Record Companies Unhappy with iTunes Pricing

Some of the major record labels** are pushing Apple to abandon its one-price-fits-all policy and allow higher prices on hit songs and possibly even lower prices on less popular tunes. From a pricing theory perspective, this makes perfect sense. A demand curve that varies greatly across products should lead to variable price levels across products.

If I had to make a call right now, sitting in front of my computer with no real data, I’d say this: “don’t do it. At least not yet.” Price perception is very important. One nice thing about Apple’s plan is that it’s simple. People are really just starting to buy music online. Varying prices gives them one more thing to worry about. While Apple’s iTunes software dominates the online music market, it represents a small percentage of overall music sales. This is the true target market– not the other music services. When the share of overall music sales is “significant” it will be time to start optimizing prices.

If I had the resources of Apple and the record labels at my disposal, I’d study the perceptions of various segments, from kids who think buying a physical CD is something their parents did to people who have never bought music online. Taking those results, I’d run game theory simulations to assess where the market might head in the next 1-5 years, and use those results to decide when and how to start variable pricing. It has to come eventually.

**Note: These are the same music executives who wanted you to pay $18.99 whether you’re getting the Spice Girls or Lucinda Williams.

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