Choosing When Not To Version Your Product

Until now I have been extolling  the virtues of versioining – finding the needs of different segments and targeting them with versions at prices they are willing to pay. I have written about

• The costs of versioning
• Ideal versioning
• Pricing the high and low versions
• Categorizing versions and
• Versioning tactics

Eclipsing all these  topics is the overarching topic of when not to version, even when all (marketing) factors are in its favor.

Despite its advantages versioning should be avoided when presence of versions will dilute a business’ unique competitive advantage and its brand message. Versioning has to align with the vision and strategy and not just meet the short-term profitability goals.

Here is an illustration that comes from the 2008 book, Cadbury’s Purple Reign by John Bradley. At a pivotal moment in its business history, Cadbury’s choose to kill all six of its inferior versions even though they were generating considerable revenue and all it had to replace them was Cocoa Essence that hardly registered its presence in the market.

There was a market for these “adulterated versions” that were priced attractively (because most of the ingredients are fillers). The versions had been in place for valid reasons and were targeted at right customer segments. All  other players in the market were doing it. Cadbury’s was making profitable revenue from these product lines and shutting these down would hand-over their market share to their competitors.

On the other hand, Cocoa Essence had to be priced much higher than adulterated versions (because of the large percentage of pure cocoa in it) and at that time there were not many customers who were willing to pay high prices for Cocoa, pure or not.

John Bradley writes,

They did not have to do it; it was not against the law to add wholesome foodstuffs to raw cocoa, as long as they were declared on the label.

Cadbury could easily have kept advertising Cocoa Essence as ‘Absolutely Pure, therefore Best’ while still promoting the cheaper cocoas to the lower end of the market.

Yet, Cadbury’s chose to go with just the Cocoa Essence, shutting down other versions, because:

[Continuing to support the previous versions] would have missed out on the huge benefit that was to come from the move: the building of the Cadbury brand reputation and that it would define how consumers should view the cocoa category

By giving up on adulterated Cocoa versions Cadbury’s stood to claim the sole ownership of the Cocoa category with a strong message that could not be easily assailed by the competition. The conversation shifted from, “we have the purest cocoa and also the not so pure versions”,  to, “we have only the purest cocoa – Absolutely pure, therefore best!”

That’s competitive advantage from deliberate versioning. Every version you add must fit with your overarching brand message and competitive strengths. Conversely, versions that weaken your brand message must be pruned even if they are profitable.

A contemporary example is versioning SaaS offerings based on availability and security. It is true that not all customers  want financial grade availability and security and not all want to pay the price premium for the highest grade security. Yet, does it make sense for your  business to provide two versions, a super-security version at premium price and a lower priced version with lower grade security and availability characteristics?

Versioning has to be a strategic decision  and strategy is about making tough choices. Versioning should align with your vision and long term goals,  not just short term profitability.

What is your versioning strategy?

Managing Multiple Versions Through Categorization

This is a screen-shot of multi-version pricing of Atlassian’s Jira, the agile project management tool. I am using this only for illustrative purposes:

There are about 4 distinct versions, a bundling dimension and 20 different possible prices. Segmentation and targeting each segment with its own version is great but it imposes a high cost on the customers – Customers incur considerable cognitive cost in evaluating multiple versions and picking the right version. (See 4 costs of versioning and Optimal versioning in SaaS.) These costs continue to linger in the minds of customers and lead  them to treat the buying experience as part of the product experience.

One way to reduce the cognitive cost to customers, even in the presence of multiple versions, is creating distinct categories. I her book The Art of Choosing, Ms. Sheena Iyengar, writes about how her research on reducing choice complexity to customers:

Categorization helps by providing an alternative to fewer versions by reducing the effects of “choice overload.” The mere presence of categories can assist consumers in visually parsing choice sets into more groupings, enhancing their perceptions of the variety among options. In other words, categorization could transform “too much choice” into just the right amount by better enabling consumers to obtain value from large versions set.

