Versioning Information Hal R Varian ValueBased Pricing n
Versioning Information Hal R. Varian
Value-Based Pricing n n n Don’t need to price by identity Offer product line, and watch choices Design menu of different versions n n n Target different market segments Price accordingly according to value Problem: inducing self-selection
Quicken Example Revisited n How did Quicken solve problem? n n Quicken for Windows at $20 Quicken Deluxe at $60 Sells to both markets at once Self-selection problem n n added features valued by high-end not useful to low-end
Traditional Goods n Physical goods n n consumer electronics/appliances airlines n n n coach and business class restricted and unrestricted fares Information goods n n hardback/paperback movie/video
DVD pricing n Men in Black n n n Terminator 2 n n n Limited edition: $39. 95 Collectors’ Series: $29. 95 Ultimate DVD: $39. 98 Standard: $34. 95 Toy Story + Toy Story 2 n n Ultimate Toy Box: $69. 99 Standard: $39. 99
DVD features n n n n Edit your own scenes How the movie was made Story boards Music videos Special effects Outtakes And more….
Dimensions to Use n n n n Delay (Fed Ex, PAWWS) User Interface (Dialog. Web, Data. Star) Image Resolution (Photo. Disk) Speed of operation (Mathematica) Format (Lexis/Nexis) Capability (Kurzweil) Features (Quicken, tech support) Comprehensiveness (Dialog. Web, Data. Star)
Making Self-Selection Work n n May need to cut price of high end May need to cut quality at low end n n n Value-subtracted versions May cost more to produce the low-quality version. Makes high-end product relatively more attractive n In design, make sure you can turn features off!
Example: WTP Impatient customers Patient customers Immediate Version 100 50 Delayed Version 40 30 Number of customers 40 60
Analysis n Offer just immediate version n Perfect price discrimination n Set price of $50, sell to 100 customers (Better than price of $100) Set price of $50 and $100 But how can you do it? Versioning: attempt 1 n n Immediate version = $100 Delayed version: $30
Analysis, continued n Versioning: attempt 2 n n n Immediate version: $90 Delayed version: $30 Method n 100 – p = 40 - 30
Arbitrage n n Don’t make it too easy to undo quality differential Intel n n n qualifying memory chips secondary market Microsoft n n Windows NT workstation/server configuration changes
Online and Offline Versions n Dyson Dictum: think of content as free n n National Academy of Science Press n n Focus on adding value to online version Format for browsing, not printing Online and offline publications n Substitutes or complements?
How Many Versions? n n n One is too few Ten is (probably) too many Two things to do n n Analyze market Analyze product
Analyze Your Market n n Does it naturally subdivide into different categories? Are their behaviors sufficiently different? Is there possibility of user confusion? Example: Airlines n Tourists v. Business travelers
Analyze Your Product n n 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 n n get users to trade up Microsoft Works to Microsoft Office
Goldilocks Pricing n Mass market software (word, spreadsheets) n n n Network effects with limited choices User confusion with multiple versions Standard default: 2 versions Our recommendation: 3 versions Extremeness aversion n Small/large v. small/large/jumbo
Microwave Oven Example n Bargain basement at $109, midrange at $179 n n High-end at $199 added n n Midrange chosen 45% of time Mid-range chosen 60% of time Wines n Second-lowest price on list
Box net example n n See box-net-pricing 3 versions n n n Free: 1 GB Premium: 5 GB Pro: 15 GB
Bundling n Offer a bundle n n Microsoft Office has 90% market share Why bundle? n Products work together (economies of scope) n n n production side user side Introduce new product (Outlook) Option value: zero incremental price Increase switching costs (AT&T)
Why bundle: reduce dispersion n n Example: price separate or together Mark: $120 for WP, $100 for spreadsheet Noah: $100 for WP, $120 for spreadsheet Profits n n Without bundling: $400 With bundling: $440
Reduce Dispersion: Price separate or together? Profits: With Bundling: $440 Without: $400
Information Bundles n Magazines and newspapers n n Dispersed value and law of large numbers Customized bundles and nonlinear pricing n n In previous example sell first item for $120 Sell second item for $100
Bundling to increase switching costs n n Suppose you get phone/cellular/ CATV/ Internet from one provide Price breaks for more services How likely are you to switch? Other examples n n portals software bundles
Lessons n n n 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
- Slides: 25