As we have seen in this chapter, product differentiation leads to additional revenues and is the basis for conducting experiments for determining what products and product versions to introduce in the future. We have also discussed how substitute and complementary products and services further drive innovation. Subsequent chapters will explore how product differentiation forms the basis for experimentation, innovation, and product development.
In this chapter, we have illustrated how price discrimination could be applied to Joan’s jewelry box case and optimum prices for product versioning could be derived. The key takeaways include the following:
- By adding additional versions, Joan has dramatically increased the present value of her business.
- Many large and small businesses, for reasons of simplicity, offer products using a one-price solution in order to have a simplified management agenda.
- By adopting a one-price solution, companies overlook the high-end consumers and the premium prices that they will pay for a product.
- A one-price solution also ignores the price-sensitive consumers who could be drawn into the market if an affordable option is made available.
- If a high-end product is not perceived as being adequately differentiated with higher-end features and additional functionality, the low-end product could cannibalize the demand for the higher-priced product.
- Two goods are independent if their consumption or use is not related. For example, cell phones and lawn mowers are independent goods.
- Complementary goods are typically used together like toothbrushes and toothpaste.
- Substitute goods have an equivalent function and one substitute good can be consumed or used in place of another. Examples are CD players and MP3 players and cable TV carriers versus satellite TV carriers.
- Companies have to be very cautious how they use price differentiation to personalize prices lest they incur the wrath of customers.
- Information asymmetry occurs when the seller has better information about the value of a product than the buyer and vice versa.
- Selling a product at a higher price in a market where consumers are not knowledgeable or privy to the true market price is called arbitrage.