eMusic pricing, part 1: Goldilocks and the three plans

4 minute read

Im my original post on eMusic Europe I noted that the prices for the Basic plan in Europe increased significantly more versus the US price than the corresponding prices for the Plus and Premium plans: the Basic plan price for eMusic Europe (excluding VAT) was 42% higher than the US price, while the Plus and Premium prices were 24% and 23% higher respectively. The price differential for eMusic UK was even higher: 46% higher for the eMusic UK Basic plan (excluding VAT) vs. 30% and 22% higher for Plus and Premium respectively.

At the time I thought that this differential meant that the eMusic US Basic plan was under-priced (at least in the eyes of eMusic management) and that eMusic would correct the “problem” at some point by raising the price of the eMusic US Basic plan. For various reasons I now think I was mistaken, but this mistake got me thinking about how eMusic prices its various plans; hence this first in what I hope will be a series of blog posts on eMusic’s pricing strategies.

As I see it there are several features of eMusic pricing that are worth discussing:

  • Why are there three monthly price plans, as opposed to just one or two (or for that matter, four, five, or more)?

  • Why is the Basic plan price set where it is?

  • What accounts for the exact price differentials between the Basic plan and the Plus and Premium plans?

  • What accounts for the pricing of booster packs?

  • How does eMusic’s subscription model interact with its pricing plans?

Goldilocks eats the bears' porridgeIn this post I address the first question, which as it happens is quite straightforward to answer: In offering three subscription plans eMusic is deploying a differential pricing strategy consisent with the advice given in Carl Shapiro and Hal Varian’s book Information Rules: A Strategic Guide to the Network Economy; in particular, Shapiro and Varian recommend Goldilocks pricing based on the principle of extremeness aversion:

Consumers normally try to avoid extreme choices–it leaves them out on a limb. It's perceived as risky to go for the top or the bottom of the product line for most consumers, and much safer to choose something in the middle. Positioning a product so that it represents a compromise will end up getting you extra purchasers. Just like Goldilocks, most consumers don't want to choose between too big and too small. They want a product that is just right. [Information Rules, p.81]

Varian and Shapiro go on to point out that moving from two price levels to three can significantly increase overall revenues (using as an example soft drink sizes at a fast food restaurant):

By adding a jumbo size that almost no one consumes, the producer can end up selling more than he would with only two choices, in part because the median product looks attractive in comparison with the expensive, jumbo version. [Information Rules, p.81]

Under this theory eMusic’s expectation would be that most people would opt for the Plus plan (65 downloads per month). Whether this expectation is borne out in practice I can’t say, since eMusic doesn’t release information on the relative number of people on the various plans. However it’s worth noting that when eMusic introduced a “retail digital starter kit” for sale in brick and mortar stores it was priced at $14.99 and in essence was a first month’s payment toward a Plus subscription–more evidence of eMusic’s desire to promote the Plus plan as the default.

Note that eMusic follows the same three-level pricing strategy with regard to booster pack, offering packs for 10 downloads, 25 downloads, and 50 downloads. Again, according to the Goldilocks theory the 25-track booster pack should be the most popular.

Finally, note that eMusic subtly biases users’ choices by the manner in which it presents the various options: On the eMusic signup page the Premium plan is pre-selected (i.e., via the web form’s radio button control) and is also highlighted as the best Value. However on the page to purchase booster packs the 10-track booster pack (the lowest-price option) is pre-selected (although the highest-priced booster pack is still highlighted as the best value). Why the difference? My best guess is as follows:

Because subscription plan downloads expire at the end of each 30-day period, and because most users don’t use their full quota of downloads (as has been emphasized in many eMusic-related stories), it’s in eMusic’s interest to encourage users to sign up to the most expensive plan, since that presumably maximizes the number of unused downloads per user, and that in turn maximizes eMusic’s average revenue per track (defined as total monthly revenue divided by the actual number of downloaded tracks for that month).

On the other hand, booster pack downloads do not expire and by their nature are purchased by people who’ve exhausted their monthly quotas and are eager to download more tracks. Thus it’s much more likely that purchased booster pack downloads will in fact be used. Given that, it’s in eMusic’s interest to encourage users to purchase the booster pack that has the highest revenue per track, namely the cheapest one ($4.99 for 10 downloads or about $0.50 per track).

That concludes part 1 of my discussion of eMusic pricing; next up: powers of nine.