Web Pricing Needs to Grow Up a Bit

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Everyone on this site will surely know the “4 P’s of marketing”:http://marketing.about.com/od/marketingplanandstrategy/a/marketingmix.htm. I must come clean, I have a favorite P. It’s Price. I’ve always been a secret admirer of the pricing strategies of companies, even before I got into marketing myself. I can’t understand anyone not admiring the genius of the “Buy One, Get the Second Half Price!” offer.
An accountant would say that this is just a marketing trick and that it would be more honest just to say “Get 25% off this item but only if you buy 2 of them”. That’s why there are no accountants in marketing. The strategy is to create extra demand for a product that you already have a qualified customer for at the till. For every customer who you get in the door interested in the sale item, you double the speed of your inventory movement. It’s genius. Then, of course, there is the Walmart approach of constantly rotating in-store price discounts. This strategy encourages frequency and loyalty in shopping behaviour and I would guess also increases the total amount of time spent in store.
Comparing these pricing innovations in the offline world with pricing online demonstrates the maturation process still needed in online marketing.
Let’s take one of the biggest and most successful online retail sales sites as an example, “iTunes”:http://www.apple.com/itunes/. Don’t get me wrong, I love iTunes for its simplicity of use and its vision of creating music “experiences” for customers. Further, at a billion paid downloads and growing, it’s tough to argue that they need a whole lot of coaching from me. That said, I would suggest that their current pricing practices reflect their existing dominance in the music download space (78%, I heard). I would predict that as new entrants increase their own market share, iTunes will naturally have to look at maturing its pricing practices to compete.
So what does iTunes do with pricing that so violates my sacred and favorite “P”?


Let me give you 3 examples.
First, all the songs on iTunes cost $.99. It doesn’t matter if it’s the latest song from Gnarls Barkley or a B-side from Michael Jackson’s “Bad”, they are all priced at $.99. Can anyone think of any credible retailer in the offline world that prices all products regardless of size, quality or demand at the same level? (Dollar stores don’t count, I said “credible” retailer).
Second, full albums are all the same price. If they are a full LP (vs a few singles or a double or ‘special” album), they are all $9.99. Has anyone been to an HMV recently? Tons of the CD’s on iTunes can be purchased at HMV for less than they are available at iTunes because HMV will discount older albums that aren’t moving. Last, not all singles can be purchased at iTunes. Indeed, some singles (presumably if they are really popular and the rest of the album sucks), are only available if you buy the whole album. Excuse me? I’ll date myself here and say that I still remember being able to buy 45’s at Sam the Record Man and there would have been a riot if I was forced to buy the whole “Rio” album when all I wanted was “Hungry like the Wolf” single.
This last infraction is directly related to the first one and in my opinion the central issue at the heart of the immature web pricing practices. The web has turned traditional supply and demand on its head. There is only one digital copy of “Hungry like the Wolf” at iTunes and it doesn’t take up any shelf space. There are no inventory control issues online which would force the company to develop innovative pricing to meet traditional supply and demand factors. iTunes is quite happy to leave “Hungry Like the Wolf” on the servers waiting for the long tail buyers like myself to come along to purchase it at $.99.
But I’ll say this. iTunes has missed an opportunity with me that likely one of their future competitors won’t. I went to iTunes looking for Gnarls Barkley and would have paid $1.98 for his new hit “Crazy”. And while I was there underpaying for the thing I wanted, I would have picked up a few of the oldies if they had just put up a sign which read “Buy One Get the Second Half Price.”

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8 thoughts on “Web Pricing Needs to Grow Up a Bit

  1. Matt Williams

    Well, the problem with iTunes tends to be in the Digital Rights Management. You’re only purchasing a certain set of rights to use the song and Apple can change those rights on you. Their recent update nerfed a number of programs that were working with iTunes. The songs downloaded only work on the iPod and removes a lot of choice on the comsumer side for bigger, cheaper mp3 players. Your only option is to burn a playable disc (playable in your car or whatever) and then rip the music back on to your computer as an mp3 and reenter all the metadata again.
    iPods are ridiculously fragile, and tend to end up failing in a year and a half or so. You can buy their “Apple Care” to extend your warranty of a mere 90 days to a year for the product for an extra $79 for most of the players.
    Essentially Apple has managed to axe what you can do with your music after you have purchased it. They have gotten everyone to buy pretty, yet cheap music players who replace them every year or so. The golden moment for Apple? Most of them are happy about it.
    In the end of things, all of the extra costs add up to a lot more than the mere $0.99 you pay per song on iTunes because in most of the ways you can cut the cake they are getting much, much more than that for the music.

