1. CHAPTER 3 Versioning Information (Product Differentiation)

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

3. 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

4. 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.

5. 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

6. 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

7. 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

8. 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

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

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

11. 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

12. 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

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

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

15. 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

16. 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

17. 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

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

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

20. 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

21. 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

22. 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

23. 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

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

25. 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

26. 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.

27. 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

28. 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.

29. BASICPRE MIER DELUXE

30. TurboTax for the Web 1040EZ STATE It’s Deductible Additional Software Offered

31. 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

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

33. 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

34. 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

35. iPod & iTunes

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

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

38. 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

39. iPod: Photo 30 GB –7,500 songs –$349 60 GB –15,000 songs or 25,000 photos –$449 “Art on Display” – iTunes 4.7 auto syncs the Album cover art for songs downloaded

40. 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

41. 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

42. 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

43. 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

44. Versions of iTunes iTunes 4.0 – iTunes 4.7.1 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 emails, Instant Messenger, or web pages, allowance accounts, and gift certificates V 4.2 - sign in and buy music using either an AOL or Apple Account

45. 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 4.7.1 – Support for iPod shuffle

46. QUESTIONS??