U2′s Grammy opening performence is over and legions of fans await the new album in March. It’s been announced that the album will be available in five different configurations. Six if one includes the inevitable digital download.
Price differentiation isn’t new. Even after the introduction of the long-playing record, the single continued to thrive for years. But in a declining revenue world, there’s a new push to expand the supply curve to different products with different price points.
Now there’s little doubt the new album will sell well. How to Dismantle An Atomic Bomb sold over 9 million worldwide. But it’s been over four years since then and the recorded music world has changed dramatically since November 2004. In an era of lower sales, it’s the right move to capture as much revenue as possible – without screwing over the fans. Not that easy. It’s even harder as a clear demand curve for music hasn’t truly been pinned down.
Yet even without a hard-coded data set, it seems that U2 has missed the mark by a mile. But that isn’t necessarily a bad thing.
Dividing Up The Fans
I often divide music fans into two groups: listeners and collectors.
Listeners don’t need album art or know the bios of each band member. They may not even know the names of most of the albums. But they do know a few songs and put those in digital rotation on their iPods.
Collectors are the ones who need to own every album, who treasure owning the physical product, who display their music collections like fine art.
It’s an overly simplistic view that slashes a much more detailed continuum in half but it serves the general purpose. These two groups could not differ more, from their consumption of music to their price elasticity, they are polar opposites.
A frugal traveler can find a coach round-trip ticket from New York to Sydney, Australia for just under $998. Upgrading the same trip to the flat reclining seats of first class costs just over 1000% more at $10,599. On a cost basis, it doesn’t cost the airline 10x for the person in First. Even assuming that four coach seats would fit in the same space and a little extra for the free booze and upgraded meals, it would be generous to allocate a 5x in supply cost. So where does the extra $5,000 come from?
The demand curve. The airline knows that for some people, paying 10x for the luxury of stretching their legs on the 21 hour journey to the other side of the world is worth the price. Sure, some of the tickets are expense accounts and flying First on someone else’s dime is always the easier decision, but a good portion of the seats are leisure travelers paying their own bills. Knowing price elasticity is a wonderful thing.
The airlines aren’t pricing First Class by cost but by very complicated demand curve analysis. Lessons hard learned from decades of business and the miracle of on-the-fly pricing systems capable of analyzing multiple variables in real time.It’s especially important with perishable goods. After all, if that seat doesn’t sell, once the plane pushes back from the gate, that revenue is lost forever.
So what’s behind the U2 pricing schema on the chart? I’m sure someone, somewhere tried to look at demand curve data but in the end, I would wager, it’s a compromise between the band’s desires and some wild ass guesses (WAGs).
It’s not hard to see how U2 most likely missed the mark with the pricing WAGs for the new album. While one could argue about specific price points and product offerings, I’ve got three rules that govern my WAGs on what products to offer and where to price them:
1. Start the Supply slope as close to zero as possible
Both Radiohead and NiN did this well. Radiohead offered In Rainbows on a name your own price basis. Beyond the one-time marketing coup that resulted in enough free press to choke a horse, it showed a willingness to get their music out there, to hit the casual listeners. NiN offered a free download. Getting heard in a world without radio/MTV dominance is almost impossible. The only thing that comes close to universal saturation is an iTunes TV spot with iTunes storefront prominance. Barring that, you’re in the wilderness and most casual listeners won’t even know you have a new album let alone hear it. Offer a very, very cheap download. Offer free songs. Start the supply curve as clsoe to zero as possible.
The Fireman, shown in the chart below, starts digital at $8.99. A bow to iTunes, no doubt, but a veritable fortune for a casual listener to spend. At just $3 more for the CD as well as the digital, it seems that the CD is being denigrated, de-valued, disparaged. After all, not all collectors are wealthy and for the more egalitarian of them, the CD will be the displayed product.
Minimal cost is good. Free is better. Whichever, the supply curve should not start at $9. Less than $5 or the digital masses will ignore you.
