Add-On

Combining a low-priced core product with optional additional paid features

Add-On Business Model Pattern

Add-On Business Model Pattern

The add-on business model pattern combines a low-priced core product with optional paid features, allowing companies to offer customization and increase revenue while remaining competitive. This pricing strategy impacts the value proposition, revenue streams, and customer segments of a business model. To implement the pattern, businesses should identify the core product, develop valuable add-ons, set competitive prices, and communicate value clearly.

What is an Add-On Business Model Pattern?

The add-on model is a pricing strategy where a company offers a basic product or service at a low price, while providing additional features, services, or customization options as paid “add-ons.” This model allows customers to tailor their purchases to their specific needs and preferences, while enabling businesses to increase their overall revenue and profitability.

Add-On Business Model - How It Works

Why is the Add-On Business Model Pattern Important?

The add-on business model pattern is important because it offers several key benefits for both businesses and customers:

  1. Customization: Customers can personalize their purchases by selecting the add-ons that best suit their needs, leading to higher satisfaction and loyalty.
  2. Increased Revenue: By offering add-ons, businesses can generate additional revenue streams and increase their overall profitability.
  3. Competitive Pricing: The low base price of the core product or service helps businesses remain competitive in the market, attracting price-sensitive customers.

Impact on the Business Model

Add-On Business Model Pattern

The add-on pattern primarily affects the following aspects of a company’s business model:

  1. Value Propositions: The core product or service is designed to provide essential value, while add-ons enhance and customize the offering.
  2. Revenue Streams: The pattern diversifies revenue streams by generating income from both the core product and the add-ons.
  3. Customer Segments: The model caters to different customer segments by allowing them to choose the add-ons that best fit their needs and budgets.

Historical Context

  • Early 20th Century: The concept of add-ons is not new. For instance, in the automotive industry, Ford’s Model T came with a basic setup, with customers paying extra for additional features. This approach allowed Ford to maintain a competitive base price while offering customisation.
  • Mid-20th Century: The practice became more common with the rise of consumer electronics and appliances, where basic models could be enhanced with additional features at an extra cost.
  • Late 20th to Early 21st Century: The software industry, particularly with the advent of the internet and digital products, revolutionised the add-on model by offering core applications or services for free or at a low cost, with premium features available for additional fees.

Theoretical Foundations

  • Price Discrimination: The add-on model aligns with the economic theory of price discrimination, where businesses charge different prices for the same product or service based on various customer segments’ willingness to pay. This approach maximises revenue by capturing consumer surplus.
  • Consumer Surplus: This model caters to varying levels of consumer surplus by allowing customers to choose how much more they are willing to pay for additional benefits, enhancing customer satisfaction and loyalty.
  • Behavioral Economics: From a behavioral economics perspective, the add-on model exploits the “foot-in-the-door” technique where consumers are more likely to purchase additional features once they have committed to the base product. It also leverages the endowment effect, as users who invest in a core product are more likely to value it and consider add-ons.
  • Product Differentiation: The model allows for product differentiation, enabling companies to stand out in competitive markets by offering customizable solutions that cater to individual customer needs.

How to Implement the Add-On Business Model Pattern

To successfully implement the add-on pattern business model pattern, businesses should follow these steps:

  1. Identify the Core Product or Service: Determine the essential features and functionalities that will form the base offering.
  2. Develop Valuable Add-Ons: Create add-ons that provide genuine value to customers and complement the core product or service.
  3. Set Competitive Pricing: Price the core product competitively to attract customers, while ensuring that the add-ons generate sufficient revenue.
  4. Communicate Value Clearly: Effectively communicate the value of both the core product and the add-ons to help customers make informed decisions.

Trigger Questions

  • What complementary products or services can we offer to enhance our core offerings?
  • How can we bundle or package our add-ons to create attractive and valuable customer options?
  • What pricing strategies should we employ for our add-on offerings to maximize revenue?
  • How can we use add-ons to differentiate ourselves from competitors and create a unique selling proposition?
  • What cross-selling and upselling opportunities can we identify to promote our add-on offerings?

Examples of the Add-On Business Model Pattern

Business-to-Consumer (B2C) Examples:

  1. Airlines: Airlines often employ the add-on business model by offering base fares for flights and then charging additional fees for services such as seat selection, extra legroom, priority boarding, checked baggage, in-flight meals, and entertainment. For example, RyanAir is known for its low base fares but charges for carry-on bags, printed boarding passes, and even water on board.
  2. Video Game Consoles: Gaming companies like Microsoft (Xbox) and Sony (PlayStation) sell their consoles at relatively low prices but generate significant revenue through the sale of add-ons such as games, downloadable content (DLC), online gaming subscriptions, and accessories like controllers and headsets.
  3. Telecommunications: Mobile phone carriers like AT&T and Verizon often offer base plans with limited data, talk, and text and then charge additional fees for features such as extra data, international roaming, hotspot capabilities, and device insurance.

Business-to-Business (B2B) Examples:

  1. Software as a Service (SaaS): Many SaaS companies, such as Salesforce and HubSpot, offer a basic subscription plan with limited features at a lower price point. Customers can then purchase add-ons or upgrade to higher-tier plans to access advanced features, more storage, additional users, or premium support. For example, HubSpot’s Marketing Hub offers a Starter plan with basic features, while its Professional and Enterprise plans include more advanced tools and support.
  2. Logistics and Shipping: Logistics companies like FedEx and UPS offer standard shipping services at base rates but charge additional fees for add-ons such as expedited delivery, insurance, tracking, and special handling for fragile or hazardous items.
  3. Advertising Agencies: Advertising agencies often use an add-on model by offering a basic set of services, such as creative design and media planning, at a base rate. Clients can then purchase additional services like market research, social media management, influencer marketing, or video production for an extra fee. For example, a client may hire an agency to develop a print ad campaign (base service) and then add on services like digital ad creation and placement.

Summary

How: The add-on business model pattern offers a low-priced core product with optional paid features, allowing customers to customize their experience and businesses to increase revenue.

Why: By providing a competitive base product and valuable add-ons, companies can attract a wider customer base, cater to diverse needs, and generate additional revenue streams while maintaining a strong value proposition.

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