Versions, Successive Generations and Pricing Strategy in Software Markets: Theory and Evidence

Pricing and product line strategies based on versioning and introducing successive generations are widely used by software manufacturers. Such product release and renewal strategies, which aim to expand market share and implement more e¤ective price discrimination, also expose …rms to the risk of cannibalization of their higher quality products by lower quality versions, and of current generation products by those from preceding generations. The nature of this tradeo¤ depends on many factors, which includes the way in which consumers assess the relative "performance" impact of better generation and more feature packed software versions. We study this tradeo¤ both theoretically and empirically, by developing a new analytical model that distinguishes how additional features and higher performance generations a¤ect demand and pricing decisions, and by testing the predictions of this model using data about software demand and pricing collected from Amazon.com. Our empirical results demonstrate that gains from market expansion and price discrimination do not always dominate losses from cannibalization, suggesting that software vendors may not be choosing their product renewal and release strategies optimally. Further, we …nd evidence that software manufacturers are not choosing their pricing strategies optimally. We discuss managerial implications of variations in each e¤ect across di¤erent software categories, and across …rms using a versioning strategy or a successive generations strategy.