  2. Rohan Jayasekera

    Michael, you dismiss dollar stores as not “credible”. By which you apparently mean that they are to be summarily dismissed. Why? Millions of their customers don’t agree, and their business model is proven to work.
    There can be a *lot* of value to the customer in having the price known to be acceptable *before* going shopping. If iTunes were to charge for “Crazy” whatever price would maximize revenue, maybe it would charge not $1.98 but $3.98 because, although fewer people would buy, perhaps those who did buy would pay enough to more than make up for that. And you might not be willing to spend $3.98. Not only that, but next time you were interested in a hit song you might not look on iTunes for it because it might (or might not) be too expensive. Uniform pricing is predictable pricing.

  3. neil

    iPods are ridiculously fragile, and tend to end up failing in a year and a half or so.

    Frankly, this smacks of FUD. I’d like to see some empirical evidence that this is true – I haven’t read or heard anything online about iPods being “ridiculously fragile”, besides the complaints about the surface of some iPods being prone to scratches – something that doesn’t affect playback whatsoever.
    At any rate, I really don’t understand the complaints about iTunes DRM. Apple isn’t the one that forces DRM on their products, it’s the record labels, and for what it’s worth, the Fairplay DRM is one of the more user-friendly content protection schemes out there.
    (Probably the most user-friendly is emusic.com’s DRM-free downloads, but the vast majority of their songs are from indies and smaller labels – a the key factor.)
    To respond to Michael’s point that the iTunes pricing is “immature” – I think the fact that iTunes dominates the music downloads industry is proof enough that their pricing scheme is bang-on.
    Variable pricing is better for the labels and slightly better for Apple (who takes only a small percentage of each .99 sale), but it’s not better for customers in the long run. When you consider that the other major option for downloading music is free, having a straightforward pricing scheme removes any complexity that purchasing music via the iTunes store may have.
    It comes down to this: Apple isn’t running the iTunes store to sell music; they’re running the iTunes store to sell iPods. It’s a critical point.

  4. danielb

    i actually don’t think they’ve missed a trick – this is really good pricing strategy from both a marketing & a business perspective:
    WHY IT MAKES SENSE AS A MARKETING MOVE
    every song is exactly the same price – this is a really simple story to spread. & the story itself is about simplicity – it’s cheap & easy to download music.
    1. My dad asks me where he can download a song – without doing any research, I can tell him straight away ‘buy it at itunes, it’s only 99c’.
    2. A newspaper’s running a story on itunes. the fact that every song costs just 99c is a very simple fact for them to embed, & quickly gets across apple’s message: this is cheap & easy.
    3. Even better: a newspaper is publishing a story on a new single. The journalist is looking for a retailer so that they can quote price. should they use a high street retailer where the price might fluctuate? nope – they’ll quote itunes, because the journalist doesn’t even have to look the price up & they know it’s not going to change before the paper goes to press.
    WHY IT MAKES SENSE AS A BUSINESS MOVE
    1. You might be willing to pay $1.98 for Band X’s new single, but from apple’s point of view that means they have to have a product management team constantly watching the prices of millions of singles.
    2. You might be willing to pay $1.98 for something, but not everyone will be. that means apple has to deal with EMI complaining that sales are down due to higher pricing on their singles. they also have to deal with bad press (read: forum posts) from customers complaining that their favourite single is double the price of everything else.
    3. how much money do apple owe EMI this month? all they need to know to answer that question is pull a report on how many EMI singles they’ve sold & how many EMI albums they’ve sold.
    4. what do they push heavily? the single that’s making them most money, or the most popular single? no problem – the answer is exactly the same. there’d be no way of doing this with a ‘buy one get one half price’ model.

  5. Robert Simon

    You also have to take into account the need to rapidly and aggressively acquire new labels and emerging talent into the iTunes model. Flat pricing is attractive to lesser known competitively weak bands that want to use iTunes as a marketing platform in addition to a distribution channel. I imagine price parity with established talent is a key drawn for raw talent to sign away rights.

  6. benry

    This problem has little to do with iTunes and more to do with the record companies. They’re the ones setting the price structure that Apple has to operate under.

  7. calvin hwang

    Great discussion. To me, it’s import to frame the pricing. Apple is not in the business of marketing music singles. The are in the business of marketing iTunes Music Store. Having that frame in mind, the strategy stems from the consumer proposition of what iTunes Music Store is about – Simplicity. Simplicity in use (navigation, user interface, intuitive architecture), simplicity in iPod interface (plug and go), simplicity in selection (large catalogue at one consistent price point). This is a competitive advantage versus traditional CD stores where their prices are variable. A fixed 99cent price point is not only attractive (and importantly attractive to P2P filesharers) you know what to expect to pay so you are not inconvenienced by having to shop around or wait for a sale. In my opinion, I find it rather visionary of Jobs to really gun for this price point. Web search agents are increasing more sophisticated, with the ability to scour the web for the lowest available price. So why not just start out with a single aggressive, consumer agreeable pricepoint and just not go there?

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