Economics of Information Versioning & Bundling Michael Nelson January 23, 2001

Versioning Offer a product in different forms for different market segments Let the users choose the version of the product most appropriate for themselves (self-selection) To maximize profits, make the total value created as large as possible and then extract as much of that value as possible

Bundling Personalized Pricing A form form of versioning in which 2 or more products are offered as a package at a single price Design a package that is optimized for personal interests and charge accordingly Business Travel Packages vs. Vacation Travel Packages

Product Dimensions Susceptible to Versioning & Their Likely Users/Uses Product Dimensions Delay User Interface Convenience Image Resolution Speed of Operation Format Capability Features Comprehensiveness Annoyance Support Likely Users/Uses Patient/Impatient Users Casual/Experienced Users Business/Home Users Newsletter/Glossy Uses Student/Professional Users On-screen/Printed Uses General/Specific Uses Occasional/Frequent Users Lay/Professional Users High-time/Low-time Value Casual/Intensive Users * Source: “Information Rules”

Delay “Information is like an oyster: it usually has the greatest value when it is fresh” Ameritrade Delayed Stock Quotes vs. Real-Time Quotes Delayed Stock Quotes are Free Real-Time Quotes cost $20/month

User Interface Offer Different search interfaces to different market segments Thomson Corporation Offers two different products to search their 350 databases 1.DialogWeb – Targeted to professional researchers Has very extensive & powerful search capabilities Cost = $300 to sign up + Fees based upon the number of searches, the number of databases, & the amount of time on-line. (Min. $75/month) 2.DataStar – Targeted to nonprofessional searchers It’s a stripped down version of DialogWeb Cost = $50 to sign up + different costs depending upon which databases you want to search + connection time + additional charges to set profile alerts for each database. (No min. monthly charge)

Image Resolution Different Prices for Different Resolution Versions PhotoDisc.Com Not only do they offer different resolutions, but they also bundle various photos Single-Image Prices Low-Resolution - $30 Medium-Resolution - $100 High-Resolution - $180 Bundled Services Offers different picture themes of 4 pictures on a CD These pre-designed CD’s range in price from $180-$400 Also offer customized CD’s Cost = $70 + regular single image price

Features and Functions Quicken Quicken 2001 Deluxe $60 - Includes: Missed Bill Reminder, Portfolio Tracker, Capital Gains Estimator, Tax Planner, Investment Alerts

Features and Functions Quicken 2001 Home & Business $80 - Includes Quicken 2001 Deluxe + - Customized Invoices, Accounts Payable Management, Payroll Tools Quicken 2001 Suite $100 - Includes Quicken 2001 Deluxe + - TurboTax & Quicken Family Lawyer Quicken 2001 Home & Business Suite $140 - Includes Quicken Home & Business + TurboTax Home & Business + Quicken Business Lawyer

Customized Products Qitup.com Offers customized music for cheerleaders Allows team members to select various songs and add their team name into the mix Cost = $100/min on tape + 15% supplies fee They say if you have 10 girls on your team, a 2 min. mix would cost only $20 each

Excellent example of Versioning & Bundling Personalized Wine Choose your wine Choose your own label design Create a personal message on the label Wines of the World Club Every month you receive a different wine from a different region of the world (Different Price Classes $27-$80/month)

Nonlinear Pricing Charles Schwab Schwab’s Active Trader Commission Discounts Commissions are based on the # of trades per quarter & the # of shares traded 1,000 Shares 1-30 trades = $30/trade$.03/share trades = $20/trade$.02/share 61+ trades = $15/trade$.01/share

Schwab Signature Services Platinum Targets the high-end segment Must have either $1mm or more in assets, or trade 48 times or more a year with at least $50,000 in a Schwab account Personal Service from an investment specialist Special access to participate on conference calls Access to enhanced research reports Streaming real-time quotes Discounted trades

Give Away Content Since marginal costs are close to zero, it costs nothing to give away partial information, if it will entice buyers to purchase the full package Stephen King “The Plant” Installment payment plan Installments 1, 2, &3 = $1 each Installments 4-8 = $2 each (Total cost $13) Result: < 1/2 of the readers paid for the download of the last installment & the project was suspended

Contentville.Com Reviews and sells books Versioning - Allows the browser to read the first chapter of any book and then buy Bundling – Join Contentville’s Citizens Club ($20/year) and receive 20% off the retail price, plus an extra 5% off for being a member Also receive a 1 year subscription to “Brill’s Content”(retail value $17)

Goldilocks Pricing Not too much, Not too little Consumers try to avoid extreme choices “Extremeness Aversion” When you can’t decide how many versions to have, choose three Adding a premium product influences low- end buyers to trade up to the middle product * Source: “Information Rules”

DejaVu Ultimate example of Versioning & Bundling Goldilocks Pricing 1-month $10 6-months $45 1-year $80 Prices reflect bundled products/services Includes printed version of “Showgirls” magazine mailed to your home each month (retail value $8)

Magazine profiles different clubs & the girls at the clubs Acts as self-promotion to get you to go to the clubs to see the girls in person Includes free passes for admission to any DejaVu club anywhere in the U.S. (retail value $16/visit) Reviews movies, interactive CD-Roms, DVD’s, & adult websites They either own, or have partnership agreements with the companies which produce the above products

Conclusion Adjust the characteristics of the information products to emphasize differences in what customers value Add value to on-line information to differentiate it from hard copy If the market segments naturally, design the information product line to match If the market does not segment naturally, choose three versions Bundle complementary goods Nonlinear pricing allow consumers to build their own bundles * Source: “Information Rules”