Product Versions – Right way to Unbundle pricing

airlines_baggage2Previously I wrote about two cases of airline pricing – one a completely unbundled offering and the other that offers five different product versions. The recommendation and implication for your product pricing was to use unbundling as way to expose customer preferences then create targeted versions with select features.

When we look at pricing I have always recommended methods that increase the total value pie for both brands and customers versus those that are skewed towards one or the other. Increasing total value may mean customers pay higher prices but they willing pay and get more share for that price. Conversely decreasing prices may not result in better value for customers as they may pick a version purely on price and miss out on value and you lose as well.

There is a recent study out that makes a stronger case against unbundling by looking at key economic aspects and customer preference.The study’s authors recommend asking these questions before you unbundle your offering:

  1. How does the price sensitivity of consumers who buy only the base product compare to the price sensitivity of consumers who value the add-on?
  2. How many consumers will use the add-on only if it is offered for free?
  3. How great is the marginal add-on cost?
  4. Will the competitor independently discover and implement the add-on pricing opportunity?

Valid questions but these are not the relevant ones because they lose sight of the goal of maximizing the total value.  And on the topic of competition you must assume your competitors will know everything about your price.

My recommendation is do not use unbundling as a strategy but as a worthwhile experimentation for a new product or established ones in the market. You experiment to answer the following questions:

  1. Who are the most price sensitive customers?
  2. Is this within your business strategy to target this segment?
  3. What is the sub-segmentation preference, that is what mix of features are attractive to different groups?
  4. What is the optimal set of versions you can offer that allows customers to self-select and feel good about it?
  5. What should be the pricing for these versions that maximizes your value and customers willingly pay the price?