In business there is a term used to describe products that
are designed to get you in the door and buy bigger ticket items. It is called
loss leader pricing. When you break that phrase down the first word “loss” is
because the business is probably loosing money selling those items. The word
“leader” means it leads you to buy other products. We see this all of the time,
but probably don’t even realize it.
For instance you can buy a brand new razor with two cartridges
for around $10, but if you want to buy additional razors themselves you will have
to fork over $25 for an eight pack.
Have you ever purchased a new printer? What
a steal you can get a whole unit with ink for under $50. It isn’t until you need
a refill that you realize the cartridges alone will cost you over $50.
Loss
leaders are everywhere. Go into a supermarket and buy an 18 pack of water for
$3, two bags of chips for $4, or a 12 pack of coke for $3.99. These are all
tactics to get you to buy other, more expensive, things.
Well that is what music has officially become… a loss
leader.
According to
Apple’s 10-K filings for 2011 iTunes made $5.4 billion. Amazing right? Now think
about this.
Forbes reported that Apple sold five million phones within three days of their iPhone
5 launch on September 21st, 2012. Now even though the vast majority of these phones were at reduced rates through cellphone carriers, companies such as AT&T, Verizon, and Sprint still needed to pay Apple a subsidy to get the new highly in-demand product.
According to CNN money that subsidy averages about $450 per phone. That equates to $2.25 billion dollars for
Apple. A little under half of what their iTunes division made last year. So in three days Apple's iPhone made half of what their entire iTunes store made in a year.
Last week Samsung, Apple’s biggest rival, announced they will start buying up smaller music streaming and distribution companies to strengthen their own music network called Hub. The technology bohemian isn't doing this to sell more music. They are doing it to "lead" consumers into buying one of their Galaxy smartphones or tablets. Samsung is finally catching on to something Apple, Amazon and Google have known for years. You sell more technology devices if you can easily fill them with low cost music.
Using music to get consumers through the door to lure them
to buy bigger ticket items isn’t necessarily new. For years Wal*Mart had isles
of CD’s. That’s right I said “isles” of CD’s. They did this because you had to
go somewhere to buy new music. This was before you could beam it to your phone
while you borrowed your neighbors Wi-Fi connection. When you went to Wally
World to buy that new Pearl Jam CD. I know I’m old. You were forced to look at
those beautiful big screen TV’s, stereos, DVD players, and other high priced
electronic items, and chances are, at least once, you walked away with one of them. In the end
your $16 CD purchase cost you about $500. That is a loss leader.
But today music has completely become a loss leader. If you
don’t believe me look around. If you are a Starbucks card holder you will get
the occasional free download of a new music track, or you can buy those albums
in their stores for $10 while you drop another $8 on a cup of coffee, plus
another cup for your friend, and, oh wait, one of those awesome muffins.
Artists don’t make money by selling music anymore. That is
an antiquated business model and if a manager or record labels is telling you
otherwise start running back to your day job because you will make more money
and work less there. Just take a look at the sales numbers according to www.gloriousnoise.com. Total album sales
were at $616.6 million in 1996 and have dropped to $330.57 million last year,
and yes that includes digital sales for 2011.
But for some reason artist’s still think that they make
money by selling albums. The truth is in today’s market they don’t. The smart
ones understand how to use their music as a loss leader just like Apple, Samsung, Coca Cola, and
Starbucks. Trent Reznor gives his music away and uses
those free tracks to encourage fans to buy his concert tickets, merchandise,
autographed memorabilia and anything else he can make money on. He understands that the market has
changed their valuation of music. To them music no longer has a monetary value.
Napster has taught them otherwise. Incubus’ manager Steve Rennie said it best
“for some reason college kids can afford their beer and weed money, but will
not pay for their favorite song.”
On a good note music has not lost its
intrinsic value and that is why ad agencies, film companies, and big businesses
still fork over money to attach their brand to a particular tune. To make money
in today’s market artist must stop thinking that people will pay for their
music. Instead they must start using their music to get those consumers to buy
into their brand. Hell it worked pretty good for Apple.
