Record executives have been pushing to move the iTunes digital music service, which sells songs for $0.99, to a demand-based pricing model, where hit singles would cost more, and rarely bought tunes would cost less (or perhaps they just want to raise prices). Now I’m a big fan of segmented pricing, but when Steve Jobs calls your pricing aims “greedy”, it’s time to listen. Legal digital music downloads are relatively new. iTunes is now one of the top 10 music sellers in the country, but it’s still a nascent market. They key aim is now to grow that market (even at the expense of the old channels, since this one is more profitable for everyone except the record stores). Any pricing aim that slows profitable growth should go to the back burner. (The music industry’s inability and unwillingness to go digital might leave them at the mercy of Apple, who will surely know how to milk profit when the time is right.) Right now, $0.99/song is a simple, easy-to-understand price point, which seems fair, even though in many ways it’s quite high.
That said, there’s an interesting article over at Slate about using demand to set prices. While this concept is intriguing, and may be viable in a few years, I don’t think it’s right right now. Penenberg does bring up the important concept of “The Long Tail”, or what he refers to as an “Embarassment of Niches.” iTunes can stock more music than any record store ever could.
What record companies should be doing, rather than trying to jack up the price on hit singles, is figuring out how to exploit their deep catalogues. This is content that’s already produced, doesn’t require million dollar promotional budgets or trendy videos. In a purely “rational” world, the way to stimulate demand for the 90% of the music that accounts for only 10% of the sales would be to reduce its price. However, that would create the impression that the cheaper music is lower quality, further discouraging people from purchasing it. Instead, companies could promote certain songs by certain artists as free (even free for a certain time, then they’d disappear of your hard drive). Apple has a limited program of this type now, but much too limited. If I could subscribe to a “Free Music of the Week” list, aligned to my prefered genres, matched to my ratings of other songs, I would discover a lot more music than I do just by listening to KGSR. This would stimulate the purchase of songs on “the Long Tail”, at a cost of essentially 0, since no one is buying these songs anyway. (I’d love to get data on how many songs have never been purchased at iTunes.)
While it’s much easier to play these types of games with digital offerings, you can do it in the real world as well. Supermarkets offer samples of new products to drum up interest, for example.