How to increase revenue by using versioning strategy to design a software product line
by Rahul Malik : Linkedin
When a software company offers only one version of the product, then there is always a deadweight loss which will be higher than when it offers more versions of the product.
One key characteristic of software products is that they have high cost of production and low cost of reproduction. Different customers may have different value for a particular software product so differential pricing becomes very important. A key aspect of pricing is to use value-based pricing : sell your product at different prices to different customers based on their willingness to pay (WTP).
To understand WTP and Demand, read : How to estimate Customer Demand and Willingness to Pay
Frequently, firms cannot directly identify the different segments. Value-based pricing leads to differential pricing, since customers have different willingness to pay for information. There are two approaches to value based pricing : personalised pricing and group pricing. Personalised pricing requires knowledge about individual customers. The intelligence about customers comes directly from them as they communicate their needs and indicate the products of interest to them. However, we can still get valuable customer data without customer active involvement or even without expensive marketing data.
We can learn a great deal about customers by offering them a menu of products and seeing which one they choose. For example, we can offer a product line with one product targeted for amateur users and one product targeted for professional users. This strategy is called versioning which means offering your product in different versions for different market segments and let users choose the version of the product most appropriate for them.
Self-Selection technique means to design versions to accentuate the needs of different groups of customers. Emphasising customer differences allows you to extract more of the value you have created as each customer selects the version that best meets his or her needs.
Designing a Product Line
The key is to identify dimensions of your product that are highly valued by some customers yet of little importance to other customers. Now you need to offer versions that are designed to differ in ways to appeal selectively to each type of customer. The fact that different types of customers value these dimensions differently is what provides the basis for differential pricing. Some of these dimensions are delay, interface, convenience, operation speed, format, features, support etc. By creating low end and high end versions of products, you can sell the same product to customers at different prices. If high priced product attracts some low end customers then you get more revenue from them than if they had bought low end product so you should make your high end product as attractive as possible. In order to avoid cannibalization, you should reduce the price of the high end version to make it more attractive and reduce the quality of the low end product.
Revenues for a multi version product will always be higher than a single version product if priced in the right way.
Now the question is how many product versions to be offered to customers. One version is too few for the reason that there are different segment of customers in the market. Offering too many versions will have supply side costs to maintaining it and also it can confuse customers in deciding which version to choose. One should analyze the market and also the product. You have to see whether the market naturally subdivides into different category of customers whose behaviours are sufficiently different to select different quality of products. You should also identify the product’s key attributes in order to segment the market according to one of more of these attributes as described above. A common tactic is to design a high end product first and then degrade it on some attributes to reach a low end version. The low end version works to advertise for the high end version. Also it is easy to meet the competition if they come up with a high end product at lower prices so you can respond by repositioning one version and still protect your revenues.
Some of the examples of software product versioning done right are Microsoft 365 and Atlassian Jira.
Give it a try and let me know how it works for you.
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How to use versioning strategy to design a software product line
