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: WTP 6040Number of customers 3040Delayed Version 50100Immediate Version Patient customers Impatient customers

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 =

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 Offline Versions 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-pricingbox-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? Profits: With Bundling: $440Without: $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