For Jira, I recommend three changes to their versioning  (without changes to software):

1. Hosted Vs. On-Site: There are two major categorizations – hosted and on-site. Instead of listing them together in one price list they should start with this choice  question to the customer and send them to two different pages (or tabs) with their own versions. This is similar to what Mozy does with  their Home vs. Pro versions. In case of Jira, while there is value on letting customers compare the pricing for hosted vs. on-site versions, that is offset by choice overload. Segregating the two categories does not mean they are not available for comparison if the customer wants to do so.
2. Bundling: Make the bundling explicit and stand out. It is not clear from this page that they also offer GreenHopper at its own price. It is worth testing with their customers their preference for bundled offering over standalone versions. Bundled pricing should also signal the savings to the customers which is not clear from this page.
3. More Granular Number of Users: Ideally, it would help to have three levels Small, Medium and Enterprise each with preset number of users.  Another option  is offer fewer levels based on number of users. I strongly recommend removing their 10 user version, it is priced very low compared to 25 users version and does not add to their bottom line. The 10 user $10 version is too tempting for those with higher willingness to pay.

[tweetmeme source=”pricingright”]Versioning is the right strategy for profit maximization but the costs it imposes on the marketer and the customers must be actively managed.

The Science of Optimal Versioning in SaaS

[tweetmeme source=”pricingright”] There is nothing more profitable to a marketer than the ability to price the same product at each customer’s willingness to pay (and get away with it).  The next best thing is to define one version for each customer with the  right value-price combination. But there are costs to versioning, I wrote about the four costs:

1. Product Costs- Cost to create the different versions
2. Sales and Marketing Costs
3. Menu Costs – Maintaining all those SKUs
4. Customer Costs – Incurred by your customer. This is what it takes for your customers to understand your multiple versions

If your offering is SaaS based and your go-to-marketing strategy does not involve an expensive sales force, it is arguable that your first three costs are close to $0. It is very tempting to use the magic of software configuration to define and offer one version per customer. When the customer comes to your website to signup, if you can show them just the one version that is right for them and nothing else, then you have achieved the marketing nirvana – pricing at each customer’s willingness to pay. Since this ideal situation is not possible,  you have to present them all your versions and let the customers self select.

Product costs, Sales and marketing costs and Menu costs are incurred by you, so you can control them and reduce them to $0. But  the customer incurs the cost to select your versions.  This cost is a double whammy:

1. Presented with multiple versions, it will not be obvious to customers which is the right version for them. Your customers need to spend time thinking and evaluating these options and make a choice. That is a significant tax on them.
2. While we should expect that once the customer picks a version and signs up,  this costs becomes irrelevant (because it is now sunk cost), only it does not.  Research shows these costs are sticky – customers remember and associate these costs with overall product experience.

So not only it is tiring for your customers to sign-up, the feeling lingers through out their lifetime (with you). Even though your product experience may be exceptional, its value to customers is reduced by the one-off buying experience. If the customers have to go through this process at each renewal instance, they are never allowed to forget the costs.

Sheena Iyengar, author of the recent book, The Art of Choosing, and a prominent researcher in consumer behavior writes in her 2000 paper,

Customers are more likely to make a purchase when offered a limited array of options than a wide range of choices. Subsequent customer satisfaction is higher if the selection choice set is small.

In addition, customers’ willingness to pay was higher when presented with fewer options.

So what should be your versioning strategy for your SaaS offering?

1. If you can only present the same pricing page to all your customers then practice Goldilocks pricing. This is three versions, a low, medium and a high priced version.
2. If you have a way to not show all versions to all customers – for example, enterprise version to SME customer – then offer three versions for each segment.

What is your versioning strategy?

Pricing Your Multi-Version Product

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*:

1. Different customers must value the various versions differently. This means customers needs and the value they get by hiring a version must be different.
2. 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.

Where To Allocate Your Promotion Dollars?

You have $X dollars to be used as promotional discount to increase your product uptake, i.e., maximize number of subscribers rather than maximize profit. You have two versions of your product, Silver priced at $19 and  Gold priced  at $49. How will you allocate the promotional dollars to drive most uptake? Will you discount your Silver version, Gold version or split between both?

