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					  CHAPTER 3

 Versioning Information
(Product Differentiation)
Chapter Overview

• How to design a “product line”
  – Capturing greatest profit
• Profits
  – Depends on total value created and fraction
    extracted
  – Two principles
Chapter Overview

• Principle One
  – Offer versions tailored to the needs of
    different customers
• Principle Two
  – Design these versions to accentuate the
    needs of different groups of customers
  – Self-selection
Designing Your Product Line

• Identify dimensions that induce
     self-selection.
• Dimension(s) selected may be
     highly valued by some customers
     unimportant to others.
• Offer notably different versions designed
     to appeal selectively to each type of
     customer.
Dimensions: Delay

• Strategy
  – Control information/product release time

• Example
  – Information
    • Streaming stock quotes
    • 20 minute delay
  – Service
    • Fed Ex next day by 10 a.m.
    • Next day
Dimensions: User Interface

• Strategy
  – Build 2+ access modes
  – Diversify appeal across user classes
• Example: Database search engine
  – Power User: professional researcher,
    advanced user
    • Interface- multiple refinement options
  – Casual User: beginner, occasional user
    • Interface- simple search textbox, “how to” links
Dimensions: Convenience

• Strategy
  – Restrict/enhance access to product

• Example: Retailing
  – Enhancement: on-line shopping
  – Restriction: availability only at bricks and
    mortar location to stimulate foot traffic
Dimensions: Quality of Product

• Strategy:
  – Variation in quality of product/service


• Example: Booksellers
  – Highest Quality:   newest release
  – Good Quality:      selection of current titles
  – Value Quality:     discounted/used books
Dimensions: Speed of Operation

• Strategy
  – Develop varying capabilities in
    product/service


• Example: Internet Access Providers
  – Broadband
  – Enhanced Dial-up
  – Dial-up Modem
Dimensions: Format

• Strategy
  – Limit accessibility, duplicate, or print
    information
• Example: Professional Journals
  – Abstracts of articles are available
  – Require subscription
  – Require purchase for full version
Dimensions: Capability

• Strategy
  – Create discernible differences to target
    market segments
• Example: Voice Recognition Software
  – 20,000 word vocabulary               $ 79
  – 50,000 word vocabulary               $ 595
  – Legal vocabulary                     $1,195
  – Medical vocabulary                   $6,000
  – Orthopedic medical vocabulary        $8,000
Dimensions: Features and Functions

• Strategy
  – Add attractive features to basic product
• Example: Intuit Quicken
  – Basic version
    • Electronic checkbook
  – Deluxe version
    • Investment Module
    • Financial Calculators
    • Asset Management
Dimensions: Comprehensiveness

• Strategy
  – Offer varying detail levels


• Example
  – On-line Consulting Industry
     • Fees are structured on level of detail/expertise
Dimensions: Annoyance

• Strategy
  – Distribute free limited version with special
    screens
  – Encourage full version registration
• Example
  – ZoneAlarm
  – Spybot
Dimensions: Support

• Strategy
  – Offer technical support as pricing strategy

• Example: Security Software Vendors
  – Basic version offers known virus protection
  – Additional subscription fee offers automatic
    updates and technical support
Pricing and Quality

• Adjusting Pricing & Quality
  – Avoid making low-end product too attractive
  – Reduce price of high-end product
  – Reduce quality of low-end product
Pricing and Quality

• Goldilock Pricing
  – Use 3 versions of product
     • Value
     • Middle
     • Deluxe
  – Extremeness Aversion
  – Middle version decision
     • Importance of offering product at the level
Pricing and Quality

• Promotional Pricing
  – Different forms
    • Sales
    • Coupons
    • Rebates
  – Some inconvenience for users
  – Valuable only if it segments the market
Pitfalls

• Degrading products serves low-
  willingness-to-pay
• Cheaper products allow more customer
  choice
• Low-end product sales reveal value
On-line or Off-line

•   On-line info available off-line
•   Off-line info easier to read
•   Sell off-line while on-line is free
•   National Academy of Science Press
Bundling

• Definition:
  – A special form of versioning in which two or
    more distinct products are offered as a
    package at a single price.
• Example: Microsoft Office
  – Word Processor
  – Spreadsheet
  – Database
  – Presentation Tool
Bundling

• Tying
  – Individual products are offered only in the
    package
• Bundling
  – Individual products are offered in package
    and individually
  – Price of the bundle is less than the sum of the
    component prices
     • Two components = $70/each
     • Bundle = $100
Bundling

• Determine whether or not to offer a
  targeted discount
  – On-line Wall Street Journal
     • Offers a discount to subscribers of the paper
       version
• Dispersion in customer value
  – Reduces dispersion in customers’ willingness
    to pay
  – Significantly increase the value extracted from
    customers
Bundling

              Willingness to Pay
                    Word
                                    Spreadsheet
                  Processor

      Mark            $120                $100


      Noah            $100                $120

     If price @ $120 each only buy one product = $240
      If price @ $100 each buy both products = $400
Bundling

