Thursday, March 26, 2009

iTunes: Variable Pricing to Replace 99¢ Pricing

LA Times -- The world's largest music store, Apple's iTunes, plans to boost the price of many hit singles and selected classic tracks to $1.29 on April 7, breaking the psychological barrier of 99 cents in what could be the first big test of how much consumers are willing to pay to download individual songs.

The move, part of a new "variable-pricing" strategy that will also lower the price of selected songs, is an attempt by the music industry to wring more revenue from digital downloads in the battle to offset declining CD sales. Label executives contend the new pricing will allow them to offer packaged downloads of songs that might entice consumers to spend more on music.

Apple Inc. set the 99-cent-per-song rate in 2003 when it launched the iTunes Store. The company long resisted pressure from the music industry to allow flexible pricing, arguing that it would inhibit sales. Apple changed its tune in January, however, announcing that it would begin selling music at three prices: 69 cents, 99 cents and $1.29, based on wholesale costs set by the labels.

True to supply-and-demand economics, the price of music downloads will be geared to the artist's popularity. Releases from new artists would receive the lower pricing, while tracks from popular acts would get slapped with the higher rate. Even classics, such as Bruce Springsteen's "Born in the USA," could retail for the higher price. Most of the 10 million songs in the iTunes catalog are expected to remain at 99 cents.

MP: If this works for Apple, maybe movie theaters will be next to implement some kind of "variable-pricing" strategy for movie tickets. If it doesn't make sense to sell all music at a single price, it probably doesn't make sense to price all movies the same.

16 Comments:

At 3/26/2009 8:14 AM, Blogger ExtremeHobo said...

Haha, and based on supply and demand models, wont the demand for the "favorite" songs decrease as their price goes up? Considering delivering to an MP3 is basically free for Apple, I am not sure if this will have the increased profits they hope for.

Also, there are a whole slew of Russian mp3 sites operating under sketchy copy-right laws selling mp3s at about a dime a pop.

 
At 3/26/2009 8:43 AM, Blogger Colin said...

"Haha, and based on supply and demand models, wont the demand for the "favorite" songs decrease as their price goes up?"

Probably, but I imagine Apple is more interested in profit maximization than sales maximization. You do realize that it is possible to raise the price of something and still make more money don't you?

In any case amazon.com has already had a variable price strategy in place for some time now for mp3s, which is why I always check there first.

 
At 3/26/2009 8:51 AM, Anonymous Dwood said...

Well i would have to agree with your supply and demand model statement but i think people will still pay top dollar for there favorite songs if they are already i Tunes users. People that would be interested in the Russian Sites you have displayed would be more inclined to get them for free rather than ten cents from a torrent site. But realize that this only makes the main stream songs more expensive where as you could download your favorite song at a discounted rate, or possibly even get a whole album for under ten bucks. All in all, I'm wondering how it all will turn out. This could change they way a lot of things are priced.

 
At 3/26/2009 9:05 AM, Blogger Justin M Ross said...

"Haha, and based on supply and demand models, wont the demand for the "favorite" songs decrease as their price goes up?"

You are confusing demand with quantity demanded. Apple faces what is called in the managerial economics literature as the "pure selling problem," which exists when marginal cost is 0.

Intuitively, for a given demand curve, people are not very sensitive to increases in price when the price is very low. A increase in price will reduce the quantity demanded, but the fewer sales are made up for in revenue by selling every unit at a higher price. In which case total revenue increases. If quantity demanded falls too much, then revenue will decline.

I am certain that Apple understands this trade-off.

 
At 3/26/2009 9:07 AM, Blogger ExtremeHobo said...

You do realize that it is possible to raise the price of something and still make more money don't you?

Possible, but not always true.

SIMPLE example

If they were selling 100 mp3s a day at $.99 = $99 revenue. - royalties $.10 * 100 = $89 revenue

Now lets say they sell 60 at 1.29. Revenue is only $77.40. Subtract royalties (60*.10) and profit = 71.40.

