Imagine you could charge different prices based on your customers' willingness to pay. In this scenario, you wouldn’t need to choose which target audience to focus on; instead, you could cater to multiple groups by aligning your prices with their respective willingness to pay. This approach allows you to combine the best of both worlds- growth and profitability.
Embrace versioning
To maximize your pricing' strategy, differentiation is key. Price differentiation means setting different prices based on variations in willingness to pay across customer segments. The most straightforward way to differentiate is by versioning your product offering.
Versioning involves creating multiple versions of a product to appeal to different customer segments. The concept is simple: design product variations that cater to varying preferences and budgets. For example: When booking a flight, customers can choose options like extra legroom. Though the base product (a seat on the plane) remains the same, customers can select versions with added features at different price points. For instance, a segment within the economy class may pay more for extra legroom without opting for the higher-priced business class. This approach extracts more value from customers willing to pay for specific features while still serving budget-conscious travelers with a lower-cost option. Despite its potential, versioning is underutilized and often seen only among innovative companies.
Apple: Master of Good-Better-Best Pricing
Apple has perfected the art of appealing to both premium and mass-market consumers through versioning. Rather than offering discounts to attract customers with lower willingness to pay, Apple strips away certain features to create a less expensive alternative. Conversely, Apple enhances its products with additional features to attract high-spending customers. This method, known as “good-better-best” pricing, provides consumers with clear choices while maximizing revenue across segments.
Example: MacBook. A quick look at Apple’s website reveals three versions of the 13-inch MacBook. While the base design remains consistent, each version differs in specifications such as processor speed, memory, and display technology:
- Good: The most basic version with lower specifications.
- Better: A mid-tier option with improved specs.
- Best: A high-end version with top-of-the-line features.
By using this tiered pricing approach, Apple captures more value from customers willing to pay for enhanced features while maintaining accessibility for more budget-conscious buyers.
Combining growth and profitability
By leveraging price differentiation and versioning, businesses can effectively balance growth and profitability. Offering multiple product versions ensures you can cater to a wide range of customer preferences without sacrificing revenue potential. Smart pricing isn’t about choosing one target group—it’s about serving them all at their optimal price points. Whether through added features, stripped-down alternatives, or entirely new versions, a well-executed versioning strategy can unlock significant opportunities for revenue growth.
‘Good-better-best’-pricing Apple MacBook
Apple demonstrates how versioning—offering multiple product variants—can optimize profits while expanding market share. By pricing each version for maximum profitability and strategically providing cheaper and more expensive options, Apple effectively appeals to diverse customer segments. This approach ensures that all versions maintain healthy profit margins since the costs of producing the variants typically align with their respective price points.
The power of versioning
Versioning is a significant driver of success for many companies, including Microsoft, Netflix, Uber, and Spotify. Even car manufacturers rely on a form of versioning by allowing customers to configure vehicles with different options. This approach creates numerous price points for each car model, maximizing revenue without compromising margins.
Why versioning works
- Broader market appeal: By offering multiple versions, companies can target various customer segments simultaneously, optimizing growth and profitability.
- Shifting buyer focus: Versioning changes the conversation from "Should I buy this?" to "Which one should I buy?".
- Creating reference points (anchoring): A higher-priced variant can make the cheapest option seem more affordable in comparison. For example, the base MacBook looks more appealing when placed next to the premium models.
How to implement versioning in your business
To successfully apply versioning, start with precise segmentation based on customer willingness to pay for specific product features. Collaborate with your R&D team early to gather insights on potential customer preferences. Design product options that reflect different levels of willingness to pay before finalizing your product. Avoid the common mistake of designing a product first and determining its price later.
Steps to get started
- Identify key features: Understand which attributes add value for different customer segments.
- Develop clear versions: Create distinct versions of your product, ensuring clear differentiation in features and pricing.
- Communicate value: Highlight the benefits of each version to guide customers toward the option that best suits their needs and budget.
Conclusion
Versioning offers a win-win: businesses can capture a larger share of the market while ensuring profitability across product tiers. By focusing on customer willingness to pay and integrating these insights into product design and pricing, companies can unlock significant opportunities for revenue growth.