Session 5 Flashcards
Versioning
The provision of two different versions/quality levels of a product aimed at different consumer segments.
Versioning is a variant of price discrimination also known as
quality discrimination
Aim of versioning
Make consumers self-select to a product, depending on their willingness to pay (WTP)
Examples: ○ Business vs. Economy Flights ○ Cinema seats ○ Different versions of spotify accounts ○ Lite vs. pro versions
How can firms actively segment their consumer base?
- Different price sensitivity
- Network effects
- Sharing / Licensing
Different price sensitivity
● When different consumers react differently to price changes, price changes for different groups can be beneficial (e.g., business users will be less price-sensitive compared to private users).
● Example: dropbox and referral marketing
Network effects
● When the utility of a good/service depends on how many other people are using the good/service, then the price can vary on this basis (e.g., setting low introductory prices to attract consumers that benefit from each other).
Sharing / Licensing
● E.g., access to research journals for university libraries and high pricing single article prices for industry readers.
What you should do as a product developer? (versioning)
● Design your product in a way that it can be easily versioned (obvious).
● First, develop the highest possible quality, then take out features to create lower quality versions.
● Number of versions
○ Offer as many versions as there are differentiable consumer segments.
○ Offer at least three versions → “Extremeness aversion”
Bundling
Bundling is coined as the joint offer of products that are related to each other to sell them as one unit.
Examples: • Video game • Travels • Telcom • Insurance
Bundling can … consumer heterogeneity
decrease
Why Bundle?
- Reduce dispersion
- Skim off consumer rent
- Products work together
- Introduction new product
- Zero incremental price
- Increase switching cost
Reduce dispersion?
● In a large bundle, high and low valuations for individual goods tend to average out so a bundle has more consumers with “moderate” valuations
● The seller can better predict consumer valuations for the bundle and then set a price that extracts more value
Skim off consumer rent example
Offering word/excel/pp as a whole in ‘Office’
Rule of thumb: bundling
Bundling in a two-product case is beneficial when a
consumer’s valuation for the two products is negatively correlated
Difference between bundling and versioning:
○ Versioning: Try to find groups with different WTPs and set profit maximising version prices accordingly
○ Bundling: try to find a bundle for which the total consumer valuation by all consumers is as large as possible - despite drastic differences in the valuation of individual components
Different types of bundling?
- Pure
- Mixed
- Pure components
- Mixed components
Pure Bundling
Products are exclusively offered as a bundle
Mixed Bundling
Consumers can choose between all single components or the bundle
Mixed components
Consumers can choose between bundle and a limited number of single components
Not all components are offered alone!
Pure components
No bundling
How many versions should you make when versioning?
As many versions as there are differentiable consumer segments.
Offer at least three versions → “Extremeness aversion”
