In for a penny, in for a pound: Flexible pricing in the Music Industry and beyond.

During my studies, I reported on the developments in distribution and consumption in the past and current music markets – noting all of the obvious signs that physical consumption was either dead-or-alive (much like Schrodinger’s Cat) – depending on who you chose to speak to about the subject – and digital consumption, especially in the form of streaming, was making huge strides to replace its inevitable husk. However, this was not the most interesting point I observed, no.. no.. no… This spot was reserved for the multiple services now offering music to consumers at the price of nothing, or almost nothing. The catch being, of course, that these services were set up as “pay as you feel” / pay-what-you-want (I will refer to this as ‘flexible payment’ or ‘flexibly priced’ throughout this article) systems, requiring that consumers align generously and actually end up paying similar or more than they would have, on average, under a traditional system.
One company that is pushing major boundaries for artist-led business is Bandcamp, a familiar name to most. What is interesting about Bandcamp is whilst the industry continues to become locked in a subscription and playlisting market, the alternatives being offered in the form of downloads, physical copies and the famous ‘pay-what-you-want’ system resulted in growth for the company in 2016 [1].

The argument is set: does allowing the user to set the price create an equally prosperous scenario for the producer?

Whilst most surface-scratchers will reference a well-known, incredibly succesful release stunt conducted by Radiohead for their album “In Rainbows”, in which, a user was allowed to select a price (including $0) for the digital version of the album, it should be addressed that this situation is unique. Radiohead are not only a band that are large enough (fanbase-wise) to conduct such a stunt, but the cult nature of the band itself lends directly to these kinds of alternative systems of distribution. In Rainbows “sold” over 3,000,000 digital copies whilst this promotion lasted [2], which ultimately dwarfed the resulting 1.75 million physical CD sales, but which made more? Out of those 3,000,000 digital downloads, 62% resulted in no transfer of money at all and only 16% of sales were between the average CD price ($8) and $20. However, Radiohead aren’t fools. Not only were the lost sales recouped through the sale of around 100,000 premium $80 box-sets [3], but it was reported at the time that the band’s management were ready to pull the plug on the flexible payment system if the average price of the album “should drop too low” [4]. If you try to download a copy of the album today, you will realise this is exactly what happened. If this flexible method of payment is a success story in the case of Radiohead, then why is the rest of Radiohead’s back catalogue not subject to this system as well – shouldn’t every album, piece of merchandise, and concert ticket be sold using the same system? Of course not.

The prosperity of the system is questionable for big artists with cult followings, so how does this translate to the majority of artists that, due to technological advancements, are thanfully subject to both a reduction in overall production and distribution costs? Well, not so great either. Electronic music producer Subsquare released some interesting statistics about their experience using Bandcamp’s pay-what-you-want system as one method of distribution [5], which resulted in 1 in 7 downloads generating a positive income, with an average price point of $2.99. This, the artist states, is about half of what they would have made normally through a service like iTunes. Thankfully, Bandcamp’s flexible system fills a niche role as an alternative distribution platform and therefore an alternative revenue stream for smaller artists. Alternative income streams are critical for smaller artists and this seems to be where the critical benefits of a flexible system come into play, both in and out of the music world. Flexible systems are useful for attracting potential new customers, which can then be sold products to at full price when they return for more content (for example: an artist can provide a flexibly costed E.P, then a full-album at full price).

As Shelley M. Santana (Assistant Professor of Business Administration – Marketing at Harvard) states in a Forbes article [6] that sparked the need to write this post: “classical economic theory says you should pay nothing” in cases where flexible systems apply, and that is what most consumers of digital music seem to do (as in the case of both Radiohead and Subsquare). Forcing individuals to pay for music content in a post-Napster world has given rise to a numerous degree of problems such as consumers being locked into a subscription hegemony due to sheer convience – with an attitude that they should not pay for music outside of this subscription cap – and artists being locked into a platform hegemony, as refusing to publish to streaming platforms can often destine small artists to a career of obscurity. How does an system topple these problems? Mark Mulligan of MIDiA Research notes that the attempts to grip users into fixed-price subscriptions should theoretically increase the ARPU (average revenue per user) of a service, yet, it does the opposite: limiting the APRU of the most valuable customers and reducing the APRU of other customers [7], most likely due to a lack of choice in how to consume digital music – a reasonal observation given the drastic extinction of music platforms in the past two decades to the great green blob. Mulligan offers a potential method of moving the “aficionados” (high ARPU bracket) to a higher level in a tiered-band system and reducing the price of entry for the mainstream audience, with rewards being avaliable at higher bands [8]. However, the most interesting system proposed by Mulligan is similar to a Pay-As-You-Go system used widely in telecommunications – a listener (such as a infrequent listener of playlists) would only pay for as much as they use, giving them total freedom to spend less than they would have on a fixed subscription plan. Whilst all of these options would open more options to the consumer, it leaves the artist out of the equation. Unless this system allows listeners to use their PAYG credit to directly benefit the artists they admire, how will artists benefit from a service with many different options, tiers, and flexible price points?

