Rafi Mohammed

iTunes’ New Pricing Strategy: A Nice Start But…Room for Improvement

Posted on April 13th, 2009 (1 Comments)

Last week Apple’s iTunes store finally acknowledged the obvious…some songs should be priced higher than others. Instead of pricing all of its songs at 99 cents, now iTunes prices digital singles at $.69, $.99, and $1.29. While it’s definitely a start, there is so much more that Apple, music companies, and artists should be doing.

First off, the general pricing strategy seems to be to set higher prices for new releases. For example, all of the tracks from U2’s new CD “No Line in the Horizon” are priced at $1.29 each. Tracks for American idol winner Kelly Clarkson’s new CD are priced at $.99 and $1.29, with the most popular songs at $1.29.

I disagree with this strategy.

Especially for an established artist, the window to become a best seller is fairly short. If they don’t strongly chart (and maintain this ranking) in the first few months, their new work probably isn’t going to ever make it. And I certainly understand the notion of capitalizing on inelastic demand by charging high prices to diehard fans who highly value new music. But to have blockbuster hits - songs that launch the word of mouth necessary to propel a new CD into the sales stratosphere - an artist’s new songs must be loved (and purchased) by new fans situated well beyond the reliably fanatical core. Hits sell more concert tickets, beer squeegees, big buck corporate events, and builds anticipation for the next CD.

After spending a year or two in the studio and incurring millions in direct and indirect costs, is it really worth it for an artist (and their record company) to risk the fortunes from and glory of mass adoption with high release prices? Let’s see, at a 15% royalty rate, adding an additional 30 cents to a single price (i.e., going from 99 cents to $1.29) is 4.5 additional cents per track sold for an artist. Multiply that by say a million songs sold, we are talking an extra $45,000 of gross profit to an artist (before management cuts, etc). In U2’s case, this extra $45K is roughly equivalent to the revenue from selling an extra 4 field seats ($250 per ticket) to each of its upcoming stadium shows. Gee, if I were U2, I’d seriously consider setting new track prices at $.69.

The other interesting anomaly is how classic hits are priced on iTunes. Consider Bob Dylan’s song “Like a Rolling Stone,” which Rolling Stone Magazine ranked the #1 song of ALL time. Guess what its iTunes price is…$.99 ( the same price as “Disco Duck” by Rick Dees and His Cast of Idiots). Is there no justice to iTunes’ pricing?

So how should iTunes, record companies, and artists set their track prices? After the promotional period passes (and new songs either make it or don’t), it is time to make the most money possible from each track. At this point, dynamic pricing methods should be used to estimate and monitor demand to set the profit maximizing price for each song.

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Readers' Comments on This Blog Entry

From Steve Smith on April 15th, 2009
Hey, I LIKE Disco Duck!