Note: This article gives basics of price discrimination, product versioning and consumer surplus that will help see the case I make on iPad2 sales.
[tweetmeme source=”pricingright”] How should a marketer set prices for different versions? I wrote,
Set prices of your versions such that those who are able to and willing to pay higher prices will do so and are not tempted by the low priced version.
A slight variation of this statement was suggested by Chris Hopf,
Assort Value of your versions such that those who are able to and willing to pay higher prices will do so and are not tempted by the low priced version.
The difference is the value allocation but both statements are not only correct but also are complementary. To explain this we have to go to the very beginning of price discrimination – the Pigouvian economics. For a marketer to adopt versioning strategy the following two conditions are necessary*:
- Different customers must value the various versions differently. This means customers needs and the value they get by hiring a version must be different.
- The products must not be commodities -products must add unique value to customers.
Together these two explain the value assortment argument. But it is not enough to just create value, a successful business model is not only about creating value but capturing a fair share of it. Pricing is the lever for value capture. This is what I said about setting prices for the versions.
Let us walk through an extreme case for simplicity. Let us say there are only two customers Bob and Alice. You, the marketer, create and sell shaving gel.
If both Bob and Alice value just the utility of the gel and hence do not value any other benefits there is no point in creating multiple versions, one for Bob and one for Alice. For instance, if Alice finds that she gets more from Barbasol, after all it is the same product as Pure Silk, then she will pick Barbasol.
If Bob considers the gel just for its utility and has low willingness to pay (WTP) but Alice appreciates the scent and values how it works in the shower and hence has higher WTP then it makes perfect sense to create two version. The version for Bob is the simple Barbasol and the version for Alice is Pure Silk.
How would you price these two (given Bob does not value Pure Silk at all)? You should price these two such that:
Value of Pure Silk to Alice less Price of Pure Silk
Value of Barbsol to Alice less Price of Barbasol
In other words, Alice, the high WTP customer, must get higher net value (consumer surplus) from Pure Silk than what she gets from Barbasol. This means Alice will be nudged to self select herself to the Pure Silk version and not tempted by the Barbasol despite the lower price.
In reality there are lot more Alices, Bobs, Charlies, Davids, …
Some might choose Pure Silk regardless of the price and at the other extreme some might always choose Barbasol. Some, if they didn’t know about lower priced Barbasol, would choose Pure Silk but when offered side by side would find higher value in Barbasol and choose it.
The general questions become –
-What are the customer segments?
– What do they value?
-What are they willing to pay for that value?
-What is the size of each segment?
-What are the product versions and their prices that would maximize profits?
That is the core of strategic marketing.
Talk to me.
*Note: There are 3 conditions for practicing price discrimination (price harmonization) but the arbitrage is not relevant to versioning strategy.