The key could lay in the way that customers act.
In the previously mentioned Forbes piece, Santana explains the differences between “exchange norms” – the idea of an exchange between a business and a customer – and “communal norms” – the idea of an exchange between two members of a community. With the amount given in the latter, community situation depending on the relationship between the two parties. In a study conducted by Santana and Morwitz [9], it was found that the average sale price of items increased when they were advertised to individuals by asserting that “they” (the customers) and the businesses shared a “communal relationship.” This theory may explain the success of In Rainbows, as the fans of a cult band such as Radiohead share a much more involved relationship with the band; there’s Radiohead fan-clubs, forums, meetups, ect, and fans are therefore, assumingly, going to pay more, or will be willing to purchase the premium editions at a higher price. In an article by Clark and Jordan [10] it is discussed that communal norms of trust and relationship may set boundaries as to the generousity of two parties, dependent on their status with each other and the seriousness of the costs involved. An example given states that whilst a person may be willing to take a best-friend out to lunch, or purchase them a birthday gift, they will never be willing to pay for “house, car, or college tuition” fees. This draws parallels in the music world, whilst a fan might buy a t-shirt, album or a ticket to a gig, they will not be willing to single-handedly cover the costs of that band’s entire tour. Fans who relate or communicate strongly with bands may also have a higher threshold of generousity than those that do not. This seems to be the key to the success of flexible pricing systems.

Making significant connections with listeners is a difficult process which explains the need for marketing teams within large music labels. However, If you have ever sat outside a bar on a warm, weekend night in a city with a vibrant music scene, you most likely will have been approached by a new artist trying to sell a variety of music: reggae EPs, punk demos, hip-hop mixtapes, and the like. This is a primitive form of going straight to the listener with a flexible pricing system. Most of the time these marked, burned CD vendors will give CDs out at a low price, or possible for donations or in exchange for a like/share on a social media platform – the idea is that by giving away this music for next-to-nothing, there’s a potential market for new listeners. By pricing the content at full-retail, they would just be pushing away potential listeners. Whether this practice is successful or not is debatable, but the examples can be seen within other markets. Take for example, Harvest Coffee & Cafe in Shelbyville, Kentucky: the business operates as usual in normal hours, but on Wednesdays they take a “community-focused” approach, offering up food for whatever their patrons can afford. This balances paying the bills using the exchange norms method and introducing the community to your unique buisiness by emphasising the communal, flexible pricing on one day per week. The exposure side of pay-what-you-want (trading low income for high exposure) can be extremely valuable, however, the act of giving control to the customer can build up trust between new customers and the producers of the conten, that can become financially beneficial. Customers of Harvest Coffee & Cafe may only visit each Wednesday, they may also build a liking for the food to such a degree that they return on regularly-priced days – just as listeners may continue to pay the bare minimum for releases, or they may grow a liking for the band and purchase new releases, t-shirts, gig tickets and other items.

