Rafi Mohammed

Apple iTunes' New Pricing Strategy: A Nice Start, but...

Posted on January 14th, 2009 (0 Comments)

Last week Apple announced it was changing the pricing structure for digital songs sold on its iTunes site. Instead of charging 99 cents for every song on iTunes, the leading online music retailer is now selling individual songs for 69 cents, 99 cents, and $1.29. This is definitely a step in the right direction. All songs aren’t worth the same price. For example, The Rolling Stones’ “Jumping Jack Flash” is probably more valuable than a song by the Monkees, wouldn’t you agree?

That said, the manner that Apple appears to be setting prices is problematic for several reasons:

First, according to an article in the Wall Street Journal (“Apple Changes Tune on Music Pricing” by Ethan Smith & Yukari Iwatani Kane), Apple plans on setting prices in accordance with a song’s popularity. The problem is popularity has little to do with the value customers place on products. If this were true, $15,505 Honda Civics (the most popular car in the U.S.) would be more expensive than $173,079 Ferraris. So while slower selling songs like The Who’s “We Won’t Get Fooled Again” may end up in the 69 cent bucket, my bet is that the value (hence price) of this classic song is much higher.

Second, it may not be in a musician’s best financial interests to set high prices for their popular hits. Music royalties are just one part of a rock and roll star’s earnings portfolio, which also includes concerts, merchandise, and corporate use of songs. Music (especially new releases) is the carrot that draws in these far more lucrative revenues. In short, the more music a star sells, the more they’ll earn from concerts and merchandise. A 30 cent bump in the price of a digital single (of which a musician probably earns a 15% royalty, 4.5 cents) shouldn’t be an impediment to selling more $100 concert tickets.

Third, the value of a song depends on the demographics of its buyers and this should be reflected in the price. A well-heeled listener of Adult Contemporary music is probably willing to pay more for a song than the average grunge rock fan.

There are opportunities to increase profits and sales by aligning music prices with their value. For example, Digonex Technologies has a fascinating case study on a pricing project they recently completed for a major music label. Using its dynamic pricing software to equate prices with value resulted in 20% revenue growth, 35% boost in volume, and a 15% increase in profits.

Finally, my sincere thanks to writer Blair Chancey for the generous profile she recently wrote on me for Quick-Service Restaurant Magazine.

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