Analyzing Managerial Decision: iTunes Music Pricing

by

HCM-540, MBOL5, Health Care Organization
Instructor:
Saint Leo University
Distance Learning

November 10, 2013

Abstract
Apples’s Itunes music store came upon the music industry in 2003. It quickly became supreme within the music industry. The iPod, Apple’s MP3 players, and iTunes software were all interfacing, making it one of the more popular technology favorites among consumers. At odds with iTunes were the music companies crying foul over infringement and pricing. Buying overpriced CDs were quickly becoming a thing of the past. Music had been illegally accessed through peer-to-peer file sharing networks. With the recognition that music was being stolen, other ways were being developed by those with a stake in earning a profit. The industry had to decide if it should allow piracy to continue of develop variable pricing alternatives. This paper takes a look at alternative pricing in the case study, iTunes Music Pricing. At the conclusion, readers will have a better understanding of variable pricing policies.

Introduction

Variable pricing represents a concept use, by Apple, to describe the structure of pricing to advertise downloadable data. Variable pricing involves the different cost of a product for based on the preferences of the producers. This varies from the model of flat pricing, where one fixed price is applied to those items that are the same. Content of purchased songs, all cost one price and all movies will cost another. Apple captivated the music industry with its introduction of variable pricing through iTunes Music store. Variable pricing was not welcome by music executives of the industry but Apple quickly demonstrated its pricing power in delivering a product and convincing executives that its policy was here to stay.

The Best Pricing Model

A variable pricing policy would be the best model for iTunes to raise the sales revenue at its Apple’s Music Store. A variable pricing strategy would allow Apple to charge a higher price for popular music and a lower price for the songs with less popularity, with hopes that higher sales would be generated. This would make up for decline in sales of the more expensive songs but eventually striving in the direction of increasing overall sales. Billboard of Nilesen SoundScan suggests, that 21% percent of music with a higher price point saw almost a 21% decline in sales but achieved a 29% positive performance in price that more than makes up for the loss (unknown, 2009). Top 40 was more resistant to price fluctuations, and saw a near 11% decline in revenue after being increased to $1.29. These top 40 songs, which have an inelastic demand should be unchanged by the increase in price. Consumers of the top 40 songs that demonstrate price insensitivity will contribute greatly to the increasing revenues because the optimum price can be gauged at a value that is greater than marginal cost. ITunes Music Store would be better equipped to take on the growing opposition of large wireless carriers presenting downloadable musical content to its cell phone users. Maximized returns are supported by the variable pricing strategy by permitting the company to amend the value per-unit price increasing revenues.

Potential Pricing Policies

There several pricing policies to explore for Apple’s iTunes Music Store. One pricing method is the Product Bundling strategy. Bundling would allow Apple to bundle and sell a mix of different songs; old and sell them at an acceptable price. Bundling allows Apple to remove older music from its inventory serve as a means to attract other potential customers. Both customers have opposite relative valuation of each product. The minimum bundle value has a greater value than the sum of minimum reservation prices for each product (Brickley, J, Smith, C & Zimmerman, J,2009). Another strategy is the group pricing policy. The group pricing policy would allow Apple to target group sensitivity by analyzing the attributes of the target group. For example, Apple might segregate its music customers by age, income, or dress group. If using age, Apple knows that a certain age group may prefer rap music of the today as oppose to the rap music in the era of 1990. Additionally, it offers the ability to limit product transfer in submarket groups. Block pricing takes advantage of the multiple unit of purchase by consumers. The individual demand for products slopes downward as the purchase of products increases. For Apple’s iTunes management, it could charge customers a price equal to the marginal cost of each unit purchased. For example, the first song purchase may be for 99 cents, second 98 cents and so forth. Another way is to charge a block price for multiple units with a declining price for each successive purchase. Two-part tariffs take advantage of customers paying an upfront fee for purchase rights of a product. This strategy is often used by amusement parks that charge an admission fee and then charge a separate price to enjoy the rides. Apple could charge a small fee for membership and then a fee to purchase its units. Depending on the growing popularity of iTune’s music, Apple may be able to extract more profit from its customers.

Pricing Risks

Apple runs the risks of buyers not being willing to absorb the various price differentiation to iTunes music. One music executive, in the case study noted, “We need to convert more people to the habit of buying music online.” It was his belief a price increase would not be the best resolution to raise the habit of purchasing music online. Consumers are still finding technology to download free music leaving the industry to find a way fend off piracy of illegal downloads and make it better and cost efficient for users to buy music online.
Pricing Objective
Apple’s overall objective is to make a profit from all sales and not just online music. After analyzing Apple’s 10-k statement of 2004, their sales totaled $8,279 million dollars; it can easily be observed that iPod sales were $1,306 million dollars while the other merchandise totaled $278 million dollars (Jobs & Oppenheimer, 2004). Apple’s digital iPods and music account for more than 15% of the total revenue. The sales for each product had accelerated in comparison to the prior years; an increase of 279% and 672% respectively. Comparatively, Apples strategy in each market is to maintain prices at a low level so a high rate of return is realized from the iPods. If Apple were one dimensional in product offering, they would need to adopt a different pricing strategy.
Future Pricing

Apple’s awareness of managing the pricing strategy of downloaded music is likely to change in the future. A view of the market, as it was in 2004, shows that Apple had a great influence over the online music industry. Apple’s introduction of the iTunes and related products gripped the established record executives and eventually garnered much respect for their entry into a competitive market. As of 2008, Apple has managed to gain substantial leverage with the record companies. However, as competition grows, it will lose leverage based on new entrants to the market and developing technology. Potential competitors will include wireless competitors who will begin to offer similar types of downloadable formats for music. Companies such as Amazon and Pepsi-Cola have already begun to collaborate their marketing efforts. With a growing number of players competing for a share of the market, it is a safe assumption that Apple will no longer be as dominant as it once was. Though competitors and substitutes will be key in future pricing strategy, Apple seems positioned to continue to lead in the music industry.

Conclusion

Variable pricing is a way of allowing businesses to vary the prices to different market segments, for the same goods or services. Apple demonstrated its dominance in the music industry by introducing its variable pricing strategy that would eventually change the way music is delivered and priced. Apple was able to manipulate the music industry while extracting a profit using its iTunes software. Executives in the industry no longer have exclusive power on the type of pricing offered to consumers for their musical products. While other pricing strategies are available such as cost-plus pricing, group pricing, two-part pricing and block pricing, variable pricing allows Apple to take advantage of customer sensitivity; capitalizing on popular items. Each should be examined because there will be different risks that drive the choice of pricing policy.

References
Brickley, J, Smith, C & Zimmerman, J. (2009). Managerial economics and organizational architecture (5th ed.). New York, NY. McGraw-Hill Companies, Inc
Costello, S. (2013). Variable pricing tiers in itunes. Retrieved from

http://ipod.about.com/od/itunesplus/a/itunes-pl-price.htm

Golijan, R. (2013, April 28). itunes turns 10: How apple music store killed old music industry.
Retrieved from http://www.nbcnews.com/technology/itunes-turns-10-how-apple-music-store-killed-old-music-6C9633923
Jobs, S., & OPPENHEIMER, P. (2004, November 30). Apple computer, inc. 10-k. Retrieved from http://investor.apple.com/secfiling.cfm?filingID=1047469-04-35975&CIK=320193
Unknown. (2009, July 22). Variable pricing on itunes already generating more revenue for record labels. Retrieved from http://www.edibleapple.com/2009/06/22/variable-pricing- on-itunes-already-generating-more-revenue-for-record-labels/
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