Upselling: Optional Feature Pricing
Many companies are offering optional, related products and/or additional features along with the main product. This is called: cross-selling and/or upselling
. Optional Feature Pricing (OFP) is the pricing mechanism behind the second one i.e., "upselling" marketing tactics
. In upselling strategies the main product often has limited features (offered at a Basic Price) while the optional features, which deliver added value to the customer, cost extra over the Basic Price (usually sold at a premium). Typically, the firm covers the costs through the sale of the Base product and makes more profit through the sale of the additional features.
To understand an OFP strategy it's good to start with Philip Kotler's Model with 5 Product Levels
. Here, the Basic Product being offered resembles the 'Expected Product' from the Model – offering just enough features to satisfy the customer's basic requirements, while also distinguishing itself from the competitors. Each additional feature offered by the firm 'augments' the Basic Product.
APPLICATIONS OF OPTIONAL FEATURE PRICING
OFP is typically used in the Consumer Durables market - phones, computers, and cars. For example, a Car manufacturer might be selling a particular car model at a Basic Price. Additional features such as Leather Upholstery (instead of Polyester), Wooden linings (instead of Plastic), Music system, GPS system, etc. could be sold at a premium over the Basic Price. A customer could either opt for the Standard model or choose one or more of the additional features offered, by shelling out extra bucks.
Another example of OFP is found in the Airline Industry. There is a standard rate for booking a seat in an airplane; opting for the Window seats costs extra. Also, food & beverages served during the flight are additional costs that a passenger may choose to bear.
ADVANTAGES OF OPTIONAL FEATURE PRICING
- Selling additional features provide an extra revenue stream for the firm along with the sale of the Basic Product
- Increased visibility for the business through the sale of related products and services
- Convenience for both the Buyer and Seller: For example, Mobile covers might be sold along with Mobile Phones. This is more convenient for the Seller vis-à-vis selling the Mobile covers on a standalone basis. Also, Buyers benefit from this as they can purchase the accessories along with the phone, without having to visit another store.
DISADVANTAGES OF OPTIONAL FEATURE PRICING
- The seller has to carefully choose which features to provide in the Basic Product, and which to provide as optional features. For example, Restaurants that price their Food low and Beverages high might end up with a smaller number of orders for beverages. An opposite strategy might draw in a larger drinking crowd.
⇒ Do you know of other nice examples where OFP is being used successfully? Please share.
Kotler, P. & Keller, K. L. (2016) "Marketing Management", 2016, pp. 416
Bhasin, H. (2019) "Optional Product Pricing", MARKETING91