Versioning Information

1
Versioning Information

• Hal R. Varian

2
Value-Based Pricing

• Dont 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

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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

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DVD features

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

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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)

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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!

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Example WTP
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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

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Analysis, continued

• Versioning attempt 2
• Immediate version 90
• Delayed version 30
• Method
• 100 p 40 - 30

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Arbitrage

• Dont make it too easy to undo quality
  differential
• Intel
• qualifying memory chips
• secondary market
• Microsoft
• Windows NT workstation/server
• configuration changes

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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?

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How Many Versions?

• One is too few
• Ten is (probably) too many
• Two things to do
• Analyze market
• Analyze product

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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

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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

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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

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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

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Box net example

• See box-net-pricing
• 3 versions
• Free 1 GB
• Premium 5 GB
• Pro 15 GB

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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 (ATT)

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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

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Reduce DispersionPrice separate or together?
Profits With Bundling 440 Without 400
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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

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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

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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