How To Price The Second Version Of Your Product?

[tweetmeme source=”pricingright”] Previously I wrote about the costs associated with multi-version pricing, this time let me discuss a very simple case of how to price two versions.

Suppose you have just one version of your product(service) and you want to introduce another version of the same. How should this be priced? I was posed this question recently by a small business owner who runs a service business.  Unfortunately  it is not an easy question with pre-built answer, I ended up asking her a lot more questions than I answered. But the questions are about taking a more analytical approach to the problem than just going with what seems like the right answer:

  1. Goals:
    Why do you want to introduce a second version?
    Is profit growth or sales growth your goal because increase in sales  does not automatically mean  increase in profit.
    Can you look at your current pricing to see if there is an opportunity to achieve your goals?
  2. Needs of your current customers:
    What do you hear from your current customers?
    What do they say they are missing in your current offering?
    How many times have you had special requests from your customers?
    Every touch point you have with your customers, from their call to book an appointment to the time you say good bye there are many opportunities to find out what your customers value. Can you mine this data to see whether your customers are seeking a simpler or premium version or even drastically different version?
  3. Needs of future customers:
    These are the segments who are not yet your customers. Why isn’t your product attractive to them?
    Is it the features, price or accesibility?
    Where do these people buy and where do they seek information about products?
    If you introduced the new version, will these people know about it and decide to try it?
    Unlike current customers you do not have an easy way to find the information stated in the previous point. This  requires you stepping out and doing a market research which is not a DIY task. So more most small businesses bits  or atoms I recommend  (2) – serving the unmet needs of current customers before explanding their market.
  4. Cost of versioning:
    What are the costs of introducing a new version?
    I previously wrote about costs associated with multi-version pricing,  in this specific case the costs are minimal given the nature of the service and it is a simple case of moving from one to two versions. But costs are relevant to see whether the new version delivers incremental profits over a single version offering.
  5. Incremental Profit: When you introduce a new version you cannot assume that it will appeal only to new customers or only to the sub-segment of current customers you planned to target. If you have not correctly answered the question in (2) above you might end up giving up profits because your premium customers switched to the basic version. In the presence of second version, customers are not any more making choice in isolation. They will be comparing the benefit to price paid between the two and will be deciding. If either of this price is wrong for the benefits it delivers you may end up with lower profit.

As I mentioned I did not have a price figure to give to that small business owner. But the questions helped her go seek data that she may already be collecting or can collect to help make the right decision on pricing.

It is never a simple question of “How do i price my second version?”. But it is a problem that can be methodically broken down by using the framework I gave above.