Low Prices = More Customers? Not Always

May 20, 2007

Found this Harvard Business School Press article on pricing in the media business. It`s an excerpt from the book “Manage for Profit, Not for Market Share” from Hermann Simon, Frank F. Bilstein and Frank Luby.
The authors argue to avoid proactive price cuts: ” They make you poorer, unless you have the evidence, the data, and the math to prove otherwise. You run a company, not a charity.”
In the article they have a short case study about Universal Music and their price cuts in September 2003.

Interesting is the unusual point of argumentation cause everywhere in the press your are reading “CD prices are to high…” So the authors make some good points why UMG was wrong to cut prices.
But there were two things in their argumentation I disagree with.

“If nearly half of all music buyers in the United States haven’t seen a high school classroom in almost twenty years, these are probably not people who have abandoned retail stores. Instead, these are the same people who pay hundreds of dollars for Bruce Springsteen or Rolling Stones tickets. . . . They have a proven willingness to pay for music.”

I agree, that older customer have a higher price point for CDs, but to argue they will pay this prices because they pay this high prices for concert tickets is wrong. The market for recorded music has changed and the consumer behavior is changing .
The older people pay the higher CD price cause of convienience, the habit of buying and loving analog products, missing know how or interest in the digital music world. That has nothing to do with the entertainment pricing. If the money get short, they would soon change their price point and go to the concert anyway.
There is definetely a willingness to pay for music under young and old consumers alike. The young ones just spend their money more for tickets at the moment (The live entertainment industry has a big market growth in the last years. Ticket prices still growing.)
The second point I disagree was the suggestion to an indirect price increase this way:

“(…) reduced the number of tracks on some discs. On a per-­song basis, this amounts to a price increase. Howard Stringer, at that time the chairman and CEO of Sony Corporation of America, said that consumers actually prefer fewer tracks on each CD, and added that putting fewer tracks on a CD could speed up the next release by the artist.19 Although this reflects a price increase—customers get less for their money and spend more often—it does not hurt them as long as the artist remains popular. This move reflects a return to the way record companies released albums decades ago.”

The decision how frequent you can do releases with an artist is much to complex and its often not the problem that there are no new songs of an artist.
The production of an album are fixed costs and I don`t think you can really save songs for the next album… Music is not a FMCG product where you make smaller packages, and save a lot of money.
Music is a creative product with fast moving trends. Is a potential “hit song” written today also a hit next year? Perhaps is it works for a few artists, but not for the whole industry.


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