I am under no illusion that Bandcamp’s flexible system works as well as traditional systems or other flexible systems in place (such as in Harvest Coffee & Cafe) due to the nature of digital music being less tangible than both physical music and a breakfast or dinner. This is a point that Bandcamp itself seems to state: pay-what-you-want only results in a transaction at higher-than-minimum price, 40% of the time [11] – whilst there is no statement regarding if this information includes minimums of $0, minimum prices are set by the user (which Bandcamp recommends setting at $7 for full-length albums) and can serve as a barrier, preventing people from paying nothing. Bandcamp assumes this will increase the overall profit by 50%, unfortunatley, they do not factor in the problem that occurs by imposing a minimum limit, something that many artists don’t do in order to entice new customers, as mentioned in the prior example. Brian Hazard made a passionate recognition of this problem [12], calling the minimum limit “a stumbling block”, he also opened up a much more personal argument, that free music, much like free food, sounds fantastic in practice but is already devalued before you have even interacted with it. The act of paying full price for music, in some way, represents the commitment you have made to enjoying the music – much like with a dinner, you can have poor experiences with paying full-price but the act of paying for, and enjoying, something worthwhile, well… there is no comparable free scenario. This is why, ignoring the ease of theft in digital music piracy (which flexible pricing does a great deal of good in weeding out) and regardless of tangibility, flexible systems do not seem to be as successful as systems in place for real-world products due to the lack of exchange norms – what Mary Rousseau refers to as a “contractual” perspective for an individual’s “own utility and/or pleasure” [13] – which states that if a customer wants to enjoy and listen, they are obliged to pay and support the creator.

Distribution of income in the music industry seems to be becoming both narrower (for large labels) and more expansive (for both smaller labels and large acts through entrepreneurship), raising the question as to why more flexible systems are not being tried outside of the Bandcamp method? Perhaps we’re only one system away from a complete shift in the way that bands and labels distribute, just as Patreon quickly became the method of income for many content-producers on YouTube? I doubt it, but I forsee a benefitial system arising that uses customer retention and insentivisation, producing a communal bond between band and listeners whether they be first-time listeners or uber-fans. This fits the flexible price narrative well and plays-off already present norms, such as the use of mailing lists and dependency on merchandise and concert sales. Attempting to insentivise fans could be the ticket to unlocking the success story of flexible pricing. For example: If a customer using an online store to purchase a band’s CDs, vinyl, or digital downloads is insentivised to sign up to a mailing list, like a band’s facebook page, or join a type of tiered membership program – such as the famous Metallica “MetClub” that began as a paid membership group in 1994, and now provides a link between the band and their fans – will these customers purchase more music than the average person? And is it possible that the extra attention given to the content creator through social media or email would potentially make up for the lost revenue from lowering the minimum limit through the sale of other products? Could a combination of a traditional sales combined with a reward/loyalty/tiered system using Santana’s theory of communal marketing (we’re partners, not customers/sellers) create a system, under which, the ARPU of a fan increases? I don’t know the answers to these questions, but in such a fast-paced, every changing, social media-driven music marketplace, I think it’s only a matter of time before answers begin to flourish.



Referenced in this article:

[1] – Bandcamp Blog (2017) – “Everything is Terrific: The Bandcamp 2016 Year in Review”

[2] – Music Ally (2008) – Exclusive: Warner Chappell reveals Radiohead’s ‘In Rainbows’ pot of gold.”

[3] – Daniel Kreps in Rolling Stone (2008) – “Radiohead publishers reveal “In Rainbows” numbers.”

[4] – Paul Thompson in Pitchfork (2008) – “Radiohead’s In Rainbows Successes Revealed”

[5] – Subsquare (2013) – ““A month of Bandcamp pay-what-you-want.”

[6] – Shelley M. Santana, Michael Blanding in Forbes (2015) –  “Pay What You Wish: What Happens When Customers Choose The Price.”

[7] – Mark Mulligan (MIDiA) (2015) – “It Is Time To Think Beyond The Monthly Subscription.”

[8] – Mark Mulligan (MIDiA) (2014) – “Why It’s Time For A Streaming Pricing Reset”

[9] Shelle Santana and Vicki Morwitz (2015)  – “Because We’Re Partners: How Social Values and Relationship Norms Influence Consumer Payments in Pay-What-You-Want Contexts”, in NA – Advances in Consumer Research Volume 43, eds. Kristin Diehl and Carolyn Yoon, Duluth, MN : Association for Consumer Research, Pages: 7-11.”

[10] Margaret S. Clark and Sarah D. Jordan (2002) – “Adherence to Communal Norms: What It Means, When It Occurs, and Some Thoughts on How It Develops… Article in New Directions for Child and Adolescent Development 2002(95):3-25

[11] Bandcamp – Selling [What pricing performs best?]

[12] Brian Hazard (2012) – “An Argument Against “Pay What You Want” Pricing”

[13] Mary F. Rousseau (1991) – “Community: The Ties That Bind” (P. 135).