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