Moving toward the river of music – payment plans
Here is an study of consumer behavior and gym memberships. It casts some light onto the motivators which influence purchasing behavior.
Paying Not to go to the Gym
The science behind behavioral bias towards all-you-can-eat plans in the attached paper “Paying Not to go to the Gym” is pretty interesting. A private equity firm recently used it when projecting how Weight Watchers would fare under a similar shift from pay-per-meeting to subscription.
“Consumers deviate systematically from the optimal contractual choice”, largely due to risk aversion (minimizing variance of payments) and the cognitive dissonance associated with having to make regular transaction-based decisions. Same reasoning so many people pay for all-you-can-eat cell phone plans.”
In other words, the market for gyms fares far better because of the ease of use and simplicity of a flat rate for “all you can work out” pricing, as opposed to individual transactions for each time you go to the gym. People appear be pre-disposed to simplifying their transactional efforts for a known quantity – assuming it delivers what they are looking for – even if it costs far more than the “a la carte” approach.
Around the world content owners and network owners (ISPs) are beginning to try flat-rate schemes in an effort to develop a new model for recorded music.
We have already reported on the digital music flat rate here.
Warner Music is trying to get colleges to test out a new approach.
More on Warner Music and Jim Griffin’s plan here and here.
When you look at iTunes as it exists, it already incorporates this notion of simplicity in it’s ecommerce engine. You enter your payment information once and it is stored, making the next transaction that much easier. One has to wonder if iTunes would be anywhere near as successful (or amazon for that matter) if the user had to enter their credit card for each and every song or book or other product purchased. The mechanics of a flat rate are already partially installed in the iTunes commerce model.
I suggest that we consider an experiment at a premium level, instead of trying to find the lowest possible price point that would work for all consumers. Perhaps the flat rate that covers “all you can eat music” might fly at higher price points than have been envisioned thus far, when properly packaged and positioned. To some people with resources, an unlimited music service, with high quality files, that reliably delivers music whenever you want it – without any legal hassles – may be worth much more that we have imagined. We might make more progress if we started at the top of the pyramid rather than the bottom.
I invite your comments.
I was JUST speaking with my co-brainstormer & dreamer about this not two days ago:
A micropayment system specifically for music.
The problem as I see it – a gym and music are two completely different animals. One only needs a single gym. But as a musical artist, I am more than a piece of gym equipment… and as a listener, I don’t want to be tied to a particular outlet for obtaining music. I partake of both iTunes and Amazon – though as of late, I’m tending towards the latter.
And the more independent (and non) music that gets released, one artist is likely to become much more of a needle in the haystack, if we’re talking about a single service. Further, how does the revenue model in that “pay one price” service apply to an individual artist?
No answers here, mind you – just questions.
Great column. Thanks!
An interesting study. To me the “overestimation of future efficiency or future self-control” seemed to sum up quite nicely the heuristic at work.
It is almost the counterpart to the Arkes & Blumers theater example (http://faculty.chicagogsb.edu/richard.thaler/research/MentalAccounting.pdf) of consumer application of sunk cost.
You could very well be absolutely correct that at a given high monthly-all-you-can-eat price, a certain percentage of consumers will overestimate their consumption and end up paying more than if they purchased a la carte, but I’m not sure where that leaves the industry. The price elasticity in digital music is fairly profound. Sure, you capture a certain subset, but focusing on just that top part of the demand curve doesn’t address the problems at hand.
Just as there are different gyms that cater to different price points (e.g. Reebok Sports Club versus Crunch here in NYC), the overestimation may be in place in terms of TYPE of membership but the variety of gyms and gym pricing still allows for capture along the demand curve.
While cell phone plan comparisons may be more apt than gyms due to the digital good similarity, the cell phone companies (smartly) use punitive pricing mechanisms to push overestimation of consumption. Since the overage rates can be so high, many consumers opt to overestimate even though a fewer minute plan with occasional overages might very well be cheaper.
The killer, of course, is that consumers have a real alternative with digital music that they don’t with gyms or cell phones (home gym? payphones?) and while that alternative comes with some technical complexity and risk (P2P is rife with virus), for many the cost/benefit is there.
I think allofmp3.com’s massive popularity shows the potential for price elastic demand and that NiN’s and others’ offerings at multiple price points is where the industry is headed.
But all-you-can-eat will be mired in the tangle of rights ownership until a compulsory system for digital downloads can be worked out, similar to radio or streaming. After all, it can only be all-you-can-eat-of-what we’ve got. No Beatles, no AC/DC, etc.
That’s a hard sell. The gym study would be very different if the gyms couldn’t offer the most requested products like treadmills or weights…
Note also that in the report, even it is for gym, more people choose a monthly subscription instead of an annual because they want to be able to cancel.
The question we can have also is if iTunes would have even more success if it has a monthly base subscription.