On a supply and demand graph you want to find the point at which the two curves intersect to maximize profit. Increasing price does not equate to increasing profits for a company, only on a per item basis.

 
At 3/26/2009 9:09 AM, Blogger ExtremeHobo said...

Justin M Ross - Do you not think music is an elastic demand?

 
At 3/26/2009 10:32 AM, Anonymous Anonymous said...

Considering I never bought an I-tune yet, this probably won't help.

 
At 3/26/2009 11:01 AM, Anonymous Anonymous said...

People actually PAY for music? Sounds made up.

 
At 3/26/2009 2:19 PM, Blogger Colin said...

Extreme Hobo --

That's why I said possible rather than probable. In any case in your example you use a 40% decline in the number of mp3s sold, which strikes me as a bit overwrought. I really doubt that the demand elasticity is so high that a 30 cent increase would result in such a dramatic decline.

But even with a 20% decline in the number of mp3s sold Apple is still better off.

80 mp3s at $1.29=$103.20
100 mp3s at $.99=$99

Take out the royalties and Apple is still ahead. So really, the question is whether Apple expects a decline in consumption of over 20% or not. I don't see that many people fleeing iTunes over an additional 30 cents.

 
At 3/26/2009 3:46 PM, Blogger ExtremeHobo said...

If you buy a few dozen MP3s a month it could possibly send you over to Amazon.com to save a few bucks.

Have you ever noticed how some people will drive for miles to go to a gas station where gas is 3 cents less a gallon? I know I am guilty of this even when its not economically rational.

MP3s are a homogeneous good, much like gasoline or milk. One MP3 of the same song is just as good as most any other. I am thinking most people wont care what brand their Britney Spears Circus MP3 is as long as they can listen to it.

 
At 3/26/2009 6:05 PM, Anonymous Anonymous said...



MP3s are a homogeneous good, much like gasoline or milk. One MP3 of the same song is just as good as most any other.


You are forgetting the convenience of the iTunes <-> iPod connection. For many people this is worth the extra buck or two a month. It may even cost less with discounted older tracks.

 
At 3/26/2009 10:59 PM, Blogger ExtremeHobo said...

That is true, a lot of ipod (and thus itunes) users are ignorant that any mp3 works with iTunes.

 
At 3/27/2009 6:01 AM, Anonymous Ralph Short said...

I can only speak personally but as a new user of an IPOD this pricing change will not have an impact on my purchasing habits. The differential is too small to worry about compared to the convenience the Itunes store offers. Since I do a number of long drives every month I can pick a few songs for a small price and at the same time download lectures an any no. of subjects for free. Additionally, I have automatic downloads from certain news, business analysis, science, and other sites for free.

Now, all I have to do is learn how to organize it a little better so I know where everything is located. I am figuring I will get this down pat sometime in 2010 with a little help from my children or grandchild.

 
At 3/27/2009 6:24 AM, Blogger Plamen said...

"Label executives contend the new pricing will allow them to offer packaged downloads of songs that might entice consumers to spend more on music."

Boy, do they wish it were like the good old times, when you could sell the schmoes albums with a couple of good songs and a whole lot of filler! Once a bundled good is unbundled, good luck putting the toothpaste back in the tube. Whether Apple's move is good or bad, time will tell - I personally think it will tick off a lot of their most loyal customers, who will see a significant price increase on the most popular, i.e. most bought, artists. But I predict the packaged downloads will be, as they say in the gaming world, epic fail.

Apple is betting that once you go iTunes, you will not go back to pirating. I am not so sure.

 
At 4/10/2009 10:08 PM, Anonymous Mike W said...

http://www.billboard.biz/bbbiz/content_display/industry/e3i7917210cb575a9b91b4543e3d671922a

 
At 4/10/2009 10:09 PM, Anonymous Anonymous said...

Hmm...the link didn't seem to fully publish. Trying again: http://www.billboard.biz/bbbiz/content_display/industry/e3i7917210cb575a9b91b4543e3d671922a

 

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