Software editions: An application of segmentation theory to the packaged software market

Introducing multiple editions of the same software is a relatively recent i nnovation in the software market. The editions serve to differentiate among different user segments. Introduction of similar low- and high-end product s in other markets has been analyzed using segmentation theory. However, th e software market is fundamentally different from other product markets in two respects: (1) Software is characterized by negligible marginal producti on cost, and (2) the option of offering upgrades also exists. We analyze th e problem of software introduction using segmentation theory. Our analysis shows that if cannibalization is low, the vendor should introduce the full software as one edition. This result differs from that obtained in prior re search, which showed that the seller should introduce two distinct products in such cases. When cannibalization is high, introducing multiple editions simultaneously is optimal under a variety of conditions. The strategy of i ntroducing a highend edition in the first period followed by the low-end ed ition in the second period is optimal only when the consumers are extremely impatient and the software is large. A significant result of our analysis is that offering upgrades is clearly superior to other strategies only in a very restricted range of parameters. Our analysis also suggests that the v endor's profit is higher when it announces the future strategy. Our theoret ical results are supported by evidence from the software market.