Product versioning is the simplest and fairest mean to price discriminate. While it may sound unpalatable to the idealistic minds, price discrimination is actually better for customers and businesses. That is when done right. Else it becomes operationally expensive, ineffective in market or worse turns off customers. That is where even established businesses fail. I provide a very simple and testable recipe to do product versioning.
First I want to expand on the benefits of price discrimination. Price discrimination is charging different customers different prices based on their willingness to pay. It is fair when customers willingly pay their prices over marketers enforcing it. It is clearly good for businesses because it helps maximize profits. It is good for customers for many reasons
- It allows them to experience a product they otherwise would not be able to afford- like a no frill discount airline that makes overseas travel possible for many.
- It allows customers to pay for only what they value and not pay for extras.
- It gives them the choice – sometimes they may want to splurge, while most times sticking to basics.
- it gives them the flexibility and convenience – like express line at amusement parks.
When done right, for businesses, the clear benefit is profit maximization. There are also other significant benefits
- Understand customer segmentation, purchase occasions and behavior.
- Optimize capacity – be it manufacturing capacity of breakfast cereal brand or web scale capacity of a cloud service.
- Refine (pivot) current product offerings to better tune to customer needs.
- Find the right price points for the products without tying down to a single wrong price.
- Clear separation of customers – like Nordstrom and Nordstrom Rack.
- Surface customers who have even higher willingness to pay.
So it is better to offer multiple versions of your product even if it in its MVP (Minimum Viable Product) stage. This may sound contradictory to the concept of MVP, after all an MVP is meant to test the demand and discover product-market fit with limited resources. How can a startup afford to invest in multiple product versions when it has only limited resources and is lean by definition?
Offering multiple versions of the same product does not mean investing in yet another product line and doubling your development cost. Especially it is not recommended for a startup that is trying to validate its MVP in the chosen customer segment. That leads us to a real simple and effective recipe for Minimum Viable Versioning.
The underlying economic principle is – customer value perceptions are different and if they perceive a value difference (real or not) they will gravitate towards the version that they believe offers them the most value.
Think about that for a minute. This means you do not build three or four different products but make the customers think there are three or four products with different value offerings. That is you can build just one product and yet price discriminate if you can nudge your customers to believe there are multiple products.
Take for example the most quoted example of a printer price discrimination where IBM added a chip to slow down print speed. While you could do such a product line change that does entail manufacturing costs and operational complexities.
What if IBM didn’t really add a delay chip but simply changed the specs to say slower speed? A customer who values speed of printing is not going to be tempted by the lower priced “slower” version while the price sensitive customers are happy to buy the same.
Applying this recipe to the present day cloud services, you may offer a version that is limited in capacity but may not build any code to enforce that restriction. For example a 2GB capacity limit and 10GB capacity limit for two versions. Those who value more capacity will self select to higher priced larger capacity version and the price sensitive customers will stick to the lower capacity version.
Some of those who picked your 2GB limited version may end up using more than that. But so what? Most who believe they want more than 2GB self selected to your higher priced version and you gain better market adoption, better understanding of segment-version fit and better profit without changing the product one bit.
Remember the economic principle – it is not the real value difference as much as the perceived value difference. Value is in the minds of customers with their wallets out and ready to pay.
So go ahead and build one MVP. But offer three versions (Why three?) that CLEARLY and EXPLICITLY communicate to customers the value differences so they can self select. While measuring product market fit with MVP you now can measure price perception and segment-version fit. If you find exceptional demand for your “low-end” version, find a way to build it at lower cost so you get to keep more of the price as profit. Until then, they do not need to know it is the same product.