mallari
CHAPTER 10
Add-ons, Accessories and Complementary
Products
Pricing Influences Between Complementary
Products
Guide questions
What are complementary products?
What should be included in the base product, and what
should be offered as an add-on product?
How should base products be priced compared to add-on
products?
How does heterogeneity in demand lead to add-on price
structures?
How is the pricing of signpost items and optional
equipment influenced by consumer behavior?
How do network effects drive price structures?
Add-ons, Accessories and Complementary
Products
Many products are the gateway to additional
add-on modules or optional accessories. Add-
ons and accessories are found in tangible and
intangible goods, durable and consumable,
business and consumer products.
There are subtle effects arising form
consumer behavior that can drive changes to
pricing structure away from that which would be
predicted from pure economic trade offs alone.
Add-ons Complementary
Products
Pizza and Pizza Toppings GE Washing Machine and Dryers
COMPLEMENTARY PRODUCTS
Complementary products
The purchase of one product increases the likelihood of
purchasing another product, and vice versa.
Tangible and Intangible Goods
Durables and Consumables
Business and Consumer Products
When we identify a pair of complementary products, we
have identified an add-on price structure and an
opportunity for versioning.
ADD-ONN
BASIC PRODUCT ADD-ONS PRODUCT
COMPANY CUSTOMER
ADD-ONS
Any product sold in conjunction with another product can be examined as
an add-on pricing structure - Complementary Goods
Example Add-ons
Pizza
Pizza toppings
Automobiles
Optional Features
Mobile Handsets
Mobile Accessories
ADD-ON price structure
1. Independent complements
Each product provides benefits independently
The purchase of one product increases the likelihood of the purchase of
any other complementary product
Example:
INDEPENDENT TID
E
Reese’s Peanut Butter cup Breyer’s Ice Cream Smucker’s Ice cream topping
2. Tied complements
The base product defines the product
category
Complementary products enhance the
benefits of the base product, yet provide few
benefits without the base product, and are
not easily transferable for use with other
base product
TIEd COMPLEMENTS
BASE PRODUCTS COMPLEMENTARY PRODUCTS
PRICE SEGMENTATION
IN ADD-ON PRICE
STRUCTURE
Price segmentation in add-on price structure
In an add-on price structure, customer can select the specific
features that he or she desires.
Different customers may have different levels of demand for a
specific accessories.
Demand for one feature maybe high for some customers and
low for others
Plotting a demand for a feature along each of the three
features, and connecting this demand for customer segments
creates a spider diagram of the demand profile for that
customer.
Different customers will have different demand profiles.
POTENTIAL ACCESSORIES FOR
NOKIA 6103 HANDSET (2007)
• Car Kit-10 = €139
• Connectivity Adapter = €49
• Wireless headset = €59
• Travel Charger = €19
• Mobile Charger = €19
• Audio Adapter = €25
CUSTOMER SEGMENT DEMAND PROFILE
INFLUENCES TO PRICE LEVELS IN ADD-ON
PRICE STRUCTURES
There consumer behavioral effects that enable
firms to capture higher margins either the add-
on module or the base products. Some better
understood effects are the signpost effect,
optional equipment effect, network externalities
and lock-in effect.
SIGNPOST EFFECT
• The signpost effect argues for a low price on a popular or
frequently purchased products to induce purchase items that are
price to yield at a higher relative contribution margin
• The signpost effect arises from customers lacking full information
of all comparable offers.
• The basic premise of the signpost effect is that prices in certain
items can signal the customer the price of others.
OPTIONAL EQUIPMENT
Manufacturers have
something of a
monopoly over factory
installed optional
equipment and a such
they can use these add-
on items to effectively
price-segment the
market to some degree
NETWORK EXTERNALITIES
• Network externalities is an economics concept that describes
the circumstances where the value of a product or service
changes as the number of users increases or decreases.
According to the traditional economic theory, as the supply of
a product increases the price of the product falls and
becomes less valuable. In certain circumstances the opposite
might happen, the value of a product or service may rise with
the increase in the number of users. This is called the positive
network externalities or the network effect.
LOCK-IN EFFECT
• It’s a term that’s typically used to explain a
practice, where a company makes it extremely
hard for their customers to leave them /switch
to a new provider, even if the customer wants
to.
THANK YOU !
