Tuesday, March 31, 2009

Value Proposition Versioning

Value Proposition Versioning basically means offering different versions of a value proposition for the customer to choose from. The objective is to charge each customer just as much as he or she is willing to pay for. A common example is books that are sold in hardback copies priced higher initially to customers who are impatient to get the book, while later released as paperback to lower-value customers that can more easily wait.

Versioning works for all kinds of goods and services, and it has become almost a standard in web based products and services even though the marginal costs to distribute a high-end version often is identical to the low-end version. The Freemium Business Model is basically a way of versioning where the free version is provided to create the lowest possible barrier of adoption with the objective to gain a large customer base, build loyalty and trust, and convert some of the customers to fee-based premium versions.

Pricing the different versions
Value is subjective and people attach different values to different value propositions so the challenge is to properly segment users and features such that customers who are able and willing to pay high prices do so. If the low-end versions are too attractive, it may attract some customers who would otherwise pay a premium price for a high-end version. To avoid this cannibalization the relative price difference or the relative value provided can be altered.

Identifying dimensions that are valued differently
The basis for versioning is to identify dimensions that are highly valued by some customers but of little importance to others. The goal is then to develop value propositions to sell to different market segments at different prices. Below is a list to be used to identify potential dimensions from which different versions of a value proposition can be developed. To identify what dimensions that are relevant, each of the different business model components and the potential markets need to be analyzed.

Dimensions to build different versions of a value proposition from
  • Annoyance
  • Capabilities
  • Comprehensiveness
  • Convenience
  • Delay
  • Delivery time
  • Experience
  • Exclusivity
  • Features
  • Flexibility
  • Functions
  • Performance
  • Quality
  • Rights
  • Service
  • Speed of operation
  • Support
  • User interface
How many versions?
This is a highly context dependent question that comes down to what makes good business sense. Too few versions and the customer have limited choice to pay what he or she is willing to pay for. Too many versions and the customer might be confused and the costs for maintaining and offering different value propositions might be too high.

A common approach in everything from drinks at McDonalds to million dollar consultancy projects, is to have at least three versions; one low-end version to advertise and get attention, one very high-end version and one "standard" offer. The rationale for having the very high-end version is to enhance customers’ perceptions of lower-priced products and make the standard version look more attractive in comparison to the very high-end version. One very interesting approach to versioning is The Trent Reznor case study that resulted in $1.6 Million in a week for music offered in many different versions, with one of them being free.

Further reading

Further external reading
Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal R. Varian (Chapter 3 about versioning for information goods)

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