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Versioning Information

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.

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Versioning Information

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  1. Versioning Information Hal R. Varian

  2. 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

  3. 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

  4. Traditional Goods • Physical goods • consumer electronics/appliances • airlines • coach and business class • restricted and unrestricted fares • Information goods • hardback/paperback • movie/video

  5. 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

  6. DVD features • Edit your own scenes • How the movie was made • Story boards • Music videos • Special effects • Outtakes • And more….

  7. 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)

  8. 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!

  9. Example: WTP

  10. 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

  11. Analysis, continued • Versioning: attempt 2 • Immediate version: $90 • Delayed version: $30 • Method • 100 – p = 40 - 30

  12. Arbitrage • Don’t make it too easy to undo quality differential • Intel • qualifying memory chips • secondary market • Microsoft • Windows NT workstation/server • configuration changes

  13. 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?

  14. How Many Versions? • One is too few • Ten is (probably) too many • Two things to do • Analyze market • Analyze product

  15. 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

  16. 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

  17. 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

  18. 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

  19. Box net example • See box-net-pricing • 3 versions • Free: 1 GB • Premium: 5 GB • Pro: 15 GB

  20. 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)

  21. 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

  22. Reduce Dispersion:Price separate or together? Profits:With Bundling: $440 Without: $400

  23. 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

  24. 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

  25. 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

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