4: Dynamic Tension in Versioning
The demand for a product is driven primarily by the need or desire to have the benefits it delivers to the consumer. But when there are multiple competing needs, multiple options to meet each need, and limited resources, demand is influenced by factors that include price, availability, additional features, awareness, quality, fashion, and the like. In competitive marketplaces, suppliers are constantly attempting to improve their appeal to the customer by adjusting the factors that influence demand, and as such the market is in constant fluctuation.
(EN: This is from the supplier's perspective. Customer needs have not changed much since the species evolved, but the products that mean to serve those needs and the marketing effort to influence the perception and prioritization of needs are relentless. Innovation provides more efficient and effective ways of meeting our needs, and competition means each seller is attempting to convince us his solution is best. It is precisely because suppliers track demand for a product that they often miss)
The author promotes the idea "product differentiation curves," which reflect specific points along the demand curve where a specific quantity will be demanded at a specific price point - which represent the premium (high price, high quality, low volume), economy (low price/quality and high volume), and standard versions of a product.
(EN: This seems a bit flawed to me. First, it's not a curve but points on the existing curve. Second, it presumes the curve is not affected by cannibalization - that the customer who would pay a high price for quality would also take a lower quality product if it were available. So it's an interesting notion, but every supplier's offering shifts the supply curve, and customers who accept it shift the demand curve.)
Three Versions
The author speaks of "goldilocks pricing" - giving them three versions and hoping the middle one is "just right" for most people. He suggests that three versions is a good number to start with, but that segmentation in the market may necessitate more than three.
It's suggested that failure to version is "leaving money on the table." Customers will accept or reject your product and, having no other versions, will consider competing firms' products. So unless your firm serves a niche market with a very narrow range of price/quality tolerance, it's best to have multiple versions to capture more of the general market.
(EN: There is some danger in this. Some former luxury brands have attempted to reach down to the low-end and lost their brand esteem. Some economy brands have attempted to appeal to the high-end customer and failed miserably because their brand was associated with discount merchandise. In some markets, it is better to specialize, or to use "fighting brands" rather than attempting to take on too broad an audience with a single brand.)
It is also a way to promote longevity of relationships. Generally, people get richer as they get older and their tastes evolve to more lavish and expensive things - and if you lack a product to which they can upgrade, then they will choose a competitor when they want a better product.
He finally mentions that different versions enables experimentation with limited risk. If there is only one product and the company wants to see the effect on demand by raising or lowering the price, it risks its entire customer base. If products are versioned, this notion can be tested with one segment at a time.
It's also suggested that this approach makes product design more straightforward. It is difficult to imagine what most customers want - but rather easy to design a bare-bones product and one that is loaded with every conceivable feature. It is easier to define the extremes, and then work toward the middle.
It's briefly mentioned that the "base of the pyramid" has become a popular place to be in recent days. There are always more poor than rich customers, and during the past few decades of economic hardship even the wealthy customers have been more reserved in their spending. However, this also means that the bottom level of the market is a very crowded competitive space.
Versioning Strategies
The author begins with a few examples of versioning:
- Consider the hotel industry - there are fairly standard expectations of what a customer can expect of a one-star hotel versus a five-star one in terms of the amenities and services offered on the property.
- Software often has "light" and "deluxe" versions that have more or fewer capabilities than the standard version, and even present this in tables.
- Airlines offer additional services such as an airport lounge, priority boarding, free alcohol, and other special perks for frequent fliers and/or first-class customers.
The last example shows that even when the product itself cannot be modified (all passengers are conveyed from one airport to another) ancillary services can be added to create additional value that will substantiate a higher price for certain customers. Even the economy version of a product must deliver the core value, but added value (or decreased inconvenience) can be added in a myriad of ways.
There is also a brief passage about introducing new versions to the market so that customers are interested in an upscale version (or are not offended by a downscale one). Simply labeling or naming the new version "economy" or "deluxe" communicates the price/value proposition that differentiates the version from the previous "standard" product. In other instances, a brand extension or a completely different brand name may be leveraged to further distance the new version from current ones. However, this does not mean that launching a new line is that successful - if it is meant to attract new customers rather than cannibalize current ones, there must be a planned campaign to attract new customers to it, particularly those who are not buyers of the existing line.
Customer Segmentation
The author reviews some basics about segmentation: it is about recognizing that not all customers are the same, and recognizing that there are certain characteristics that define a person as part of a group that has different needs and values to other groups. Thus far, the author has discussed segmentation by income or wealth (poorer people buy economy products, wealthier ones buy deluxe products), but markets are also segmented by gender, age, lifestyle, culture, and other factors.
The goal of segmentation is to modify the standard offering to address the particular interests of a group - on the principle that not all people want the same thing in a product. By defining a segment and customizing an offering, a firm can appeal to customers who do not want their standard product, or they may increase profit from existing customers who would pay more for (or buy more of) a customized version.
Segments have three basic criteria: First, they are easily identified as a group. Second, the members of the segment are relatively homogeneous in terms of their preferences. And third, one must be able to isolate the segment for marketing communication and service without alienating or disenfranchising existing segments. If the segment is defined and served correctly, it will represent additional revenue for the firm without any detriment to the revenue it currently receives.
There are instances in which a company simply changes markets - intentionally or unintentionally - when the changes they have made to suit one segment cause their existing customers to leave the brand.
Pricing Strategies
The author merely describes and compares two (of many) pricing strategies: skimming versus penetration. Skimming involves charging a high price to capture the most customers are willing to pay before lowering the price to make it affordable to more customers. Penetration involves pricing the product very low to get as many customers to adopt it as possible, then increasing the price to maximize profit margin even at the loss of some of the customers.
Both of these approaches have their drawbacks, as customers are very sensitive to price changing. The customers who paid a high price for a product feel cheated when the price falls afterward, and the customers who paid a low price feel they have been baited when the price rises beyond their affordability.
Balancing Demands
When a company segments its market, there invariably arises the need to choose among segments because serving one means failing to serve (or even harming the interests of) another. For this, he turns to Pareto, whose core principle is that customers are not all created equal and, as a general estimate, most companies will find that 80% of their profits are attributable to 20% of their customers - and the firm must naturally prioritize the needs of those customers.
Pareto also had a theory of optimal distribution, in which the Pareto-optimal distribution of goods creates the least disadvantage to multiple competing parties. This does not mean that everyone is happy with the result, just that it does the least amount of harm to everyone. The notion of fairness, in terms of getting a desired amount of goods at a desired price, is entirely subjective. Each individual argues for his own welfare, and even a third-party tends to side with one of the individuals involved.
Particularly because goods are scarce, not everyone will get as much as they want or need - suppliers direct their supplies to where they earn the greatest profit. They earn the greatest profit because customers pay the most for them. And customers pay the most because this reflects the degree to which they prioritize their needs. In essence, people will exaggerate their needs - but when they must bear the cost of serving their needs, their actions as consumers speak louder than their words.