It makes economic sense to have more than one product version because of increased revenue generation. There are additional reasons for versioning in addition to revenue generation. By having multiple versions of a product you can experiment and watch economic behavior as consumers will focus on the features and products that are most desirable. This sort of experimentation is the basis of monopolistic competition and the mechanism that allows the entrepreneur to successfully compete. Product versions can be generated in a variety of ways including, distinct product features, product design, product promotions, product availability, warranties, and through customer service.
We have developed a product differentiation dashboard to assist with understanding the concepts and to help in determining how differentiation can improve revenues. The spreadsheet is currently in Beta development, but it is available for your perusal. The spreadsheet can be used with 3 products at this time. For now, it assumes that there is only one demand curve for the differentiated products. You can use the results from the Demand Dashboard discussed in the last post to identify the slope of the demand curve and the price where demand is close to zero.
Here is what you will enter in the Differentiation Dashboard.
- The slope of the demand curve and the price level where demand is close to zero.
- The variable and the fixed costs for a single product.
- The variable and fixed costs for the high-end, mass appeal and low-end products.
Here is a link to the spreadsheet: https://skydrive.live.com/redir.aspx?cid=a3660eed58d91ed9&resid=A3660EED58D91ED9!107&parid=root
Special thanks are extended to students in the Technology Management Course for their suggestions for improving the spreadsheet. As is always the case; simplicity should be the goal and they helped to achieve that goal.
 Goldilocks pricing is a rule of thumb that suggests that you should start out with three price levels and offer additional versions of products to attract additional revenue (Varian and Shapiro, Information Rules, Harvard Business School Press 1998). The idea behind Goldilocks pricing is that one product is too few, ten products too many and three is just the right amount. Thus one arrives at Hermes, Mass Appeal, and Midas.