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Pimp Your Music Business Plan – Pricing Strategy 102

So in my last post I wrote about how you can pimp your Music Business Plan by coming up with a creative pricing strategy.

The main idea I talked about was that offering music free of charge doesn’t mean the band’s actually incurring a loss. This was due to something called “sunk costs” and is better explained in my last post, which you can read here.

Willingness To Pay Explained

This time around, I want to show you what we call Perfect Price Discrimination. First of all, understand that every person has a willingness to pay for a product. You may want to spend more money on an album by a band you like and know, than on a band you dislike or don’t know. This willingness to pay can be expressed in your local currency, such as $0, $5, $10, etc.

Let me give you an example. Keeping all other variables simple an unaltered, let’s say I walk into a music shop, I see my favourite band has a new album and they’re selling it for $35. Now $35 is kind of steep for an album, but since it’s my favourite band, my willingness to pay for their album is higher than it would be for some unknown band. I would totally buy their CD for that price.

Now, sitting next to my favourite band’s CD, is a CD by another unknown band. I have no idea what kind of music they play, and just from looking at it, I figure that I wouldn’t pay $35 to buy it. I don’t think I’d even pay $10 to have it. Actually, I don’t mind having it for free. To sum up, my willingness to pay is $35 for my favourite band’s newest album and $0 for an album by some unknown band.

Measuring willingness to pay is actually a little more complicated than this. One big challenge is that we aren’t that expressive about how much we are willing to pay, because we don’t think much about it. It’s not like we ask ourselves “Oh, well if they sold that album for $25.48 rather than $25.50, I would totally save 2 cents, so I could go and share them on Lalala Music”. But this subject is beyond the scope of this post, so let’s not worry about it and move on with our lives.

What The Hell Is Perfect Price Discrimination?

Understand this: Price Discrimination happens when businesses charge different prices to different groups of consumers for basically the same product or service. Why would they do something like that? Well, so that more people will buy their product or service. Remember, each person has their own willingness to pay.

Perfect Price Discrimination is nothing more than an optimal pricing, where the business separates the whole market into each individual customer and charges them their exact willingness to pay. This allows them to, let’s put it like this, make more money off everybody, rather than only off a few select groups.

Optimal pricing is a normal practice, but most businesses prefer working with price lists, so they do not have to negotiate prices for every single person, which could be quite costly.

So What’s The Point Of All This Chatter?

Enter the Internet. You can set up a website that allows your (potential) fans to download your music by paying whatever they feel like it’s worth (their willingness to pay). The beauty of the system is that it’s automated, so you won’t have any additional transaction costs or setup to worry about.

So instead of setting the album at a fixed price, where only those people would buy, which have the same willingness to pay as the price you set, you’re increasing your potential profit, by offering it to anybody at any price they want to pay. This automatically increases your potential sales and profit, as well as gets your music out there to more people. Win-win-win-win, I like!

If you need an example of a band that did something similar, read about Radiohead and their album “In Rainbows” by clicking here.

The idea of this post was to open up your mind to new possibilities of pricing your music. Don’t just stick to the usual, start innovating today so that one day I can post a link to your Wikipedia entry to show off how creative you were in overcoming a major challenge.