Ever since iTunes instigated the $0.99 per song model, it has been hotly debated. Some folks think $0.99 is too expensive for a song; others think it is not expensive enough. Still more think that there shouldn’t just be one standard price for tracks; that labels and artists should have more flexibility in pricing so that hot, new items can be priced higher than catalog material, following the pattern in brick and mortar stores. As part of this overall debate, there seems to be emerging what I think is a disturbing trend of wanting the new standard per-track price to be in the region of just $0.25.

I was prompted to write this specific post by what I read in a recent email newsletter from Bob Davis of Soul Patrol. He referred to some comments from Nettwerk Management CEO Terry McBride suggesting that the sweet spot for selling digital tracks is $0.25 and that this is what labels should be selling them for in order to create a ‘tipping point’ for digital music sales. Davis suggested that he felt the same way based on sales of his Virtual Album project where he varied the pricing of the album and found that approx $0.20 was the most popular per-track price.

I definitely agree with the overall concept of having variable pricing available as a digital retail model – the more options for artists, labels and consumers, the better. But I just can’t get my head around the overall goal of making music so ridiculously cheap. Call me old-fashioned but music in digital format has already been greatly devalued in the eyes of the consumer so why perpetuate this devaluation by suggesting that a song is only worth $0.25? Shouldn’t we be doing more to add value, not decrease it?

I think free and cheap music has its place for promotional and marketing value but when people then have their interest piqued enough to actually make a purchase, I think they should be shelling out more than $0.25 per song, or $2 per album (as McBride suggests).

Davis says “smart Indy artists & labels who adopt [variable pricing] as a core strategy, will be successful in not only making money, but more importantly will be able to identify and connect with their “true fans” and therefore be able create their own marketplace that will sustain their career/business for many years.” I followed up with him via email and he further explained his position:

The price of a song should be whatever the market will bear. The cheaper the song, the more people will become customers. It’s simple economics 101.

Consider the following examples:
If 100 people buy at $1.00/song, then you make $100.00

However it’s better for the career of the artist, if they sell 200
copies at $0.50/song, because now they have 200 fans.

Even better if they sell 400 copies at $0.25/song, because now they have
400 fans.

See it’s really the total number of fans (people who actually make a purchase) that is important to the artist long term career prospects, not the short term revenue.

The identification and obtaining the permission of fans to contact them directly in the future is what should be the primary goal of all indy artists on the internet. Identifying them and obtaining their permission to contact them directly in the future becomes the single most important online asset of the indy artist, because that is how you build your
consumer base for the future.

In my example, I now would have 400 people (as opposed to 100 people), who are my fans, that I can engage directly in economic activity, that because they are my fans (ie; they have actually brought something from me at least one time), I can probably sell them other things (concert tickets, merchandise, etc) in the future.

If you extrapolate a little, then if I have 10,000 people who are willing to spend at least $10.00/year with me, then I can have a minimum annual income of $100,000/year. Now I don’t have to have a “day job”…

Bob’s logic makes some sense on the surface but I think it lacks real practicality, especially for indies. I’m curious as to where Bob thinks the average indie artist can find 10 000 paying fans per year. From my experience, pricing is not the challenge for indies, gaining visibility is, and certainly the kind of visibility that could attract 10 000 customers. I don’t think that the $0.99 track price is the barrier to entry for consumers. Many indies can’t even attract enough attention when they give their music away. It’s more that they don’t necessarily have the resources for the marketing needed to attract a large number of fans. I think 10 000 paying fans per year is quite a steep goal for the average indie. And I’d argue that if those people are truly your fans, they would be willing to pay more than a few cents for your music. Once the emotional connection is there, if you are producing good music, people will pay for it. And I feel that should be the goal – to produce music good enough that people want to buy it – not to make your music available for bargain basement prices. Of course, as Bob states, indies need to develop that direct relationship with their fans, but there are other ways to connect with potential fans and get them on your mailing list without devaluing your product. This model might be able to work for majors who can make up for the low price with volume of sales but for indies I don’t think it’s viable.