• Other reasons for bundling
  – Option value
    • Consumer may find Microsoft Office an attractive
      purchase
    • Consumer may use other programs in future
    • Use bundling to introduce new products to
      consumers
Bundling

• Information Bundles
  – Magazines are bundles of articles
  – Subscriptions are bundles of magazines


• Bundling will reduce the dispersion in
  willingness to pay, thereby reducing
  revenue.
Bundling

• Customized Bundles
  – Pop music sold on CDs
  – Create your own CD
  – Personalized newspapers
  – Customized textbooks
    • Mass customization of information
  – Quantity discounts can play same role as
    bundling
Bundling

• Lesson:
  – Bundling makes sense if it reduces variation
    in willingness to pay.
  – Combining complimentary goods increases
    revenue if it decreases the variation across
    customers in their willingness to pay.
PREMIER   DELUXE   BASIC
Additional Software Offered




  STATE   TurboTax for the   It’s Deductible
            Web 1040EZ
Product Line Comparison

                 Feature                    Basic   Deluxe   Premier
Free Electronic Filing (after rebate)

Step-by-step guide; checks for mistakes

Imports IRS Forms and data from
Quicken, Microsoft money
Includes free download of 1 state product

Year to year deduction comparison

Expert Tax Advice and future planning

Help for sales of stocks, bonds, mutual
funds and employee stock plans
Schedule C guidance (prepares W-2’s and
1099-MISC forms)
Rental property depreciation and other
deductions
  On / Off Line Versions


• All versions offered online
• All versions offered offline except 1040EZ
• “It’s Deductible” offered in CD ROM and
  book form
Pricing

                        Online         CD ROM          Promotions

  Premier             $69.95           $69.95           $39.95*
                                                          online
   Deluxe             $39.95           $39.95           $19.95*
                                                          online
    Basic             $24.95           $29.95              N/A
    State             $29.95           $29.95           $9.95**
                                                          online
  1040 EZ              $9.95             N/A               N/A
*Additional $9.95 to file state   **with purchase of federal software
Promotional Pricing

• Download online and begin using product
  today ~$20 off
• Rebates for ordering and completing
  online
• Free to try, charge when you decide to
  print or e-file
iPod & iTunes
iPod: Shuffle

• Two versions
  – 512 MB
    • 120 songs
    • $99
  – 1 GB
    • 240 songs
    • $149
iPod: Mini

• Two versions
   – 4 GB
       • 1,000 songs
       • $199
   – 6 GB
       • 1,500 songs
       • $249

*available in four colors
iPod: Versions

• iPod: $299
  – 20 GB
  – 5,000 songs
• Special U2 Edition iPod: $349
  – Jet black with a red Apple Click Wheel
  – U2 band autographs on the back
  – Exclusive U2 poster
iPod: Photo

• 30 GB
  – 7,500 songs
  – $349
• 60 GB
  – 15,000 songs or 25,000 photos
  – $449
• “Art on Display” – iTunes 4.7 auto syncs
  the Album cover art for songs downloaded
iTunes Music Store

• Buy music – individual tracks or albums
  – 99¢ per song
  – $9.99 per CD
  – No subscription required - free download
• Different purchase methods
  – iTunes account
  – Gift certificates
  – Allowance accounts
  – AOL wallet/accounts
iTunes

• Mass customization of information
  – Customize CDs and playlists
    • Allows users to burn individual songs onto multiple
      CDs for personal use
    • Listen to songs on an unlimited number of iPods
    • Play songs on up to five Macintosh computers or
      Windows PCs
iTunes: Features

• Open 24/7 on Macs and Windows PCs
• Legal way for consumers to discover, purchase, and
  download music online
• Over 1,000,000 songs from major music companies
• More than 100,000 new tracks from independent artists
  and record labels
• More than 150 exclusive to iTunes tracks from numerous
  artists
• Dozens of out-of-print Motown singles and jazz albums
  available digitally for the first-time
iTunes: Features

• Free 30-second preview of every song
• Free Single of the Week download
• “Artist Alerts” notify you when Apple adds music from
  your favorite artists to the iTunes Music Store
• View movie trailers
• Watch music videos
• Share music with up to 5 Macs and PCs
• Find out what’s playing on more than 1,000 radio
  stations
• Publish an iMix on the iTunes
• Over 9,000 audio books
Versions of iTunes

• iTunes 4.0 – iTunes 4.7.1
• Each version offers improvements and
  additional features
    • V 4.0 – add and view album artwork, burn DVD
      archives of your music, and share music within the
      same household
    • V 4.1 – audiobooks now available, drag and drop links
      from iTunes into emails, Instant Messenger, or web
      pages, allowance accounts, and gift certificates
    • V 4.2 - sign in and buy music using either an AOL or
      Apple Account
Versions of iTunes

   • V 4.5 – Post your iMix, print CD inserts, find out what is
     playing on over 1,000 radio stations around the U.S.,
     download a free song, get music and audiobooks
     related to a movie, and watch a music video
   • V 4.7 – Support for copying photo in an iPod photo and
     the ability to show duplicate songs in your library
   • V 4.7.1 – Support for iPod shuffle
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posted:11/14/2010
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