This is “Versioning and Goldilocks Pricing”, section 4.2 from the book Creating Services and Products (v. 1.0). For details on it (including licensing), click here.
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4.2 Versioning and Goldilocks Pricing
The idea behind versioning is to engage in differential pricing by offering different types or editions of a product.Shapiro and Varian (1998). Ideally, the different versions should be perceived as having different levels of quality. The number of versions can also be related to the number of distinct market segments. In many instances, it is difficult to identify the optimum number of market segments, and it is also difficult to develop products for each market segment. Goldilocks pricing, and therefore versioning, is a rule of thumb that suggests that you should start out with three price levels.Shapiro and Varian (1998). The idea behind Goldilocks pricing is that offering 1 product is too few, 10 products is too many, and offering 3 differentiated products is just the right amount. A case was made in the chapter discussing Joan’s jewelry boxes for having more than one product because of the increased potential for generating revenue for Joan.
If a company does not introduce multiple versions of a product, they will be leaving money on the table. If a company does not have a high-end product for consumers who are affluent or price-insensitive, then they will not have extracted the consumer’s surplus from affluent customers or customers who simply do not care how much the product costs, they just want it. On the other hand, a business will also leave money on the table if they do not have a lower-end product for price-sensitive individuals because price-sensitive individuals will not purchase products that are above their willingness-to-pay. Price-sensitive customers, such as students, also present another opportunity; they can be the foundation for establishing a long-lasting relationship when they have more discretionary income.
There is one additional reason for offering more than one product to consumers. Introducing multiple versions of a product permits a company to experiment and observe consumer’s economic behavior in action. The company can monitor purchase behavior and determine which features and products consumers deem most desirable. Such experimentation is actually the most effective activity for conducting research and engaging in new product development.