Itunes Music Pricing Strategy
Consumers have been able to purchase digital music and audiobooks over the Internet through Apple’s iTunes Music Store since April 2003. Apple’s stock increased from $7/share in April 2003 to over $46/share in August 2005. In August 2005, Apple’s market shares for downloaded music on MP3 players in the United States were approximately 75 percent and 80 percent respectively. Since the inception of the Music Store, Apple priced all downloaded music at $.99 per song, and about $.70 of that went to the major record companies that have the rights to the songs. Prior to this arrangement the record companies were not receiving any revenue for downloaded music via the Internet. With the boom in sales rising, and signs for higher profits, record companies began questioning the pricing policy iTunes had originally set in place. The record companies felt that the consumer market would pay more for popular songs, than archived ones that have been on the market for a while. They suggested an increase in the sales of popular songs from $.99 to $1.49 so that the record companies would accumulate a higher percentage on profit. The record companies stipulated that Apple had incentive to keep the cost of downloaded music the same to promote the sales of its most recent product the iPod. Not all record companies were in favor of this change in price. In fact, they liked the current pricing policy set by Apple. Many record companies were afraid that the price increase would transition their current consumers to pirating music based on the increase in price. Eventually, they tapped into a different market background. In January 2008 all four major music companies agreed to allow Amazon.com sale their music in the MP3 format without the digital locks that restricts users from making copies of the songs (Brickley, Smith & Zimmerman, 2009, p. 232).
Variable pricing could increase the overall profit of sales on online downloading of music. The price of archived songs would stay the same and only the more popular songs will have an increased cost. 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 (Chmielewski, 2009). The market demand for popular songs is inelastic which is expected to be somewhat unaffected by the change in price. People are willing to pay for a product that they feel has a higher quality to them. Apples position during the time to increase the price of popular songs was global. Many of Apple’s products such as the iPod and laptops were sold all over the world. The iTunes Music Store was highly successful, and has already accomplished large user numbers. A lot of consumers were not geared toward change in the way they listened to their music, and have already accumulated a large library of music via iTunes. The change in price did not suggest a complete overhaul in the way people downloaded and listened to their music.
My suggestion to Apple would be to introduce a purchasing method that would encourage multiple purchases on its iTunes Music Store. Before, consumers would purchase two songs at $.99 before the change in price, but would now only purchase one popular song at $1.49. I would suggest a change in its pricing policy to allow discounts on the amount of music purchased. Sales from this “mixed bundling” offering were estimated to be much stronger than a scenario where such a bundle was not offered. Total hardware sales were higher by approximately 100,000 units when bundles were offered. Much more surprising, the sales of software video games jumped by over a million units. The company would see an increase in revenue from bundling due to better sales for both hardware and software (Gerdeman, 2013). In this scenario it would be the bundling of popular and archived songs, just popular songs, or just archived songs.
Digital downloading of music is just one of the many markets that Apple has tapped into. I believe their biggest venture and agenda is in the mobile market. The iTunes Store sells more than just music, and is geared toward their very own mobile products. Record companies should recognize this and reconsider their perception of Apple’s price policy on digital downloads. I feel that record companies have already recognized this affect and have been monitoring other markets and their offerings. Some have already took the leap into multiple frameworks of revenue, and it will only change as time progresses.
Brickley, J., Smith, C., & Zimmerman, J. (2009). Managerial Economics & Organizational Architecture. (5th ed., p. 38). New York: McGraw-Hill Irwin.
Chmielewski, D. (2009, March 26). Hottest tracks to cost $1.29 at itunes starting april 7. Retrieved from http://articles.latimes.com/2009/mar/26/business/fi-cotown-itunes26
Gerdeman, D. (2013, January 18). Product bundling is a smart strategy — but there’s a catch. Retrieved from http://www.forbes.com/sites/hbsworkingknowledge/2013/01/18/product-bundling-is-a-smart-strategy-but-theres-a-catch/