This approach uses the latent variable scores of the latent predictor and latent moderator variable from the main effects model (without the interaction term). These latent variable scores are saved and used to calculate the product indicator for the second stage analysis that involves the interaction term in addition to the predictor and moderator variable.

This approach extends the product indicator approach to formative measures by making explicit use of PLS-SEM's advantage to estimate latent variable scores (Henseler and Chin, 2010; Rigdon et al. 2010).

When the exogenous latent variable or the moderator variable has a formative measurement model, the product indicator approach cannot be applied. The two-stage approach should be used.

The two-stage approach is NOT restricted to models that include formative measurement approaches but can also be used when all constructs are measured by reflective indicators.