Universal Music have announced plans to give the consumer what they want: lower prices. Starting in October, most CDs from Universal will have the suggested price of $13, which would allow most companies to sell the CD at less than $10.
"Our research shows that the sweet spot is to sell our records below $12.98,' said Universal Music president Zach Horowitz. "We're confident that when we implement this we will get a dramatic and sustained increase."
Historically, large retailers have sold new CDs at considerably less than the so-called "manufacturer suggested retail price."
There are, of course, critics of the plan. Some suggest that this won't have much of an effect on the situation at all.
"This doesn't have as much impact as it looks," one record executive said. "The labels were offering some discount programs to the retailers that would now end. So it's not entirely clear how much of a change there is for retailers' margins."
Another executive noted that larger retailers like Wal-Mart Stores Inc, Best Buy and Circuit City already sell CDs at around $13 anyway to get people into the stores to buy bigger ticket items.
While that is true, it's also true that Wal-Mart and Best Buy need to be cheaper than the record stores. If record stores start selling at the same price, Wal-Mart and Best Buy will have to lower their prices, possibly to $10. I think these people underestimate what the users really want. Most people I know download because they simply can not afford to buy everything they want. If the price drops to $10 as an average, that enables the user to buy 3 CDs when they previously only bought 2. Someone who normally bought 100 CDs in a year could now buy 150 CDs in a year instead. That's a significant increase.
What people really want is lower prices, and the ability to listen to music first. Lowering prices is a good first step, but they will need to go further to lure people away from the internet.
I guess someone in the recording industry must have taken an introductory Economics course, learned about supply and demand curves, and realized you don't maximize your profits by continuously raising your price. ;p
I've been working in the music retail industry for most of the last 13 years. I've seen the labels drive the cost prices (which can often be discounted by varying amounts, but still...) of CDs here in Canada through the roof. When I last worked in a store the sold only new CDs (HMV, if you're interested, in 1996), Island were one of the first labels to punch through the $14.00 per CD cost price with U2's Pop. That seemed particularly egregious, given that Polygram and the other labels had abetted HMV's practice of selling new release CDs at $15.99 - giving the public the impression that that was a fair price. When Island pushed the cost price to $14, well, you can imagine how HMV felt about trying to make a living by earning $1.99 for every copy of a CD they sold - a measly 12.5% margin. In contrast, most clothing retailers make a 300-400% margin. So when you see clothing "reduced to sell" by 50%, the retailer is often still pocketing a 200% return on the cost of the item! Many people would comment to us that they thought HMV was making a fortune (and don't get me wrong, they did okay), but it was the labels that were making all the money - it costs about $1.50 to make and package a CD. Add in another buck for shipping/damaged/etc. and then subtract that from a $14 cost price. Who's making the real money?
Lately, we've seen really intelligent changes: certain artists (Tom Waits, Leonard Cohen, and Bob Dylan spring to mind, and none of these artists are what you'd consider a "hard sell.") have had large parts their back-catalogs dropped in price where they retail for $9.99. This is a more-fair and acceptable price point to many consumers.
This change by Universal makes perfect economic sense, in the long run. Especially in light of the changes that downloading music will force in the entire industry.
I also think this... you know how stores have those listening stations? Well, instead of just playing a 30 second clip (sometimes 1 minute) why not play... the whole song? I mean... I think that would work out great. You get to hear all the songs, as much as the song you want to hear, etc. With that, and the lower prices... I think CD sales will pick up a lot more.