Manage for Success: Pricing, Newsletter #29, September 2003

"Manage for Success" is a free monthly newsletter for record label executives who want to operate their companies efficiently and successfully. It's published by Keith Holzman of Solutions Unlimited, a management consultant, troubleshooter, and trusted advisor, and is based on his many years as a senior executive in the music industry.

Copyright 2003 by Keith Holzman, Solutions Unlimited. All rights reserved.

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The subject of pricing for pre-recorded music reared its ugly head again recently when Universal Music Group (UMG) announced that it was going to reduce its wholesale price and eliminate the advertising allowances they'd been providing to large retailers. The result is that the suggested retail price for top-line artist CDs will be about $12.98 instead of the existing $16.98 to $18.98. They're also reducing box-lot prices of mid-line and budget product.

Whether the other majors will follow suit, or when they might should they decide to go along, is a matter of some speculation. I suspect they'll take a bit of time and crunch the numbers, meanwhile seeing what this reduction might mean in terms of public acceptance, and whether UMG's anticipated sales volume will increase enough to offset the effect on their bottom line. UMG says that they'll need a gain in unit sales of about 15 percent to offset the price reduction.

I'm of the opinion that Warner Music Group, Bertelsmann Music Group, Sony Music, and EMI will feel pressured into doing something of a similar nature, whether it's to their real advantage or not. Public pressure may encourage them to follow suit. But I suspect the four mega-labels will wait sufficiently long after UMG's move to avoid any appearance of price fixing or collusion.

In point of fact, UMG is not taking as big a hit as might appear on the surface. Their major saving is in the elimination of discounts, co-op funds, and advertising allowances formerly offered to such "big box" retailers as Best Buy, Wal-Mart, etc. Yes, they say they'll step up their consumer advertising, but that doesn't imply they'll do so on every release. And they're also demanding one third of all prime in-store real estate such as end caps and listening posts, and one quarter of overall bin space.

Sure, UMG will have reduced cash flow per item, but the greatest damage will be to the small retailer who will lose another portion of their already-tight margins. Music buyers will benefit, however, since CDs should cost less, provided that retailers pass on the savings -- not a forgone conclusion by any means.

On September 9 the International Federation of the Phonographic Industry (IFPI) announced another interesting fact: the top five labels increased their share of the global recorded music market from 71.4 percent to 75 percent in 2002. Therefore the share of independent labels was reduced more than three percent.

A couple of my colleagues with very long memories recall when similar attempts to reduce prices were made many years ago. The result was that there wasn't a large enough increase in sales volume to offset what they were losing in reducing prices. And here I'll quote my brother, Jac, who emailed me the other day that a 25 percent reduction by RCA in 1954 "didn't encourage people to buy albums they didn't really want and there was no downloading alternative (in that era.) It should be even tougher today."

For some time now, public perception has been that prices for pre-recorded music, specifically CDs, are too high. Remember, I said "perception," for the reality is that, in comparison with raises of other commodities, or the cost of living for that matter, it's really not the case.

In February I wrote the following in a newsletter about the perils of the record business today (http://www.holzmansolutions.com/articles/22-feb03.html)

As to the matter of price, in May 2002 the RIAA commissioned a report, which shows that, even though the public perceives CDs as being too expensive, in fact, CD prices fell 32 percent between their emergence in 1983 and the end of 2001. During the same period the Consumer Price Index rose almost 78 percent. If CD prices had risen in the same proportion, the average price in 2002 would have been over $38 dollars. Other forms of entertainment rose even more, so that the average price of admissions to entertainment and sport events increased by 142 percent!

In fact, CDs may be even more of a bargain. In 1983 the average length of a CD was less than 42 minutes, whereas in 2001 the average length was 55 minutes -- a 30 percent increase.

Notwithstanding these surprising numbers, one does have to deal with the public perception that the music industry is charging too much for its music.

And, in fact, the situation surrounding prices has not changed materially since that report was issued sixteen months ago.

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Dealing with such complex issues as pricing your product is no simple matter. That's where I can help you, since this is an issue I've been contending with for many years. Call or email me if you need any assistance with working the numbers and thinking this through, or require other managerial advice in other management or administrative areas. As a trusted advisor to many labels over the years, I treat all clients and all assignments with confidentiality. I look forward to working with you.

And if you have a topic you'd like me to address in future newsletters, please call or email me keith@holzmansolutions.com.

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Now, as managers of record labels, price is a matter that you must investigate very carefully and then deal with. In fact I've suggested in the past that independent labels re-think their price structure to see if there's a way they can increase their sales by lowering prices.

In a follow-up to the February newsletter referenced earlier, I wrote in my March message (http://www.holzmansolutions.com/articles/23-mar03.html)

Other labels have been experimenting with pricing. It's a common perception that records are overpriced, particularly in the case of CDs with less than 40 minutes. In fact any record is overpriced if the music's lousy!

Therefore you might try pricing selected new releases at just under ten dollars for the first two or three thousand units -- or until your break even quantity -- you do know when you'll break even, I hope -- and then raise the price a few dollars as the release becomes successful. Be creative in your pricing to see if the experiment works, but be sure to try it on a release with good music and performances.

My opinion hasn't changed in the last six months. I still think you need to run the numbers and see whether you can increase sales sufficiently enough to offset what it costs you to lower your prices.

In fact one colleague did reduce the price of his catalog earlier this year, and of course experienced a spate of returns as a result, because retailers didn’t want to sell CDs at a loss and wanted to collect the value of what they'd previously paid. The label had anticipated this and wasn't surprised. But, as expected, sales of catalog didn’t increase enough to offset the cost of the price reduction.

If you decide to make changes, then consider if it should be a blanket change, reducing all price categories by a few dollars.

Or does it make more sense to experiment? That would be my recommendation. It's fairly easy to lower prices, but it’s always a great deal tougher to raise them. Also, timing is a factor. When is the best time to consider a price drop? If you do a mass reduction it'll negatively affect the retailers with stock that they paid a higher price for. You won't be making a lot of friend at retail accounts if you don't think about their problem.

So you might perhaps consider setting a lower price for selected new releases as an experiment. It won't impact the retailer like a large-scale reduction would, and it might win new friends and fans at the consumer level.

Talk to your distributors and get their evaluation of pricing. What do they think, what do they recommend, and what do they really want? The consensus of a few distributors I talked to during the last week was that labels should price their product as they felt they needed to.

Finally, I'm quite concerned that if the remaining four mega-labels follow UMG's move and reduce their prices, there will be added pressure for independent labels to follow suit. I urge you, at minimum, to take a "wait and see" attitude and exercise extreme caution before making any pricing decisions.

I'd appreciate hearing from you to learn what you decide to do. If I receive a lot of information, and with your permission, I'll synthesize it (without mentioning names of individuals or labels) and publish it to the subscriber list, but again, only with your permission to do so

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And if you have a topic you'd like me to address in future newsletters,
please call or email me

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Copyright 2003 by Keith Holzman, Solutions Unlimited. All rights reserved.