Versioning Strategies in Pricing (PDF)

Chapter 11 VERSIONING Learning Objectives: What is versioning? How is versioning different from bundling or add-on pricing? Why might versioning be superior to pure per-unit pricing of complementary products? Why might it be inferior? How does market heterogeneity inform the choice of...

Chapter 11 VERSIONING Learning Objectives: What is versioning? How is versioning different from bundling or add-on pricing? Why might versioning be superior to pure per-unit pricing of complementary products? Why might it be inferior? How does market heterogeneity inform the choice of versioning over complementary product pricing? Are production cost savings the only reason to offer versions rather than individual products? How do different psychological effects influence prices within a versioning structure? How should discounts be managed when a firm is versioning? Versioning is an alternative approach to price segmentation from add-ons and other individual unit price Vision structures. Like add-ons and unit pricing, versioning attempts to price-segment customers according to their willingness to pay for marginal improvements in attributes, features, and benefits. Mission in versioning, different variations of a similar product are sold simultaneously. Some versions offer more features or benefits, while others offer fewer features and benefits. As products span from feature-deprived to feature-enhanced, the price likewise increases. Price Segmentation with Versioning Strategies using versioning often rely on a good-better-best progression of products. The good product is priced lowest and has the fewest features and benefits; it is an entry-level product. The good product is feature-deprived, providing the minimal functionality to satisfy customers. In an extreme form, it is a stripped-down version of a higher-value product, with the bare-bones features required to compete within the product category Influences on a Versioning Strategy This include: marginal costs prospect theory extreme aversion version range, order, and number effects discounting and constant, divergent or convergent price differentials Marginal Costs Versioning strategies have often been defended from a marginal cost standpoint. If the marginal cost of producing an enhanced version is less than that of producing individual products that can be added to each other to deliver the same benefits as the enhanced version, then versioning will be more profitable than producing individual items. Prospect Theory Prospect Theory and Pricing Strategies: Emphasize the core idea of prospect theory: it's better to "unbundle gains" (highlight multiple benefits) and "bundle pains" (combine costs into a single price) to influence customer behavior.  Extreme Aversion A well-understood effect in versioning is extreme aversion, an effect that arises from prospect theory but has been specifically identified with respect to the choices that customers make between competing versions. Given a good- better-best product lineup, customers tend to select the better version. While it may appear that the middle option offers the best price-to-benefits tradeoff for the most customers, research indicates that the price-to benefits tradeoff is not the only driver. Instead, the tendency to choose the middle option rather than either the lowest or highest option is Project Three partially due to the aversion of customers to buying either the lowest- or highest- quality product. VERSION RANGE, ORDER, AND NUMBER EFFECTS How many versions are too While cost savings may many? encourage firms to execute versioning, and extreme aversion may explain why many versioning strategies with three or more products What is the proper range of might be superior to ones versions? with two or fewer, these results only generate more questions such as: In what order should the versions be presented? We have to acknowledge that each version comes with its own costs. Even if the marginal costs to produce different versions were zero, the marketing costs of defining, developing, and promoting an infinite number of separate versions would soon become prohibitive. The number of versions is also limited by the need to enable customers to make quick and easy, yet meaningful, decisions. Vision and Discounting and Constant, Divergent, or Convergent Price Differential Mission When individual products within a versioning lineup are discounted, the price differences between the products will change. Changing price differentials between versions can influence customer choices regarding their desired version. Because the list prices of versions are usually optimized in relationship to each other, mismanaged discounts on one version can run among with the profits earned on all versions within the product lineup. One approach to managing this potential challenge is to consider how a price discount affects the price differential between the versions. Specifically, executives can consider whether the discounting policy results in a constant, divergent, or convergent price differential. Divergent occurs when an indicator and the price of an asset are heading in opposite directions. Negative divergence happens when the price of a security is in an uptrend and a major indicator heads downward. Conversely, positive divergence occurs when the price is in a downtrend but an indicator starts to rise. Convergence is the movement in the price of a futures contract toward the spot or cash price of the underlying commodity over time. The price of the futures contract and the spot price will be roughly equal on the delivery date.  Summary 1 3 In versioning, different variations of a similar Versioning strategies have often been defended product are sold simultaneously. Some versions from a marginal cost standpoint. If the sum offer more features or benefi ts, while others offer marginal cost of producing independent products fewer features and benefits. As the product is greater than the marginal cost of producing a spectrum moves from feature-deprived to product that delivers the same benefi ts, then the featureenhanced, the price likewise increases. manufacturer will achieve greater profi t with a versioning strategy over an add-on strategy. 2 4 Versioning strategies often follow a good-better- According to prospect theory, it is better to best progression. The good product is priced unbundle gains and bundle pains. The many lowest and has the fewest features and benefits. benefi ts delivered through the product are The best product is priced the highest and has the sources of gains. Each of these gains can be most features and benefits. In between lies the highlighted and isolated during a purchase better product, which is priced in the middle and decision to encourage customers to select a loaded with a modicum of features and benefits. higher-value version.  Cont. Summary 5 7 Extreme a version has been used to explain the The discounting policy in a version price structure tendency of customers to select the middle should consider the effects that discounting one option within a versioning offering, and not version may have on the sales of all other versions. necessarily because it delivers them the best Cross-product cannibalization, market-segment- utility for the price paid, but because consumers dependent responses to discounts, and the are simply averse to buying either the potential for sales tied to the version selected all infl lowest-quality or highest-priced product. uence the optimal discounting policy in a versioning strategy. 6 8 In managing a number of versions, executives Versioning can be used profitably in conjunction must consider cost and psychological with an add-on pricing structure. Because limitations to the number and range of products feature-enhanced versions are targeted to utility- that they will offer. In general, fi rms sensitive customers, and the profi t motive should highlight the highest-priced version and encourages the use of feature deprivation and present products in descending order. enhancement as a segmentation hedge between the utility- and price-sensitive segments.  Our Team Bautista, Mark Christian Lagunero, Jester Ann Sapico, Mark Angelo Leader THANK YOU