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?