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Value-Based Pricing and Versioning Strategies for Optimal Market Segmentation

This article explores innovative value-based pricing strategies and versioning techniques to enhance customer choice and satisfaction. By analyzing how products can be tailored to meet varying market needs, businesses can implement effective tiered pricing models that encourage self-selection among consumers. Examples such as Quicken's offerings, traditional goods pricing, and bundling strategies illustrate how companies can optimize their pricing structures. Key considerations include product differentiation, user interface design, and the balance of features across different versions to ensure success in varied market segments.

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Value-Based Pricing and Versioning Strategies for Optimal Market Segmentation

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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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