Wal-Mart Proposes Tiered Pricing for CDs
By Tom Ryan
Wal-Mart Stores Inc. is reportedly proposing a new, lower price structure for CDs as a way to shore up lagging sales. The move comes as digital music downloads – paid and unpaid – continue to rise.
According to Billboard magazine, the Wal-Mart proposal calls for a promotional program that could comprise the top 15 to 20 hottest titles, each at $10. The rest of the pricing structure, according to music executives who spoke with Billboard, would have hits and current titles retailing for $12, top catalog at $9, midline catalog at $7 and budget product at $5. The move would also shift the store’s pricing from its $9.88 and $13.88 model to rounder sales prices.
Wal-Mart divisional merchandise manager for home entertainment Jeff Maas referenced the DVD business as a model for tiered pricing. “(It) has been around for years and has worked very well,” he said.
But the Wal-Mart proposal was presented only as a starting point to fix an ailing category.
“When you look at sales declines with physical product, and you have a category declining like it is, you have to make decisions about what the future looks like,” Mr. Maas told Billboard. “If you have a business that is declining and you want to turn it around, it really takes looking at it from all angles.”
Indeed, the plan has to win approval of the major record labels. Speaking off the record to Billboard, some music execs outright rejected the idea, others said further negotiations might yield a workable solution, and a few saw the proposal as appropriate given the category’s problems.
“I don’t think this is a Wal-Mart discussion,” one top executive at a major label said. “I think this is a future-of-the-business discussion. Right now everyone is paralyzed.”
Another top executive said, “The decision might come down to: Do we give up 20 percent of our business (i.e., Wal-Mart) in order to not lose the entire business?”
Some music execs speculated that Wal-Mart might pull music entirely from the store if a solution isn’t found.
Discussion Questions: What do you think of a lower-priced/tiered model as a solution to improve music sales at retail? Secondly, do you think general merchandisers should dramatically reduce or exit the music category?
Even in a declining business there is money to be made. Wal-Mart’s approach is a good one. Tiered pricing will benefit and capture sales within that segment which still buys CDs whether it is due to budgetary or technical reasons.
There is an economic market segment that is able to come up with a few bucks to buy CDs each week or month but are very less likely to have $100 plus dollars to purchase an MP3 player.
Long term it is pretty clear that physical sales of CDs is a declining business, but as long as demand isn’t relatively inelastic, the price decrease should result in an increase in the demand (most likely as a combination of new business plus some taken from competition who doesn’t adjust price).
In the long run, all recorded music and movies must be impacted by new technologies. One doesn’t have to look far to see, as Blockbuster was impacted by Netflix, how quickly it can affect an industry.
I don’t think a tiered model will solve the music industry’s problems. The industry put their collective heads in the sand when file sharing began, insisting that they could prevent sharing and piracy. As file sharing grew, they burrowed their heads further into the sand. After many years they discovered that they could not defeat file sharing and that an an entire generation of consumers thought nothing of not paying for music.
The music industry’s problems run far deeper than pricing. Trying to solve the problem will require input from retailers (offline and online), the artists, consumers and the music labels, involve acknowledging that CD sales will never recover and that the entire industry revenue model has shifted. Once this is recognized, retailers can decide if they want to be in the CD business.
Short-term fix for massive medium to longer-term problem. The market for CDs is limited to those who can’t afford iPods or computers, technophobes, older consumers, and the like. In short, CDs are a rapidly declining commodity that has no hope of a long-term rebound.
So, the issue for retailers is whether it is worth trying to capture more of this downhill-bound category, or at least trying a few pricing tricks to stem the losses. It would be a good idea to look around the store to see what categories are next. (Books?)
You know–it’s hard to beat free, even with a tiered pricing plan. As long as music is easily available for free, there is a group out there who is not price sensitive. Wal-Mart’s pricing plan may play out like all its other pricing plans–people who want to pay less (or think they are paying less) will go to Wal-Mart.
A form of tiered pricing is used by Best Buy to get shoppers to the stores on Tuesdays and it seems to be effective.
As to Al’s point, buy a few CDs and you’ve already spent enough money to buy some kind of player, but more than a few and you could have had that top of the line iPod.
In fairness, Al’s partially right but for a different reason–CD sales are generational.
For years, Boomer collectors (known in some music retailing circles as “completists,” i.e. people who want to own a physical copy of everything Jimmy Hendrix ever played on) kept the CD market afloat. Think of them as musio’s answer to people who don’t just want to own a book’s content but want that content in a specific form–hardcover, first edition, autographed, etc.
The problem is–the collectors have what they want and a significant number of younger listeners aren’t collectors. In fact many don’t even want whole CDs, just the most popular songs.
Wal-Mart’s not the only retailer struggling with this problem, but it is one of the biggest. My bet is they won’t walk away from the category quite yet but the decision to stay engaged is far from cast in stone.
I would say that this is too little, too late. Because the RIAA has focused all their resources on suing 8 year olds, the music industry as a whole is suffering and is actually pushing customers away from purchasing music legally.
