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CHAPTER 3

CHAPTER 3. Versioning Information (Product Differentiation). Chapter Overview. How to design a “product line” Capturing greatest profit Profits Depends on total value created and fraction extracted Two principles. Chapter Overview. Principle One

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CHAPTER 3

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  1. CHAPTER 3 Versioning Information (Product Differentiation)

  2. Chapter Overview • How to design a “product line” • Capturing greatest profit • Profits • Depends on total value created and fraction extracted • Two principles

  3. Chapter Overview • Principle One • Offer versions tailored to the needs of different customers • Principle Two • Design these versions to accentuate the needs of different groups of customers • Self-selection

  4. Designing Your Product Line • Identify dimensions that induceself-selection. • Dimension(s) selected may be highly valued by some customers unimportant to others. • Offer notably different versions designed to appeal selectively to each type of customer.

  5. Dimensions:Delay • Strategy • Control information/product release time • Example • Information • Streaming stock quotes • 20 minute delay • Service • Fed Ex next day by 10 a.m. • Next day

  6. Dimensions: User Interface • Strategy • Build 2+ access modes • Diversify appeal across user classes • Example: Database search engine • Power User: professional researcher, advanced user • Interface- multiple refinement options • Casual User: beginner, occasional user • Interface- simple search textbox, “how to” links

  7. Dimensions: Convenience • Strategy • Restrict/enhance access to product • Example: Retailing • Enhancement: on-line shopping • Restriction: availability only at bricks and mortar location to stimulate foot traffic

  8. Dimensions: Quality of Product • Strategy: • Variation in quality of product/service • Example: Booksellers • Highest Quality: newest release • Good Quality: selection of current titles • Value Quality: discounted/used books

  9. Dimensions: Speed of Operation • Strategy • Develop varying capabilities in product/service • Example: Internet Access Providers • Broadband • Enhanced Dial-up • Dial-up Modem

  10. Dimensions: Format • Strategy • Limit accessibility, duplicate, or print information • Example: Professional Journals • Abstracts of articles are available • Require subscription • Require purchase for full version

  11. Dimensions: Capability • Strategy • Create discernible differences to target market segments • Example: Voice Recognition Software • 20,000 word vocabulary $ 79 • 50,000 word vocabulary $ 595 • Legal vocabulary $1,195 • Medical vocabulary $6,000 • Orthopedic medical vocabulary $8,000

  12. Dimensions: Features and Functions • Strategy • Add attractive features to basic product • Example: Intuit Quicken • Basic version • Electronic checkbook • Deluxe version • Investment Module • Financial Calculators • Asset Management

  13. Dimensions: Comprehensiveness • Strategy • Offer varying detail levels • Example • On-line Consulting Industry • Fees are structured on level of detail/expertise

  14. Dimensions: Annoyance • Strategy • Distribute free limited version with special screens • Encourage full version registration • Example • ZoneAlarm • Spybot

  15. Dimensions: Support • Strategy • Offer technical support as pricing strategy • Example: Security Software Vendors • Basic version offers known virus protection • Additional subscription fee offers automatic updates and technical support

  16. Pricing and Quality • Adjusting Pricing & Quality • Avoid making low-end product too attractive • Reduce price of high-end product • Reduce quality of low-end product

  17. Pricing and Quality • Goldilock Pricing • Use 3 versions of product • Value • Middle • Deluxe • Extremeness Aversion • Middle version decision • Importance of offering product at the level

  18. Pricing and Quality • Promotional Pricing • Different forms • Sales • Coupons • Rebates • Some inconvenience for users • Valuable only if it segments the market

  19. Pitfalls • Degrading products serves low-willingness-to-pay • Cheaper products allow more customer choice • Low-end product sales reveal value

  20. On-line or Off-line • On-line info available off-line • Off-line info easier to read • Sell off-line while on-line is free • National Academy of Science Press

  21. Bundling • Definition: • A special form of versioning in which two or more distinct products are offered as a package at a single price. • Example: Microsoft Office • Word Processor • Spreadsheet • Database • Presentation Tool

  22. Bundling • Tying • Individual products are offered only in the package • Bundling • Individual products are offered in package and individually • Price of the bundle is less than the sum of the component prices • Two components = $70/each • Bundle = $100

