Versioning Information
Hal R. Varian
Value-Based Pricing Don’t need to price by identity Offer product line, and watch
choices Design menu of different versions
Target different market segments Price accordingly according to value Problem: inducing self-selection
Quicken Example Revisited How did Quicken solve problem?
Quicken for Windows at $20 Quicken Deluxe at $60 Sells to both markets at once
Self-selection problem added features valued by high-end not useful to low-end
Traditional Goods Physical goods
consumer electronics/appliances airlines
coach and business class restricted and unrestricted fares
Information goods hardback/paperback movie/video
DVD pricing Men in Black
Limited edition: $39.95 Collectors’ Series: $29.95
Terminator 2 Ultimate DVD: $39.98 Standard: $34.95
Toy Story + Toy Story 2 Ultimate Toy Box: $69.99 Standard: $39.99
DVD features Edit your own scenes How the movie was made Story boards Music videos Special effects Outtakes And more….
Dimensions to Use Delay (Fed Ex, PAWWS) User Interface (DialogWeb, DataStar) Image Resolution (PhotoDisk) Speed of operation (Mathematica) Format (Lexis/Nexis) Capability (Kurzweil) Features (Quicken, tech support) Comprehensiveness (DialogWeb, DataStar)
Making Self-Selection Work May need to cut price of high end May need to cut quality at low end
Value-subtracted versions May cost more to produce the low-quality
version. Makes high-end product relatively more
attractive In design, make sure you can turn features
off!
Example: WTPImpatientcustomers
Patientcustomers
ImmediateVersion
100 50
Delayed Version
40 30
Number of customers
40 60
Analysis Offer just immediate version
Set price of $50, sell to 100 customers (Better than price of $100)
Perfect price discrimination Set price of $50 and $100 But how can you do it?
Versioning: attempt 1 Immediate version = $100 Delayed version: $30
Analysis, continued Versioning: attempt 2
Immediate version: $90 Delayed version: $30
Method 100 – p = 40 - 30
Arbitrage Don’t make it too easy to undo
quality differential Intel
qualifying memory chips secondary market
Microsoft Windows NT workstation/server configuration changes
Online and OfflineVersions
Dyson Dictum: think of content as free Focus on adding value to online version
National Academy of Science Press Format for browsing, not printing
Online and offline publications Substitutes or complements?
How Many Versions? One is too few Ten is (probably) too many Two things to do
Analyze market Analyze product
Analyze Your Market Does it naturally subdivide into
different categories? Are their behaviors sufficiently
different? Is there possibility of user confusion? Example: Airlines
Tourists v. Business travelers
Analyze Your Product Dimensions to version High and low end for each dimension Design for high end, reduce quality
for low end Low end advertises for high end
get users to trade up Microsoft Works to Microsoft Office
Goldilocks Pricing Mass market software (word,
spreadsheets) Network effects with limited choices User confusion with multiple versions
Standard default: 2 versions Our recommendation: 3 versions Extremeness aversion
Small/large v. small/large/jumbo
Microwave Oven Example Bargain basement at $109,
midrange at $179 Midrange chosen 45% of time
High-end at $199 added Mid-range chosen 60% of time
Wines Second-lowest price on list
Box net example See box-net-pricing 3 versions
Free: 1 GB Premium: 5 GB Pro: 15 GB
Bundling Offer a bundle
Microsoft Office has 90% market share Why bundle?
Products work together (economies of scope) production side user side
Introduce new product (Outlook) Option value: zero incremental price Increase switching costs (AT&T)
Why bundle: reduce dispersion Example: price separate or together Mark: $120 for WP, $100 for
spreadsheet Noah: $100 for WP, $120 for
spreadsheet Profits
Without bundling: $400 With bundling: $440
Reduce Dispersion:Price separate or together?
Word Processor
Spread sheet
Mark Ketting $120 $100
Noah Count $100 $120
Profits: With Bundling: $440 Without: $400
Information Bundles Magazines and newspapers
Dispersed value and law of large numbers
Customized bundles and nonlinear pricing In previous example sell first item for
$120 Sell second item for $100
Bundling to increase switching costs Suppose you get phone/cellular/
CATV/ Internet from one provide Price breaks for more services How likely are you to switch? Other examples
portals software bundles
Lessons Version your product Delay, interface, resolution, speed,
etc. Add value to online information Use natural segments if you can Otherwise use 3 Bundling to reduce dispersion,
increase lock-in, discourage entry