Thursday, 19 February 2009

Pricing Strategy for Digital Music

Apple announced early January 2009 that its iTunes store will change current pricing strategy to adopt variable pricing. This decision was based on negotiations with major music labels, who believe this pricing strategy would be more profitable (to them ) and fair (to consumers). In return, iTunes will be able to sell DRM-free music.

Curious enough to know that despite the implementation of DRM, Apple increased sales through selling songs individually and at a fixed price ($0.99 USD) and became the leading online music store in the world.

The new variable pricing strategy on iTunes is a typical first-degree price discrimination where songs are valued at three price points: US $0.69, $0.99 and $1.29. Interesting that the average price point remains the same (US $0.99). So it seems to be a bet on price elasticity and higher profitability.

The major music labels say this strategy will let them sell music at a lower price. Of course, the converse is also true: selling in-demand music at a higher premium is really what the industry is after. But price differences stimulate thinking and change perceptions. Pricing definitely sends a signal. People might come to believe that "you get what you pay for". With that in mind, variable pricing would imply that the cheaper product is worse? Possibly yes.

This argument does raise another interesting point. Ultimately variable prices rely on supply and demand. It doesn't take an MBA to realize that popular tracks would increase in price and unpopular ones would decrease. But because we're not dealing in physical formats, why should higher demand mean higher cost? After all, there's no scarcity of stock for popular music sold on iTunes: in theory, it can be downloaded by an infinite number of people. Will Yield Management be the fate of digital music?

I was curious about what the financial markets thoughts were during the announcement (CEO presented the strategy around 12:30) and extracted the day trade of Apple that day. Guess what, analysts did not like the variable pricing idea. The stocks started to tumble right after Keynote speech finished.


If variable pricing is a risk, these alternatives come to my mind..
  • Re-bundling: implementation of incentives for album purchases (Rhapsody does that);
  • Effective Yield Management;
  • Boost sales through mobile devices, such as the iPhone, via 3G networks. Mobile buyers are those that usually buy by impulse and less price sensitive, which means more profitability. The real issue in this modality is billing. People are much more comfortable with paying through a carrier, but the iTunes store provides the ideal and safe platform to buy without have a third intermediary (carrier).

Just to understand your view, I'd like to invite you to take the following poll..



Practical example of pricing


Did she take a Redbull before the show?!

Comments (4)

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I would be interested in the survey results. We are doing a project on film downloads and the data shows that customers don't like subscription. They are most comfortable with fixed pricing...
that was awesome; the plinko that is
Surprising I cliked on the fixed pricing. As a consumer I would ofcourse prefer to have consistent pricing. But for me the breakeven against subscription would depend on how many downloads so I do in a month to go in for subscription. From a company's perspective now that people are used to Itunes its simply a way of genertaing extra revenue.
In my opinion people are already used to paying more for recent launched products and less to "catalogue" products. This was common not only in the CD-era, but in several other industries. So after a trial period of charging $0.99 fixed price I think it is normal that they charge 3 different prices depending on the novelty/demand of each song. During the initial trial period, it was a good strategy to charge a fixed price, as it was a new concept (selling music online) and they wanted to make everything simple. Now that people got used to buying music online, they will find it ok to have different price levels.

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