2. Keep the Supply slope steep
Once the casual listeners can hear the music, the next group to focus on is the collectors, the uber-loyal fans who buy everything. Charge them for First Class but also offer them First Class. U2′s $96 Box Set isn’t First. It’s more like Business light. NiN’s $300 collector’s edition in limited quantities with an autograph is First Class. That’s the roomy seats with the freshly baked chocolate chip cookies. And limited is good. Collectors are a small group and treating them as such is the way to keep them happy. The rest of the supply curve gets filled in from there. The CD pricing is fairly standard. I like the Fireman’s vinyl edition at 2-3x CD more than NiN’s 7X but those WAGs are what real world sales data is for.
But take a closer look at the NiN and Fireman offerings above. The high-bit rate version download is $5 for NiN and $8.99 for the Fireman. The CD prices are somewhat in-line but they diverge from there.
NiN’s ultra-deluxe 2,500 unit limited edition run at $300 brought in $750,000 of revenue from that price point alone. The Fireman would have to sell almost 100,000 units of the deluxe box set to generate the same revenue.
It’s not just about maximizing the revenue. Ripping off your loyal collectors does no one any good. NiN’s unit limit, autograph, and care and design in the packaging is what creates the value for the purchaser, not just pricing it at 30x the cost of the CD. After all, crappy seats and stale cookies aren’t going to keep First Class passengers coming back for more.
3. Go outside the product mix parameters
All three supply curves, from U2 and NiN and the Fireman, are based purely on differentiated product mixes. While products are the most obvious way to move along the curve, it isn’t the only way.
No Line On the Horizon is available now on iTunes for pre-order. $9.99 for the rgular and $17.99 for the deluxe. Amazon has the CD pre-order for $8.99 But no one is offering me a discount to pre-order versus what it will cost later. Time differentiation is an excellent tool. Offering a discount while collecting pre-orders can help with supply chain management on the production side and it rewards loyal customers. But time based demand curve tweaks need not be just price based. A special perk can be included as well.
For those who correctly point out that it’s merely discounting to the loyal audience who would buy at the non-discount price anyway, you’re right. But the $10 CD isn’t going to be the massive revenue generator anyway. U2′s 2005 Tour in support of Atom Bomb raked in $260 million. Compared to the 9 million sold albums, a few buck discount isn’t going to hurt. But it does let fans know you care if they pre-order.
The Race To Optimize
The world of free digital music has wrecked havoc on the price-fixed world of CD sales. Now, artists are scrambling to experiment with different supply curves, trying to capture more revenue, offer more products, connect with fans in different ways. It’s a mirror of the live music business as auctions and third-party ticket sales companies have optimized the pricing system. And much more optimization will come. Ticketmaster will offer more than the dozen or so seat-price differentiations they do know.
Recorded music is behind the curve. That’s what decades of price fixing will do. And artists are now finally trying to create supply curves that match an ever elusive demand curve, something to maximize revenue as total units continue to decline. Before it was about getting as many people as possible to buy the CD. That’s as gone as are the days of 10 million selling albums.
Now it’s a different game that requires a little smarts, finesse, and thought; not the blunt rock of radio and MTV that the labels used to bang consumers over the head with to generate sales. It’s not a one product world anymore.
I may believe U2′s supply curve misses the mark, that it doesn’t start cheap enough, doesn’t slope steep enough, and doesn’t reward fans enough. But they’re thinking in the right way. Same with NiN and Radiohead and The Fireman.
The first step, to bastardize Bill W’s line, is to admit you have a problem
The fixes, the solutions won’t present themselves nor will them come quickly. The guts to experiment is the way. Only through trial and error can the demand curve even possibly be partially understood. Consumers’ music habits are shifting ever more quickly and whatever data sets are collected will only be of limited use anyway. The labels’ focus has been on punishing not innovating. U2′s pricing scheme may not seem that original but this will be the biggest selling album to date to try so many different products at so many different price points. I may disagree with the WAGs used to create the demand curve but I applaud the seismic shift.