Versioning

You’re excited to take your trip across the ocean, all the way to the other side of the world. You have two options: pay a high price for first class leg room, questionable hot towels (for your face? or just hands? where have they been, anyway?), and a quicker airplane exit upon arrival…or a lower price, squishier seats, potential for crying babies and jungle gym children, where patience is a virtue?

Airline pricing is an example of versioning: quality discrimination. It’s smart for the company when it can be done, because it maximizes the amount of business it can get. With different versions of a service with various pricing, firms can get more money from better-off people while still getting plenty of business from the less-well-off people.

Take airlines, for instance. There are fewer first-class seats because fewer people are able to, and willing to, pay for those seats. But they have them because there is demand, and they can charge more for them. Meanwhile, the families and lower-income folk aren’t excluded, and can still pay to get from point A to point B via a plane ride.

If commercial airlines has planes that only targeted the wealthy (first-class flight only), flights would be too expensive. If you have that much money, that’s when you get your own private jet. If commercial airlines didn’t have any first-class seats, they’re losing out on extra revenue that wealthier people are willing to pay to avoid annoying kids, or have extra leg room. The more you pay for your airline seat, the more diminishing marginal utility you’ll face (you’re paying a lot more for a little more comfort), which is why, for most people, it’s not worth it, even if they could technically afford it.

Versioning isn’t everywhere, but it is a lot of places. It works for airlines because the flight itself is a large fixed cost, and consumers price themselves into their seats. Similar to freemium apps, where you can use the free version with ads, or pay for no ads and some other features. Same with TV and phone subscriptions. Trust us...you’ll start seeing versioning everywhere now.