Selling Different Versions Of a Product Boosts Sales
Boxes upon boxes of income tax software sit near the entrance to a Mission Valley warehouse store.
Another shopper who dreads the April chore comes over to take a look, and soon discovers the shrink-wrapped packages are not the same.
TurboTax, packaged in blue, offers its user an easy way to complete tax forms on a home computer.
TurboTax Deluxe, packaged in gold, offers the same with a load of extras. They include reams of information from the IRS and outside tax planners, video advice from tax experts, referrals to tax consultants and software to plan future tax strategy.
The products come from Intuit Inc., whose TurboTax product was first created in San Diego.
Mountain View-based Intuit is following a common marketing strategy: selling a product in several versions, containing fewer or more options, and aiming each at a different market.
It’s a strategy shared by the consumer electronics, appliance and automobile industries, said Hal Varian, dean of the School of Information Management and Systems at UC Berkeley.
Varian, who spoke at this month’s Software & Information Industry Association conference in Coronado, noted that selling information is not the same as selling other products.
The cost of producing information is high, he said, but the cost of duplicating it is pennies. Microsoft’s Bill Gates does not worry about the production cost of an individual copy of the Windows operating system, he said.
“You must price your information goods according to customer value, not according to your production cost,” Varian and Berkeley colleague Carl Shapiro wrote in “Information Rules: A Strategic Guide to the Network Economy” (1999, Harvard Business School Press).
Varian spoke of TurboTax and Intuit’s sister product , Quicken , as two illustrations of “versioning,” the strategy of simultaneously releasing different versions of the same product for different markets. The approach lets a manufacturer get the most value out of his product.
Maximizing shareholder value while satisfying the customer is the reason for the different versions of TurboTax, said Bob Meighan, vice president and general manager of Intuit’s consumer tax unit.
Meighan, who is based in San Diego, estimated 35 percent of TurboTax buyers go for the basic product (priced at $29.95), while 58 percent go for the deluxe version ($39.95). Customers who buy the latter want every tool available to them in preparing their income taxes, he said.
The company also produces TurboTax Home & Business ($64.95) and TurboTax for Business ($79.95). Both are for “niche markets,” Meighan said, adding that generally, as the price point gets higher, the sales volume gets smaller.
Meanwhile, after six years of work, another area software company has broken its user segments into neat thirds.
“Draw Anything Easily” is the slogan of San Diego-based SmartDraw.com. Its software lets a user produce professional-looking flow charts, engineering diagrams and other illustrations on a personal computer. The user merely drags ready-made shapes, symbols and graphics from the margin of the screen and places them on a page.
Breaking its user segments into thirds is just what SmartDraw has been trying for, said company President Paul Stannard.
A standard version of SmartDraw (priced at $49) includes a basic library of symbols. That appeals to students, hobbyists and home office users, Stannard said.
A professional version ($99) includes a library of business symbols, advanced capabilities in importing and exporting Microsoft files (like Excel spreadsheets) and a nine-language spell checker that puts wavy lines under suspect words.
Meanwhile, on the side, users can buy nine collections of add-on symbols, with titles like “Maps & Geography” and “Network Design,” for $49 apiece.
Or they can get all nine collections , 33,000 symbols , by buying the “Professional Plus” version of SmartDraw ($198).
As the name implies, the version is targeted toward “highly paid professionals,” Stannard said.
Stannard recalled his product originally was underpriced, and many customers were going for the higher-end version. In that case, he said, “your customers are telling you they haven’t reached their saturation point yet. You can sell them more.”
So Stannard improved the product, increased prices and brought out three versions.
It’s a key number. When people must choose among three sizes of products, they will often go for the middle product, he said, noting it’s a technique fast food restaurants will use in selling drinks and french fries. (Authors Shapiro and Varian call it “Goldilocks pricing.”)
Stannard said he hopes to bring out a companion product to SmartDraw this autumn. The product will let a user retouch and manipulate digital photos. Stannard said he’ll make it available in two versions.
He said he would consider a discount package featuring both SmartDraw and the photo processing software.
Intuit, too, markets software suites. It rolls together its Quicken personal finance software with TurboTax 2000, a TurboTax state tax program, and a legal documents program for $99.95 (with a $20 mail-in rebate).
What’s more, Intuit has a market that software makers like SmartDraw probably envy.
Intuit has customers that return every year, since tax forms, and tax laws, change that often