Why Apple Can Hikes Prices In A Recession
Apple is going to start charging higher prices for hit songs, a sharp reversal to a policy it had maintained despite vociferous opposition from the music industry since launching the iTunes music store in 2003.
Apple is introducing a three-tiered pricing scheme, with price points at 69 cents, 99 cents, and $1.29. While most songs in Apple's catalog will remain at the original 99 cent price point, many hit songs will now cost $1.29. Apple also promises that for every song for which it charges $1.29, it will drop the price on 10 other songs to 69 cents. But that's nothing more than marketing legerdemain, since Apple will sell exponentially more songs at the higher price point, while its cost of production won't get any higher.
Moreover, it's apparently pretty tough to find a song that costs 69 cents.
Finding the bargains ain't easy: every version of a sure you'd think MUST be ripe for a discount, lets say, Macarthur's Park -- even versions by Della Reese and Andy Williams -- are still $0.99. Go figure.)This might seem like vindication for the music industry. But while the music labels might be celebrating publicly, this isn't some hard-won victory over Apple CEO Steve Jobs. Jobs has simply decided that iTunes has achieved sufficient critical mass for him to raise prices.
So how can iTunes raise prices during a recession? According to pricing strategist Al Lee, director of systems and business architecture at Motorola, Apple has created an emotional bond with users through simplicity of use and features like the "genius" music recommendation engine, that allows it transcend price. The iPod music player's brand is so powerful, Lee noted, that people took to accessorizing their MP3 players with white ear buds, even if it wasn't an iPod, because white ear buds were identified with the iPod. "Apple has a customer base that is very much attached to how they use and get content," Lee told me. And "the rule in business is you grab all the money on the table when you can."
Amazon.com also sells songs in MP3 format compatible with the iPod and iTunes music library, some at just 89 cents. But that doesn't mean that Amazon can also raise its prices, nor that it will convince many people to switch based on price. It remains to be seen whether people will really pony up an extra 30% for hit singles, but Apple hasn't made many missteps with its iPod/iTunes products, and the guessing here is that it hasn't now either.
But you might not want to try this if you're selling to business rather than consumers. "Brand matters more in the retail consumer space, less so in the commercial space," noted Lee. "The commercial space is all about economics-- what is the economic outcome of what I'm buying."