Record labels should cut prices to boost profits

Mon Feb 1 2010, 17:06 PM

Record labels could significantly increase their profits by lowering their prices, according to research from the University of Pennsylvania. In a survey of more than 600 digital music consumers, the majority of respondents said they would buy more music if prices came down. Demand would be so much higher at lower prices, says the report, that label profits would increase. The report also highlights that pay-per-song models, such as those offered by iTunes, are much more popular than subscription-based models.

The research says labels should aim for between USD0.30 and USD0.40 per song, rather than the USD0.60 they currently charge distributors such as iTunes. This would mean the cost to the consumer would come in at between USD0.60 and USD0.70 rather than the USD0.99 that is the most common price on iTunes.

"The music labels seem to be charging much higher fees than they should," says report author Raghuram Iyengar. "If the price goes down, consumer demand will go up, so much so that overall profits will be higher."

Pricing is a contentious issue in the record industry with many companies still seeking the high profits they generated before digital music took off. Due to the relatively high costs of manufacturing CDs and cassettes, and because the record labels controlled distribution, the industry was able to charge more for music before the advent of MP3s. However label prices have failed to come down despite the advent of free digital alternatives, increased competition and the declining cost of distribution. Many of the consumers questioned were reluctant to pay the same price for a digital download of an album as for a physical copy.

The US music industry has struggled in the recession, with revenue slumping from USD11.75bn in 2006 to USD8.48bn two years later. Iyengar believes this could be turned around if prices were to come down. "Unfortunately, the recorded music industry continues to labour under the assumption that people associate higher prices with increased value, rather than embracing the supply and demand theory so familiar to the college freshmen their music targets," he says.

The report contradicts recent research by the music industry which suggests consumers are willing to pay more money for hit singles. A recently introduced three-tier pricing structure for single track downloads in which the most popular tracks are priced the highest at USD1.29 has led to a reported increase in digital revenues. However, lower prices could also give retailers more flexibility to create pricing and bundle options which attract a greater number of buyers.