Base + Add-on Pricing in Extremely Competitive Categories

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.