CHAPTER 3 Versioning Information (Product Differentiation)

Chapter Overview How to design a “product line” –Capturing greatest profit Profits –Depends on total value created and fraction extracted –Two principles

Chapter Overview Principle One –Offer versions tailored to the needs of different customers Principle Two –Design these versions to accentuate the needs of different groups of customers –Self-selection

Designing Your Product Line Identify dimensions that induce self-selection. Dimension(s) selected may be highly valued by some customers unimportant to others. Offer notably different versions designed to appeal selectively to each type of customer.

Dimensions: Delay Strategy –Control information/product release time Example –Information Streaming stock quotes 20 minute delay –Service Fed Ex next day by 10 a.m. Next day

Dimensions: User Interface Strategy –Build 2+ access modes –Diversify appeal across user classes Example: Database search engine –Power User: professional researcher, advanced user Interface- multiple refinement options –Casual User: beginner, occasional user Interface- simple search textbox, “how to” links

Dimensions: Convenience Strategy –Restrict/enhance access to product Example: Retailing –Enhancement: on-line shopping –Restriction: availability only at bricks and mortar location to stimulate foot traffic

Dimensions: Quality of Product Strategy: –Variation in quality of product/service Example: Booksellers –Highest Quality:newest release –Good Quality:selection of current titles –Value Quality:discounted/used books

Dimensions: Speed of Operation Strategy –Develop varying capabilities in product/service Example: Internet Access Providers –Broadband –Enhanced Dial-up –Dial-up Modem

Dimensions: Format Strategy –Limit accessibility, duplicate, or print information Example: Professional Journals –Abstracts of articles are available –Require subscription –Require purchase for full version

Dimensions: Capability Strategy –Create discernible differences to target market segments Example: Voice Recognition Software –20,000 word vocabulary$ 79 –50,000 word vocabulary $ 595 –Legal vocabulary $1,195 –Medical vocabulary$6,000 –Orthopedic medical vocabulary$8,000

Dimensions: Features and Functions Strategy –Add attractive features to basic product Example: Intuit Quicken –Basic version Electronic checkbook –Deluxe version Investment Module Financial Calculators Asset Management

Dimensions: Comprehensiveness Strategy –Offer varying detail levels Example –On-line Consulting Industry Fees are structured on level of detail/expertise

Dimensions: Annoyance Strategy –Distribute free limited version with special screens –Encourage full version registration Example –ZoneAlarm –Spybot

Dimensions: Support Strategy –Offer technical support as pricing strategy Example: Security Software Vendors –Basic version offers known virus protection –Additional subscription fee offers automatic updates and technical support

Pricing and Quality Adjusting Pricing & Quality –Avoid making low-end product too attractive –Reduce price of high-end product –Reduce quality of low-end product

Pricing and Quality Goldilock Pricing –Use 3 versions of product Value Middle Deluxe –Extremeness Aversion –Middle version decision Importance of offering product at the level

Pricing and Quality Promotional Pricing –Different forms Sales Coupons Rebates –Some inconvenience for users –Valuable only if it segments the market

Pitfalls Degrading products serves low- willingness-to-pay Cheaper products allow more customer choice Low-end product sales reveal value

On-line or Off-line On-line info available off-line Off-line info easier to read Sell off-line while on-line is free National Academy of Science Press

Bundling Definition: –A special form of versioning in which two or more distinct products are offered as a package at a single price. Example: Microsoft Office –Word Processor –Spreadsheet –Database –Presentation Tool

Bundling Tying –Individual products are offered only in the package Bundling –Individual products are offered in package and individually –Price of the bundle is less than the sum of the component prices Two components = $70/each Bundle = $100

Bundling Determine whether or not to offer a targeted discount –On-line Wall Street Journal Offers a discount to subscribers of the paper version Dispersion in customer value –Reduces dispersion in customers’ willingness to pay –Significantly increase the value extracted from customers

Bundling If $120 each only buy one product = $240 If $100 each buy both products = $400 Willingness to Pay Word Processor Spreadsheet Mark$120$100 Noah$100$120

Bundling Other reasons for bundling –Option value Consumer may find Microsoft Office an attractive purchase Consumer may use other programs in future Use bundling to introduce new products to consumers

Bundling Information Bundles –Magazines are bundles of articles –Subscriptions are bundles of magazines Bundling will reduce the dispersion in willingness to pay, thereby reducing revenue.

