We’ve talked about this before: music has value. Potentially, a lot of value. And now, Apple is seizing their share.
But Apple and its music industry partners have done far more this week than enable the launch of a new music streaming service. They offered the world some common-sense lessons on what strategic pricing means, how to do it without Big Data razzle dazzle, and how to explain it in basic jargon-free language. In doing so, they also went against a lot of conventional wisdom on innovation and value pricing.
So what exactly did Apple do and why is it so broadly useful?
They looked their most basic pricing options and their consequences: “Basic options” here means to price higher or lower than the primary competitor (Spotify), or price at parity. They chose the third option. Pricing lower than Spotify would have ignited a price war with all its “race to the bottom” risks. It would have also forced Apple to swallow losses if it failed to pressure its suppliers (labels and artists) to concede on price. Alternatively, Apple could have charged more than $9.99 from a pure value standpoint. But that’s the difference between theory and practice. Pricing higher would have forced Apple to divert even more resources into defending the price point and why they charged more against the perceived resistance among younger fans to paying anything for music, let alone $9.99 per month. So they went for the middle, and smart, ground.
They launched a “me too” product at parity to the competition: Yes, take the headings off the tables that compare Apple and Spotify, step back a few feet, and try to find the differences. If there are any, they are subtle. Conventional wisdom says that making this move is akin to commercial suicide because you need value differentiation and you need to beat the incumbents on price or quality to build share. So why will that work in this case? It positions Apple and Spotify to wage a “value war” instead of a “price war”. Spotify just announced it has raised an additional $526 million to wage this war. That may seem tiny compared to Apple’s mind-boggling war chest, but let’s keep perspective here. This is not Elon Musk trying to start a colony on Mars. If Spotify can’t put half a billion to use to make their service irresistible, we would have to question their viability anyway.
They know that this is a growth market: Spotify leads the way with 20 million paid subscribers worldwide for its streaming service. Apple knows it will get share no matter what it does. And Apple’s growth does not have to come at the expense of Spotify’s current base or its growth. Spotify doubled its subscriber base in a year, but again, let’s weigh the big-sounding numbers against the potential. Music should be one of those Warren Buffett type markets like shaving or refreshment, things people will also be doing or needing in some form a hundred years from now. Spotify’s growth from 10 million to 20 million is impressive, but it takes them from “microscopic” to “tiny”. I mean that as a compliment. This market has a long way to go before it is saturated. Apple’s pricing at parity to Spotify – at least for the basic service – smartly takes price out of the equation so that people can focus on music and streaming rather than getting caught up in money.
They know that this is just a first step: Apple has chosen black in this chess game (as they often do as a follower rather than a pioneer) and this week they move a pawn to K4. That’s it. Apple and Spotify (and Pandora if they are wearing long sleeves and have something up them, which remains to be seen) will now wage a battle to impress listeners even more. And they will do it without wrecking the market’s prevailing price level. If this market follows what happened in downloads, prices may actually rise as this battle unfolds. The typical iTunes download is now 50% more expensive than the launch price. In the meantime, the more value Apple and Spotify add at $9.99, the worse other alternatives start to look, even and especially free ones.
In hindsight, the points above may seem obvious. That’s the point. If you say “duh” a few times as you read these, I’d challenge you to think of your own pricing challenges in your business and ask yourself whether you laid out your options out so succinctly and so they tell a story and help you choose a course of action. After all, we all know that more happened behind the scenes than what Apple executives Eddy Cue and Jimmy Iovine say in their interview.
As former record executive and music business professor Joe Rapolla says in this LA times article, "The challenge for everyone right now is that we have this window of consumers who lost the relationship between the appreciation of music and the commercial value of it." Apple, and its competitors in its new streaming market, is seizing the opportunity to remind the customers of this lost sense of value and in so doing, create a bigger opportunity. And if you want or need to start a discussion on strategic pricing in your firm, the team at Apple has given you a great way to start it and guide it. The beauty of what they did is that you don’t need Apple-level reputation and resources to start that discussion or implement its results in your own market.
Frank Luby is co-founder and CEO of Present Tense LLC, a communications company dedicated to helping people express their ideas through better business storytelling. He is co-author of the short ebook “10/10: How to write business content that is memorable and effective”, available on Amazon and other major e-book retailers. He is also co-author of 'Manage for Profit" (Harvard Business School Press, 2006). To learn more about Present Tense LLC, please visit us at www.presenttensellc.com and follow our regular blogs and posts. You can also follow Frank on Twitter: @FrankLuby