  23. Bundling • Determine whether or not to offer a targeted discount • On-line Wall Street Journal • Offers a discount to subscribers of the paper version • Dispersion in customer value • Reduces dispersion in customers’ willingness to pay • Significantly increase the value extracted from customers

  24. Bundling If price @ $120 each only buy one product = $240 If price @ $100 each buy both products = $400

  25. Bundling • Other reasons for bundling • Option value • Consumer may find Microsoft Office an attractive purchase • Consumer may use other programs in future • Use bundling to introduce new products to consumers

  26. Bundling • Information Bundles • Magazines are bundles of articles • Subscriptions are bundles of magazines • Bundling will reduce the dispersion in willingness to pay, thereby reducing revenue.

  27. Bundling • Customized Bundles • Pop music sold on CDs • Create your own CD • Personalized newspapers • Customized textbooks • Mass customization of information • Quantity discounts can play same role as bundling

  28. Bundling • Lesson: • Bundling makes sense if it reduces variation in willingness to pay. • Combining complimentary goods increases revenue if it decreases the variation across customers in their willingness to pay.

  29. PREMIER DELUXE BASIC

  30. Additional Software Offered TurboTax for the Web 1040EZ It’s Deductible STATE

  31. Product Line Comparison

  32. All versions offered online All versions offered offline except 1040EZ “It’s Deductible” offered in CD ROM and book form On / Off Line Versions

  33. Pricing *Additional $9.95 to file state **with purchase of federal software

  34. Promotional Pricing • Download online and begin using product today ~$20 off • Rebates for ordering and completing online • Free to try, charge when you decide to print or e-file

  35. iPod & iTunes

  36. iPod: Shuffle • Two versions • 512 MB • 120 songs • $99 • 1 GB • 240 songs • $149

  37. iPod: Mini • Two versions • 4 GB • 1,000 songs • $199 • 6 GB • 1,500 songs • $249 *available in four colors

  38. iPod: Versions • iPod: $299 • 20 GB • 5,000 songs • Special U2 Edition iPod: $349 • Jet black with a red Apple Click Wheel • U2 band autographs on the back • Exclusive U2 poster

  39. iPod: Photo • 30 GB • 7,500 songs • $349 • 60 GB • 15,000 songs or 25,000 photos • $449 • “Art on Display” – iTunes 4.7 auto syncs the Album cover art for songs downloaded

  40. iTunes Music Store • Buy music – individual tracks or albums • 99¢ per song • $9.99 per CD • No subscription required - free download • Different purchase methods • iTunes account • Gift certificates • Allowance accounts • AOL wallet/accounts

  41. iTunes • Mass customization of information • Customize CDs and playlists • Allows users to burn individual songs onto multiple CDs for personal use • Listen to songs on an unlimited number of iPods • Play songs on up to five Macintosh computers or Windows PCs

  42. iTunes: Features • Open 24/7 on Macs and Windows PCs • Legal way for consumers to discover, purchase, and download music online • Over 1,000,000 songs from major music companies • More than 100,000 new tracks from independent artists and record labels • More than 150 exclusive to iTunes tracks from numerous artists • Dozens of out-of-print Motown singles and jazz albums available digitally for the first-time

  43. iTunes: Features • Free 30-second preview of every song • Free Single of the Week download • “Artist Alerts” notify you when Apple adds music from your favorite artists to the iTunes Music Store • View movie trailers • Watch music videos • Share music with up to 5 Macs and PCs • Find out what’s playing on more than 1,000 radio stations • Publish an iMix on the iTunes • Over 9,000 audio books

  44. Versions of iTunes • iTunes 4.0 – iTunes 4.7.1 • Each version offers improvements and additional features • V 4.0 – add and view album artwork, burn DVD archives of your music, and share music within the same household • V 4.1 – audiobooks now available, drag and drop links from iTunes into emails, Instant Messenger, or web pages, allowance accounts, and gift certificates • V 4.2 - sign in and buy music using either an AOL or Apple Account

  45. Versions of iTunes • V 4.5 – Post your iMix, print CD inserts, find out what is playing on over 1,000 radio stations around the U.S., download a free song, get music and audiobooks related to a movie, and watch a music video • V 4.7 – Support for copying photo in an iPod photo and the ability to show duplicate songs in your library • V 4.7.1 – Support for iPod shuffle

  46. QUESTIONS??

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