Edible Apple

At Macworld 2009, Phil Schiller announced that Apple would for the first time allow record labels to begin implementing variable pricing on the iTunes Music Store. Instead of a blanket 99 cent price point, record labels would now have the option to charge $1.29 for more popular songs and $0.69 for less popular tracks.

Variable pricing on iTunes went into effect in early April, and it wasn’t long before almost every top song on iTunes jumped from $0.99 to $1.29. And always looking to make a little extra change, record labels increased the prices on a number of older, yet still popular, songs as well.

At the time, it was unclear how changes to the iTune pricing structure would affect music sales, and while it’s certainly still too soon to make a final determination, a recent studyby Billboard of Nilesen SoundScan data suggests that the gamble on higher iTunes prices is paying off for record labels. While most tracks that saw an increase in price suffered a slight drop in sales, the $0.30 price difference more than made up for that fact, and in the end, worked to increase overall revenues.

As an example, in early April, individual tracks from Pink Floyd’s epic “Dark Side of the Moon” album were bumped up to $1.29. Shortly thereafter, song sales from the album dropped by 11% while sales of the album as a whole remained stable. All told, revenue from “Dark Side of the Moon” was up 12% in the 6 weeks following the price change compared to revenue earned in the 6 weeks before variable pricing was put into play.

In conducting its study, Billboard tried to isolate any external factors aside from price that might influence sales numbers, and so it focused its study on popular artists like Sublime, Jack Johnson, and Bob Marley who “sell steadily, but [don’t] see spikes from TV exposure or media coverage.” – and across the board, Billboard found that higher prices resulted in fewer sales but more revenue.

Notably, Billboard only examined sales figures from approximately 70 artists, so while the study certainly isn’t conclusive, it does give us an idea as to how variable pricing is influencing music sales and overall sales revenue.

Specifically, Billboard found that most songs with a higher price point experienced a nearly 21% drop in sales. But again, the 29% increase in price more than makes up for that. Not surprisingly, songs from the top 40 were more impervious to price changes, and only experienced a near 11% drop in sales after being bumped up to $1.29.

Notably, despite Billboard’s attempt to minimize the influence of other factors, there was only so much they could take into account. For example, they concede that a seasonal drop in sales often occurs after the first quarter, not to mention the fact that the pricing changes on iTunes didn’t happen in one fell swoop, but rather took place gradually over the course of a few weeks.

Still, as record labels continue to experiment with variable pricing in an attempt to craft the most efficient and profitable pricing structure, and indeed a lot of these experiments are based on simple trial and error, you can bet that variable pricing will only become more common place going forward. In its report, Billboard noted that tiered pricing on iTunes is “already responsible for a 10%-15% increase in revenue on average for affected tracks..” And with CD sales still slumping, record labels need all the help they can get.