Josefina Anorga Carlos Albizu University iTunes Music Pricing Adopting a variable pricing policy might increase the sales revenue of Apple’s Music Store. Pricing the more popular songs at a higher price and the less popular ones at a lesser rate would generate higher sales for the lesser popular ones. Thus making up for the slight drop in sales of expensive tracks and ultimately working towards overall increased revenues. Although most songs with a higher price point experienced nearly 21 % drop in sales, the 29 % increase in price made up for the loss.
Moreover, sales for the top 40 songs have a relatively inelastic demand and are expected to be unaffected by the price rise. The customers of these popular songs are price-insensitive and hence make a greater contribution to the increased revenues since the optimal price can be marked at a value much higher than the marginal cost. With the tiered pricing structure, iTunes Music Store would also be able to tackle the increasing competition by the major wireless companies offering downloadable music to the cell phone subscribers.
Variable pricing intelligently supports the maximized returns by allowing the company to adjust the value of per-unit prices to increase revenues and encourage the potential customers to be allured by the lowered prices of specific tracks. Apple’s iTunes Music Store might adopt other strategies such as Product Bundle Pricing strategy to make a bundle of different songs (both popular and less popular tracks) and sell them at reduced prices. This will not only help the sales of the slow moving sound tracks, but also work as a revenue generator by way of alluring potential consumers.
The bundling strategy will help in increasing profits by extracting additional consumer surplus. Another strategy that the company may adopt is the captive pricing policy. This approach will require the company to charge higher prices for the songs since they can only be downloaded exclusively on the iPod. This will ensure higher revenue from the existing customer downloads, however the company might not be able to increase the iPod sales following this pricing policy. The company may implement promotional pricing strategies such as offering some specific songs at discounted prices along with the purchase of the new iPods.
This would not only boost the sales of the iPods, it would also attract the customers to buy the usually expensive songs at discounted rates. This would directly promote the music sales thus increasing revenues. While the variable pricing strategy is seen as way to increase revenue, the sophisticated pricing structure poses high risks and potential costs to the company. With the advent of the information technology and the rise in the unauthorized file swapping networks, the company is already at a high risk of losing consumers, who can easily download pirated music free of cost.
Moreover, since a major share (about $0. 70) of the revenue per song goes to the record companies that have the right to the songs and the iTunes Music Store gets a very small share of the profit from the downloaded music, the company cannot afford to lose profits from the sales of iPods. A complicated pricing structure poses a great risk of losing the customers to other companies, which will adversely affect the sales of the iPods also. With the music companies tying up with other competitors such as Amazon. om, who sell the music catalogs wrapped in digital rights management software, implementing the complicated pricing, would only mean losing the sales and promoting the unethical practice of unauthorized free downloads. Apple’s pricing objective of flat pricing is not directed at maximizing revenues due to the sale of downloaded music. The company is enticed to sell the downloaded music at low prices in order to promote the sale of iPods. Apple follows a profit maximizing policy for the iPods revenue stream and so follows a stable policy for the attracting the customers by a flat price for the downloaded music.
However, the record companies are only concerned about maximizing revenues from the downloaded music and they are not concerned about the revenue from the sale of iPod. The iTunes Music store is a service that Apple offers to its consumers who wish to buy the third party music and audio books over the internet. Moreover, with no subscription fee and broad range of personal rights being offered with the music content, including playing the music on an unlimited number of iPods, Apple is clearly not focused at generating increased revenues through music downloads (Forms 10-K).
Apple’s ability to control the pricing of downloaded music is likely to change in the future. Third party content providers require Apple to provide variable pricing policy along with adequate security mechanism. If the company continues to focus on revenue maximization of iPod hardware sales considering the music content download as a peripheral business activity, the recording companies might get agitated due to the absence in increased revenues.
The company might lose its leverage over music companies owing to the increasing competition. With other companies like Amazon ready to sell the music with embedded security features, the music companies are likely to collaborate with companies thus adversely affecting iTunes Music store business.
References Forms 10-K, United States Securities and Exchange Commission: Apple Computer, Inc. Retrieved on August 18, 2010 from http://www. sec. gov/Archives/edgar/data/320193/000104746904035975/a2147337z10-k. htm
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