LINDA WERTHEIMER, host:
Today, a top music distributor is launching a new pricing scheme. It's aimed at enticing more people to buy more music on the Internet. [POST-BROADCAST CORRECTION: The new pricing plan was to be announced on the date this story was broadcast, but it was scheduled to go into effect three weeks later.]
NPR's Laura Sydell reports.
LAURA SYDELL: When Apple first started iTunes, there was one price, 99 cents. Then it changed to three prices; 69, 99, and a buck 29. Prashant Bahadur thinks if they charge less, they could sell more music.
Mr. PRASHANT BAHADUR (VP, Retail Marketing; The Orchard): There might be songs, which have never sold for a year. Can we get some movement on those particular songs or albums?
SYDELL: Bahadur is the VP of retail marketing at The Orchard, a wholesaler of music tracks to online retailers like iTunes and Amazon. It has a catalogue of over a million songs. Artists range from Elton John to Cab Calloway. The Orchard tries to figure out how much to charge for music. Too much, and people won't buy it. Too little, and no one makes a profit.
Mr. JAN EGLEN (CEO, Digonex): We use our science to systematically decrease the price.
SYDELL: Jan Eglen is the CEO of Digonex. Today, The Orchard announced a deal with the company.
Mr. EGLEN: We find the exact moment and the exact price that the people are willing to pay. That's the sweet spot.
SYDELL: Digonex has an algorithm. They plug in a bunch of numbers such as how many songs are being sold and how often they sell. Then it calculates how much to charge. Digonex did an online experiment with their technology. They were surprised by what people bought.
Mr. EGLEN: Interestingly, they really didn't buy the top-selling music. What they did was to fill their libraries up with older things that they could buy a lot cheaper.
SYDELL: Some of the music was priced as low as 35 cents a pop. In two days, they sold 35,000 tracks. They did have big hits on the site.
(Soundbite of song "Cold Hard Bitch")
Mr. NIC CESTER (Lead Singer, Jet): (Singing) Gotta leave town, got another appointment.
SYDELL: I can't say the name of this hit song by Jet on the radio, but it was another big surprise in Digonex's test. Fans paid a buck 29 for this song even when they could've gone to another site and paid less. Eglen says that means people will stick with an online seller if it has a variety of prices in music.
Mr. EGLEN: Where they can get old stuff and experiment with some very low prices, that if you have some new music that is by well-known popular artists, they're willing to pay more money for it.
SYDELL: What Digonex is doing is what economists like USC's Professor Joseph Nunes call dynamic pricing. He says economists and retailers have been trying to nail this for years.
Professor JOSEPH NUNES (Marketing, USC Marshall School of Business): We know on hot days people drink more. So if a supermarket could rush out and change the price of their soda very quickly, they would.
SYDELL: Dynamic pricing is easier online because no one has to go change the tags on every item in the store. However, dynamic pricing can sometimes tick off consumers, especially with music, because price increases will be driven by demand, not the actual cost of making the product.
Prof. NUNES: The buzz on the internet will become how this firm is actually changing prices, not because there's some cost change and they're just trying to maintain profits, but because they're trying to increase profits at the expense of the consumer.
SYDELL: The new pricing scheme will start in three weeks. The way you might see the new pricing scheme on a site like iTunes is that prices will move between the three tiers based on Digonex's algorithm. Digonex will offer up new price recommendations weekly. For Digonex, this is just the beginning. Now that the internet has made dynamic pricing easier, they hope eventually to apply their technology to everything from concert tickets to shoes.
Laura Sydell, NPR News.