Sidebar: I understand I have  consistently advocated about profit maximization and not using price to drive volume. But let us assume you have a very good reason to do that and it is not permanent price drop but a controlled price promotion. May be you have a freemium model with a Bronze version at $0 and want to move most free customers to paying customers.

Consumer behavior research says, based on Prospect Theory (Kahneman and Tversky 1979), you are better off spending the promotional budget on discounting the lower priced version than the higher priced version. While rational economics states (assumed?)  a $5 discount is the same regardless of the price, consumers look at $5 with reference to the base price. Consumers value $5 discount on $19 version more than then do the discount on the $49 version.  So  discounting your silver version maximizes new customers.

However there is an exception – when customers’ reference price (the price they expect to pay for similar products regardless of their economic value) is lower than the price you charge. Here the effect is reversed so you should discount the Gold version. If you are interested in understanding this case please write to me.

In either case, you are better off allocating the promotional budget to just one version and not dividing between two versions.

4 Costs of Versioning

[tweetmeme source="pricingright"]Versioning is about delivering multiple product (service) versions at different price points for targeting different segments. Since not all customers are alike and their needs and willingness to pay are different, versioning helps to reach a larger customer base. It is the right step in the direction of profit maximization. Pigou said, “if one price is good, two are better”, and I have echoed the same in many of my posts on the need for versioning. But how far can we take this?

1. Are 3 versions better than 2?
2. Are 4 better than 3?
3. How about infinite versions  or one version per customer for each purchase occasion? (the case of different price per customer for the same version is First degree price discrimination and is impossible in practice)

While versioning is the right step in the direction of profit maximization it is not without costs.

I classify the costs into four main types:

1. Product Costs: Is your product amenable to versioning? What is the incremental cost of creating and packaging each additional version?  Can the new versions be produced on the same infrastructure? If not what are the capital needs? If you are a bootstrapped tech startup or a cash strapped small business (like Crispy Green) it is almost impossible to find the resources to invest in versions.
2. Sales and Marketing Costs: It is not enough that your product is versionable at low costs – you need to invest in building the brand, marketing, training the sales team (if you have one) and the channel partners. What is the sales learning curve? How fast and easily can you train your sales team on the different versions, their target market and price? If your sales team has high churn then you will incur these costs over and over.
3. Menu Costs: These are the costs associated with creating the SKUs, price lists and operationalizing the pricing strategy. Arguably these costs are lower for information goods (software and information services) and use of pricing software will help those selling physical products. Nevertheless the costs exist in creating, maintaining and updating the many different price lists.
4. Customer Costs: This is the cost incurred by your customers in understanding all your many different versions to make a choice. These are also the costs you have least control over. The costs may not be incurred in the form of dollars but there are definitely cognitive costs and opportunity cost to the customer. Worse, the effects of these costs do not end after version selection. Theoretically, after the customer spends the time to make a selection those costs should not matter to their continued use of products (because those costs are in the past and hence are sunk). But research published in the Journal of Management Information Systems Winter 2007-08, show that cognitive costs are sticky – customers remember and associate these costs with overall product experience.

All these costs mean there are real limitations to the number of versions that can be developed and marketed. Product Costs, Sales & Marketing Costs, and Menu Costs mean, even if the versions can find new customers the incremental profits from them must justify the additional costs incurred. Is there adequate ROI on these additional investments from the incremental profits and how does this ROI compare to other opportunities available?

If resources are not a issues and breaking even each month is not a problem you struggle with everyday (for example P&G) you can afford to make those investments. But what about cognitive costs?

Researchers, Iyengar and Lepper say in their work in Journal of Personality and Social Psychology (2000)

Customers are more likely to make a purchase when offered a limited array of options than a wide range of choices. Subsequent customer satisfaction is higher if the selection choice set is small.

If a marketer can achieve clear separation of the segments and target them with exclusive versions, they can reduce Customer costs.

The net is there are limitations to versioning strategy and the number of versions that can be offered to customers.

What is the ideal versioning strategy?

How do you know when to version?

What is the right number of versions that will delight your customer?

Should you create vertical or horizontal product line versions?

How can you profitably operationalize your versioning strategy?

I will be happy to talk to you.