To pre-embed or not? Product design and add-on pricing in the presence of consumer valuation uncertainty

Innovations in software add-on services drive profit growth in manufacturing. The success of innovative add-on services faces challenges arising from consumer valuation uncertainty. Consumers typically rely on segment-based expectations during early purchasing decisions, leading to choices that may not reflect their true needs. Traditional add-on options include bundling (Strategy S) and add-on pricing (Strategy O). We examine a novel upgradeable add-on strategy (Strategy U), where manufacturers sell products with pre-embedded features unlocked through additional payments. While pre-embedded designs incur extra costs for basic products, they offer consumers flexibility for post-purchase upgrades. We developed three add-on pricing models based on consumer valuation theory and the Karush-Kuhn-Tucker (KKT) method. Our findings indicate that: (i) pre-embedded designs do not consistently increase the basic price but raise the add-on price; (ii) under Strategy U, large add-on cost or high-expectation segment may decrease the add-on price; (iii) for manufacturers, Strategy U is less suitable than Strategy S when expectations for add-ons are low, while Strategy O is preferable when pre-embedded cost is relatively high; (iv) Strategy U cannot create a win-win scenario, whereas Strategy S can yield mutually beneficial outcomes. Our study provides new insights on pricing and strategy selection for stakeholders.