Price Versioning: A Powerful Competitive Tool

Normally, price segmenation follows one basic rule: price high and then offer discounts. But price versioning is a powerful exception to this rule.

Versioning means you develop a lowest-cost base price model that captures your most price sensitive customers while ensuring tolerable margins. The twist is you then offer better-featured versions of your product at higher prices (and margins) for less price sensitive customers.

Japanese and Korean car manufacturers do this all the time. Even today they offer base models with no air conditioning or radios. And even that can have a twist! High-end carmakers like Ferrari, BMW, and Porsche often charge more for special edition "lightweight" cars without AC or radios.

Versioning makes proper pricing an easy undertaking.

First, since you're offering different prices to different people, your customers will self-select their own category (and often switch categories). Thus it's simple to segment your market.

Next, develop a variable pricing structure that captures the lowest "acceptable" price sensitive customer while offering higher-end offerings for less price sensitive customers. You'll soon find (as any car dealer knows) that even the most price sensitive customer will often upgrade or buy accessories/options.

Two quick examples:

• You can purchase a new brand-name, large-screen TV on eBay for less than the cost for most resellers. An eBay director told me online stores were selling TVs at their cost in the hopes of selling more profitable accessories, like stands or wall mounts. In other words, they're using price versioning. 
• I know of a bike store in the Midwest that only builds custom bicycles. They price every component and the labor involved the same, regardless of the bike being built. Yet few, if any, of their customers are price sensitive -- buyers of "custom" anything seldom are. This is where versioning can help. I estimated that if they charged a little more for higher-end parts (and thus greater profit margins) they could put an additional $1,000 in their pockets. That's a lot for a bike shop owner.

Action: Even Wal-Mart uses price versioning, so how can you put this powerful tool to work in your business?