The iTunes Store has been facing a lot of trouble lately. In recent years, the industry veteran has watched its download revenue growth slip, while subscription services like Pandora, Spotify and Rhapsody have been booming.
Part of the problem: iTunes hasn’t changed its pricing model since 2009. As a result, its annual organic revenue growth has slowed down, from over 50 percent per year for years to under 20 percent per year.
However, it wasn’t always that way. For many years, iTunes seemed to have pricing, and market share down to a science.
When the iTunes Music Store first appeared in 2005, all songs, irrespective of their popularity, were priced at 99 cents. That pricing stuck regardless of whether it was that year’s No. 1 artist, Kelly Clarkson, or consigned-to-oblivion Guy Lombardo.
By 2009, iTunes announced multi-tier pricing, which based prices on popularity, and perhaps some nod to the price sensitivity of consumer segments. Therefore, music fans could download Pitbull’s certified gold, party tune “Fireball” for $1.29, while “Midnight on the Interstate” by indie folk artist Trampled by Turtles can be purchased for 99 cents. Songs from the forgotten 1970s psychedelic rock band Vanilla Fudge have songs available for 69 cents.
The evolution to a three-tiered pricing system was an instant hit. While the demand for iTunes’ hit songs (those in the top 200) dropped by six percent, organic revenue for that segment grew 18 percent because of the price boost. Anecdotal evidence shows that the low prices boosted the sales of less popular music, like that from Vanilla Fudge.
But lately iTunes has been singing a different tune. While the overall streaming music business pulled in $1.4 billion in revenue last year – a gain of 39 percent – revenue from permanent song and album downloads from the likes of iTunes, declined one percent last year to $2.8 billion. (To its credit, Apple now offers iTunes Radio, a streaming version of iTunes that now competes directly with Pandora and others)
Since iTunes has been operating under the same pricing model for seven years, a fresh pricing model is needed to stimulate organic growth. The new model should incorporate the elements we’ve seen in other industries facing disruption, including:
- Better segmentation of customers based on behavioral characteristics;
- Customer response modeling which accurately predicts price points in an intensely competitive landscape;
- Dynamically pricing products based on price-response characteristics.
These Revenue Management strategies can help iTunes revive its download business, drive organic revenue growth, and resume its place atop its competitors.