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Versioning: Necessary Business Practice, or Product Sabotage?

Moneyville, a blog of the Toronto Star

Companies mangle their own products and services to extend product lines

February 15, 2012

What did the 20-gigabyte (GB) and 60 GB Sony PlayStation 3 consoles have in common when they were launched? Everything-- except the components to play high-definition Blu-ray discs were disabled on the 20 GB console.

The ability for producers to charge two very different prices for these products despite only small differences in features is known as "versioning," a strategy that McCombs Associate Professor of Marketing Andrew Gershoff says is a common pricing pratice to maximize profits.

According to the story, there are several popular brands that have used this very technique. Research led by Gershoff suggests that consumer dissent toward versioning is increasing.

The Moneyville blog described Gershoff's research into this pratice, and why it may be a necessary strategy for some companies:

Although it may feel instinctively wrong to consumers, versioning benefits both buyers and sellers, says the paper’s lead researcher Andrew D. Gershoff, an associate professor of marketing at McCombs.

 
Charging some customers more allows a company to charge other customers less, in effect using the larger profit made from wealthier consumers to make up for the lower profit margin on the product sold at a lower price.


Offering the same product to everyone at the same price would mean setting a price somewhere in the middle, which some customers could not afford, and which would fail to capture the ability to pay of the customers with more money to spend.


“Sometimes the only way to be profitable is to have different products at different prices,” says Gershoff. "Everyone has come to understand that two seats on the same flight may have been sold for wildly different prices."


Gershoff says people would be more likely to accept the practice in electronics and other products if they didn’t perceive it as unfair. They are also more likely to accept the practice if the differences between the higher- and lower-priced items are obvious and numerous.


“I don’t expect that this reaction will go on forever. As consumers come to learn that versioning is a common practice, it will be perceived as less unfair,” says Gershoff.

You can find the rest of the story here.

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