Additionally the $10 per year that Bob’s plan requires each of the 10 000 to spend, means at $.25 per song, each one of those 10 000 needs to buy 40 songs every year! Not all 10 000 will want to buy the same 40 songs so the artist then has to produce way more than 40 songs every year of retail quality – again that could be a tall order. But then I guess if you’re only charging $.25 per song, they don’t have to be that great eh? Do we really want music to become fast food? Cheap, hastily consumed, and an entirely forgettable experience?

I’d also argue that just because I forked out $0.25 for a song, that hardly qualifies me as a fan and isn’t an indication that I’m that invested in you as an artist. However, get me to buy your whole album for $10 and maybe I’m someone who would then be willing to part with more cash to go see a show or make some additional purchase because I clearly have a real interest in your music.

Kevin Kelly recently suggested you only need “1000 true fans” to make the same living that Bob suggests – approx $100 000/year. Kelly’s concept is that you just need 1000 fans who’ll spend $100 in the course of a year. I’m not sure which model is better and would be interested to hear from musicians and labels who have direct experience to relate but it seems that this would be more feasible – a smaller number of people who have a strong connection to your music.

VARIABLE PRICING AS A PROMOTIONAL TOOL

I would suggest using variable pricing as a promotional tool, but not as a way to lower the benchmark for music. Reel listeners in with a limited time cheap download or something similar but the ultimate goal should be to develop the emotional connection and turn that buyer into a real fan – someone who thinks your music is actually worth paying for. i.e Use cheap pricing in a similar way as free promotional downloads – to create demand, stay visible, attract an audience – but the ultimate goal is to get fans to fork out $8 – $10 or so for a whole album, not $2. Lil Wayne gave away albums worth of free music in order to develop anticipation for Tha Carter III which is being sold for approx $10, not $2, and moved       1 000 000 units in its first week.

Labels and indies should absolutely experiment with variable pricing and see how their individual market and fans react in order to make the best informed decisions. The more choices for artists and consumers, the better. But I worry that lowering the bar to such a level will adversely affect the quality of music being produced, and the amount that consumers are willing to pay for music-related products.

MUSIC AS A LOSS LEADER

In a recent blog post on what seems to be a likely Amazon-Myspace deal, Lucas Gonze points out that for places like Amazon, digital music is a loss leader because the margins aren’t really that profitable.

“I’m skeptical that downloads will ever be a non-trivial revenue source for Myspace. The margins are too low.

Amazon itself doesn’t make anything on them; it makes money on downloads by using them to attract shoppers, and then upselling products with a real margin. For example, a user will click into Amazon to buy a download, see a recommendation for an MP3 player, and buy the MP3 player.

So if Amazon has a hard time making money on music priced a little below iTunes standard pricing, how can downloads priced at a fraction of the cost be profitable for indie labels and musicians?

Applying the concept of loss leaders that Lucas mentions here, it logically requires that the download is then just the gateway to other products that the musician will be selling for more money – concert tickets perhaps? Merchandise? These are probably the most common supplemental sales, but the fact of the matter is that the digital song is the most viable sale – possibly the cheapest and easiest to manufacture and distribute. The cost is unaffected by geography, unlike concert tickets where an artist has to physically be somewhere and must pay for his/her travel expenses and that of the band. So I’m not seeing how cheap downloads as a loss leader would really work for the individual artist or small label. I can see cutting the cost of a particular track or album in order to provide the gateway to buy other albums at a higher cost but I just don’t see how a viable business for indies can be made from cut-price downloads.

This morning I just read an article by Kavit Haria on InnerRhythm.org discussing a similar topic. Kavit takes a similar view to Bob: “it is no longer about how much people should pay for your music; it is about getting your music into the hands of as many people as possible.” While this may be true – the monetization has to come from somewhere and again, the struggle for indies IS getting it to as many people as possibleand I don’t think price in itself is the barrier.

I’d like to see some further exploration of other realistic revenue streams, or “upsells” that indie artists can pursue, especially if they plan on taking the tactic of making their music sales a loss leader. Feedback is always welcome. As always I’d love to hear from bands and labels who may be experimenting with these ideas and have real-life experiences to share.

