Sahil Alvi

Technology

Rewarding Early Adoption: A solution to stanch the decline in music industry's sales (while rendering piracy irrelevant)?

by sahilalvi on Aug.14, 2009, under Technology

 

U2 - No Line on the Horizon

“…How can you stand next to the truth and not see it?

A change of heart comes slow

It’s not a hill, it’s a mountain
As you start out the climb
Do you believe me, or are you doubting
We’re gonna make it all the way to the light…”

– Lyrics from the song I’ll go crazy if I don’t go crazy tonight by U2

Last March, imagine if U2’s new album No Line on the Horizon was released on iTunes, Amazon, and brick-and-mortar stores like Virgin Megastore and Barnes & Noble for $4.98 a pop. Yes, that’s right: 4 dollars and 98 cents for the WHOLE album.

Why, in God’s name, would anyone do that?

Simple: Music companies have a certain top-line target and also a break-even point. Say, Interscope Records’ US sales target was 4 million copies at $ 9.99 over the lifetime of the album. That is $ 39.96 million in total album sales. For simplification: say $40 million in total US sales.

Now, we all know that not all of the $9.99 per unit goes to the music company. But our discussion right now is not focused on who gets what piece of the pie in the industry value chain. Our focus is on how can we reverse the fortunes of the industry as a whole?

We all also know, not everyone buys “albums”; many, if not most, of us ”buy” singles from sites like iTunes at 99 cents a pop. Not to mention, a significant number of consumers do not even ”buy” singles either. They just rip’em off their friends or download them from the many torrent sites out there.

Why does any of the above happen?

Why are albums sales on a secular decline?

Is it because a jewelcase CD album costs $9.99, gets damaged over time, and difficult to store?

Infact, while we’re at it, why does iTunes charge the same amount for its online version of the album despite the electronic distribution costs being – seemingly — lower?

Why does the music industry leave all that money on the table for consumers to freeload off of them?

Worse still, why does the music industry allow online and off-line (counterfeit CD’s) pirates to make money off the talent, talent scouts and music producers work so hard to discover, refine, produce, and deliver to us in the marketplace?

Let us go back to the revenue target for the new U2 album. Say, the record company executives are insistent that they have to achieve their target of $40 million in revenues over the life of the album. What alternatives do they have where, as the old Hindi adage goes: “Kill the snake without breaking your stick.” Read that: Reach your target revenues without alienating your consumers.

How?

Enter the magic of “Variable Pricing.”

Reward your most loyal U2 fans. 

Reward “Early Adoption”…in tangible dollar terms.

Offer the first 2 million copies of the album (both on CD and electronic format at iTunes, Amazon, etc.) for a ridiculously attractive price of $4.98 each. That is a 50% discount on the standard price.

You’re still giving the consumer all the bells and whistles that iTunes has recently promised to offer in order to shore up flagging album sales.

Moral of the story for fans: Early bird gets the worm…not for free but for a major discount.  

Say, with this pricing model, the record company ends up selling 2 million albums in the 1st week of the release and has raked in a cool $9.9 million already. This is more than 4 times what the U2 album sold in its first week of release (484,000 units) and twice as much in revenues as the company would have otherwise generated at $9.99 a pop. 

So the record company moves on to the next tier of pricing for it’s next 5 million copies of the record at $7.50 per unit. The key is that the difference in pricing has to be big enough to justify the early movers to move quickly and convert to the “early buyer”  status.

1 year later: The next 5 million copies have sold to generate another $37.5 million in revenues. In contrast, at $9.99 per unit, perhaps the company would have sold these many albums over the entire lifetime of the album. 

On the third go around, the record company finally prices the album at $9.99 per unit for the late-risers to buy at that price in perpetuity — until the company decides to run a promotion to coincide with U2’s next worldwide concert tour, etc.

So, has the company met its annual sales target already?

Yes!

Did it exceed its targets?

Yes indeed!

Did it do it sooner than planned?

Again, a resounding yes! The company has done in 1 year what was expected to take the entire lifetime of the album. 

Did it generate more consumers for U2’s new album, and perhaps, a big addition to the fan-base?

Again, the answer is: Without a doubt!

Did U2 and the record company make its fans happier — both financially and ethically?

You guessed it…ABSOLUTELY!

So you’re pushing your product quicker, selling more of it, getting your cash flows earlier, and blowing your targets — all of this while you’re making your consumers a happier, more loyal lot….and getting rid of the piracy/illegal download problem, for the most part.

It is a basic principle of economics: For most discretionary purchases, there is an elasticity embedded in their prices. If the producer and/or distributor makes the product available for cheaper, she/he can expect to sell more of it. If she/he makes the product dearer, she/he will sell less of it. Surely, there must be (if there aren’t already) quantitative analytical models at the music producers (Universal, Interscope, Sony, etc.) and distributors (Apple, Amazon, Virgin, etc.) that can run sensitivity analyses on the sales volumes a record company can achieve at each price point. And by weighing in on the various sales volume-to-price point options, the company can decide what the optimal prices for it to sell might be. Instead of $4.98, the opening price could be $3.00 or $6.00 or whatever else. 

The bottom line is:  the more record companies and content distributors reward loyalty and early adoption among its consumers, the better off the creators, producers, distributors and consumers of content will be…

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