CDs will probably end up in the Smithsonian beside 8 tracks in a few years as media players are now all the rage. I predict that in 5 years, when you sit in your 3 series, you will have media ports instead of a CD slot. I would put all the CDs on clearance and focus on downloading.
Al and Ryan are both right about who is buying CDs, and I’ll add to that tech/audiophiles like myself who still buy CDs because we aren’t willing to buy highly compressed music. (Regardless of whether you can hear the difference, re-encoding compressed music into another format degrades it significantly.) I buy a CD, rip it to a lossless format, and store the disc. When storage and bandwidth allows iTunes and other online distributors to sell lossless (CD-quality or better) music, I’m done.
For all the reasons stated and some others, physical music sales are on the way out. It’ll take a while, though, and there’s good reason to experiment with pricing models that make retail sales viable. The labels need to take a bottoms-up approach to their entire industry, something they’ve been unwilling to do so far, and include legacy retail sales in the model.
Perhaps a marketing perspective can help here. A CD, in all reality, is a “bundle” of individual tracks. This reality is created by the development of the single track download market. Truly, though, this has always been the case. The purpose of “bundling” is to increase transaction amounts, or, to move less than desirable inventory. Either way, product marketing has proven that “bundles” only move when they have significant perceived value. Breaking this down for a CD, some of the tracks have high value (usually one or two), some have moderate value (varies, but say another two to four) and some have no value at all.
The music industry has to completely change their paradigm. Songs, like any other “assortment” of product, have winners, losers, and marginals. Some “assortments” produce a high percentage of winners…as is the case everywhere in every product category. Accept this fact, and understand that in order to generate any value out of the non-winners, the “bundle” has to be priced appropriately.
Using the DVD model for CDs is, in my opinion, inappropriate. DVDs are single products, not “bundled” assortments. Are those price points “right”? Using classic pricing schemes, if there are 2 tracks of high value, 3 with moderate value, and the balance with low value, then the “bundle” probably needs to sell for no more than $5. The unpalatable fact is that for the vast majority of consumers, the bulk of the “products” in the “bundle” simply have no value. They would not be bought, other than when included in a bundle.
Embrace this logic, and you’ll see CD sales take off again.
Cheaper prices will help maintain business, but it will keep decreasing to a certain point. There will always be a market for people who want a physical product.
I don’t have an MP3 player and buy all my CDs as originals. I have exactly 1 burned CD comprising of simply music from my originals.
I keep buying authentic CDs since I like originals, don’t want shelves of product showing blank CDs (how tacky), and have zero care for portable music (for now). I can also find most of the CDs I want at around $10-13. Never do I pay over that.
There’s obviously a growing trend for downloads, but there if stores can knock down prices to around $10, that’s fantastic and should keep the industry kicking for a while longer.
I’m actually surprised that downloadable music is so big sales wise (like iTunes). If you’re going to download files, you might as well do it from a P2P network and get it free!
Don…I found your bundling theory fascinating, but what it overlooks is the possibility of the artist combining tracks as an art form. A well produced CD arranges a flow to the tracks to create a mood, build a theme or even tell a story. Within that framework, a track that may seem odd or insignificant on its own (worthless by your pricing standard) could be essential, say as an interlude between two more dynamic songs. Hard to put a price on that.
Yes, undoubtedly, the prevalence of the “bundled” form is at an end, but I believe many recording artists will mourn the day when they were able to have control over the listening experience. And that means they’ll probably find a way to keep the format alive.
One minute after Wal-Mart finds another merchandise category with better financials than music CDs, they’ll be gone. All merchandise categories compete with each other for space. Categories with poor financials get eliminated.
But just because a business is declining doesn’t mean it disappears. Sometimes the financials improve when the space is simply reduced. Decades ago, every department and discount store had a major sewing machine business. Most stores dumped sewing machines long ago, but a few stores (such as Target) still carry them. They cut down the space and don’t have as much competition as before, so the category could be financially worthwhile.
Think music CDs will disappear? A few stores still sell sheet music!
In response to the “artists” out there: I am NOT denying any of the artistic, holistic, or experiential “value” to a well produced CD. I’m not even arguing the benefit to the artist, or to the high taste level consumer. I too have found the album format a wonderful experience, and enjoyed many titles I would not otherwise have ever heard.
My comments were more in the nature of how “most” or “the average” consumer of music appears to be behaving. I am not arguing that everyone has an MP3 type device, or uses computers to download and burn their own compilations. Clearly this is not true. However, the incredibly rapid growth of digital download can’t be denied, nor can the absolutely horrible metrics for hard copy music sales.
The suggestion to view a CD as a “bundle” is radical, and will offend almost all artists of any genre. I’m sorry! I’m only arguing that an approach built around that theory might generate more long term revenue than not.
Don misses the point of an “album” with his bundling theory. True, some “albums” are merely a compilation of songs, some good and some bad. But a true artist will use the compilation of songs we call an “album” as a canvas. Every song contributes to the overall experience and helps paint the picture. If you do away with this art form, you lose a lot. CDs are the current format for albums. Whatever format comes next needs to maintain this artistic outlet.