They discovered that:
83% of Americans discover music through terrestrial radio, movies, or television
64% found out about music from friends and family, while
56% used online sources to find music.

Not only that but even for respondents that used the internet to research music, only 12% said the internet had a major role in what they purchased.

While the internet did not play a major role in how respondents determined what to buy, the study showed that post-purchase, 53% of music buyers went online to engage in some way, such as going directly to the artist’s site or myspace, looking for live performances online, reading blogs about the artist, sharing with friends on sites like facebook, or rating/reviewing the music online.

CDs aren’t quite dead.

With all the hubbub about the decline of the CD it’s interesting to note that 82% of music buyers say that all or most of the music they buy is CDs. Only 15% said at least half their purchases were individual digital files.

So while CDs may be on the decline, relatively speaking, a lot of people are still buying them, and based on this survey, I’m guessing most of those CDs being consumed are issued by the major labels.

So this would all seem to paint a pretty grim picture for the digital music marketer and indies without access to mainstream media eh?

Well, maybe, maybe not. Here’s my take on it.

What About The Long Tail?

Let’s look first of all at the folks that were surveyed – a random sampling of about 2000+ Americans. In other words, more than likely the participants skew toward mainstream music fans. If they are buying music they hear on radio and TV, and relying on these sources to find out about new music, they are most likely not buying underground hip-hop or cutting edge electronica for example. They are buying pop music because that’s what those outlets expose them to. So what need do they have to go online to discover or be influenced by the internet? Everything they need is directly accessible to them via mainstream media in their everyday lives. They are buying mostly CDs – again, easily available in your local Target, Best Buy etc. No need to go online for that. But if you are looking for something outside of the mainstream, the first place you are going to turn is to the internet.

I’m guessing if you surveyed a sampling of people that primarily buy music online, or are fans of niche genres – the long tail, if you will – the numbers would be radically different. For this type of audience I’m guessing that the internet plays a very different and more crucial role.

This may seem like stating the obvious but surveys like this are really only useful if you are interested in what the mainstream is doing.

I’m not really ;)

Consumers do engage online after purchase.

Although majors love to complain about online bootlegging, in my opinion they shouldn’t be worrying so much about that. It seems pretty clear to me that it’s not really their target audience that’s doing most of the bootlegging. Those people are hardly even using the internet to find music, never mind trying to figure out how to get it for free. I’m guessing that these people that buy cds and don’t go online till after the fact are NOT on BitTorrent looking for the latest Britney album. I’m not suggesting that online piracy is a non-issue, but I think the major labels are placing undue attention on it when instead they should just be re-tooling their strategies to make the most of how their consumers are behaving pre and post purchase.

The report points out:

“Post-purchase online activity can encourage additional buying. Overall, 26% of internet users who bought music in the past year said online resources led them to buy more music. Among internet users who bought music in the past and who did at least one post purchase activity online, 40% said online resources led them to buy more music.”

Since, according to this report, this audience is looking to engage online post-purchase, majors should stop fussing so much about what happens online pre-purchase and focus on more engaging websites for their artists and developing the customer relationship from that point – collecting email addresses, giving consumers reasons to keep coming back and eventually buy more from that artist.

Indies could learn a lesson from this too – engage your consumer whenever possible to earn future business. This is also another reason why you need your website to be well optimized so that when your fans Google you up after buying your music, they will easily be able to find and engage directly with you.

To me the lesson here is that once you get the consumer engaged online, it’s easier to encourage them to purchase again. So it’s all about cultivating that relationship with the buyer directly, which is so much easier to do online, even for indies and very hard to do offline.

So the way I see it, this report may be not so encouraging to the new media departments of major labels, but indies should still be confident that in this digital age, you can have direct access to your potential consumer and can develop direct relationships with those who are more than likely actively searching online for music like yours!

Internet is for the indies!

Phew, guess I still have a job ;)

Also see Coolfer’s take on this report