Apple's Risky Price Increase on iTunes

Last Updated Apr 13, 2009 12:12 PM EDT

Apple changed how many of us listen to music with iTunes, the online store where any individual song could be downloaded for 99 cents. Several billion songs have been purchased at that price.

So why is Apple messing with success by allowing music companies to raise prices on popular songs to $1.29?

Because it probably will work to generate more revenue and profit. Although some customers will be turned off by the 30 cent increase, more than enough will go along to make up for the lost business, Harvard Business School professor Anita Elberse tells CNET News in the story Will Consumers Determine iTunes Prices?

This is a fascinating experiment on pricing in a dour economy. Few companies have the guts to jack up prices, let alone a 30 percent increase.

I won't be buying as many songs from iTunes as I have in the past. Last year I spent in the neighborhood of $500 on iTunes, most of that on single downloads (as opposed to entire albums). So 30 percent additional cost would tack on another $150 to my bill -- equivalent to a trip or two to the grocery store, five fill ups of gas, ten books in a series my daughter loves to read, or a date night with my wife.

In today's uncertain economy, many of us start to make these mental calculations of value. My iTunes purchases this year have already dropped, and they will drop even more with the price increase started last week. (In fairness, prices of less popular songs are dropping on iTunes to 69 cents. But they are less popular for a reason.)

What does your gut tell you about this pricing strategy? Will it work? Take our poll.

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.