Bundling Customized Bundles –Pop music sold on CDs –Create your own CD –Personalized newspapers –Customized textbooks Mass customization of information –Quantity discounts can play same role as bundling

Bundling Lesson: –Bundling makes sense if it reduces variation in willingness to pay. –Combining complimentary goods increases revenue if it decreases the variation across customers in their willingness to pay.

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FeatureBasicDeluxePremier Free Electronic Filing (after rebate) Step-by-step guide; checks for mistakes Imports IRS Forms and data from Quicken, Microsoft money Includes free download of 1 state product Year to year deduction comparison Expert Tax Advice and future planning Help for sales of stocks, bonds, mutual funds and employee stock plans Schedule C guidance (prepares W-2’s and 1099-MISC forms) Rental property depreciation and other deductions Product Line Comparison

All versions offered online All versions offered offline except 1040EZ “It’s Deductible” offered in CD ROM and book form On / Off Line Versions

Pricing OnlineCD ROMPromotions Premier$69.95 $39.95* online Deluxe$39.95 $19.95* online Basic$24.95$29.95N/A State$29.95 $9.95** online 1040 EZ$9.95N/A *Additional $9.95 to file state**with purchase of federal software

Download online and begin using product today ~$20 off Rebates for ordering and completing online Free to try, charge when you decide to print or e-file Promotional Pricing

iPod & iTunes

iPod: Shuffle Two versions –512 MB 120 songs $99 –1 GB 240 songs $149

iPod: Mini Two versions –4 GB 1,000 songs $199 –6 GB 1,500 songs $249 *available in four colors

iPod: Versions iPod: $299 –20 GB –5,000 songs Special U2 Edition iPod: $349 –Jet black with a red Apple Click Wheel –U2 band autographs on the back –Exclusive U2 poster

iPod: Photo 30 GB –7,500 songs –$ GB –15,000 songs or 25,000 photos –$449 “Art on Display” – iTunes 4.7 auto syncs the Album cover art for songs downloaded

iTunes Music Store Buy music – individual tracks or albums –99¢ per song –$9.99 per CD –No subscription required - free download Different purchase methods –iTunes account –Gift certificates –Allowance accounts –AOL wallet/accounts

iTunes Mass customization of information –Customize CDs and playlists Allows users to burn individual songs onto multiple CDs for personal use Listen to songs on an unlimited number of iPods Play songs on up to five Macintosh computers or Windows PCs

iTunes: Features Open 24/7 on Macs and Windows PCs Legal way for consumers to discover, purchase, and download music online Over 1,000,000 songs from major music companies More than 100,000 new tracks from independent artists and record labels More than 150 exclusive to iTunes tracks from numerous artists Dozens of out-of-print Motown singles and jazz albums available digitally for the first-time

iTunes: Features Free 30-second preview of every song Free Single of the Week download “Artist Alerts” notify you when Apple adds music from your favorite artists to the iTunes Music Store View movie trailers Watch music videos Share music with up to 5 Macs and PCs Find out what’s playing on more than 1,000 radio stations Publish an iMix on the iTunes Over 9,000 audio books

Versions of iTunes iTunes 4.0 – iTunes Each version offers improvements and additional features V 4.0 – add and view album artwork, burn DVD archives of your music, and share music within the same household V 4.1 – audiobooks now available, drag and drop links from iTunes into s, Instant Messenger, or web pages, allowance accounts, and gift certificates V sign in and buy music using either an AOL or Apple Account

Versions of iTunes V 4.5 – Post your iMix, print CD inserts, find out what is playing on over 1,000 radio stations around the U.S., download a free song, get music and audiobooks related to a movie, and watch a music video V 4.7 – Support for copying photo in an iPod photo and the ability to show duplicate songs in your library V – Support for iPod shuffle

QUESTIONS??