Variable iTunes pricing a moneymaker for artists

"A $1.29 vs. 99 cents price point has not made a notable difference in consumers appetite for online music," Pali Research analyst Richard Greenfield says. "On the album side, you've seen variable pricing for a while and it's not clear that it's had a notable negative impact, so I'm not sure why the single environment would be different."

Other factors surely influenced sales. A seasonal sales dip often takes place after the first quarter. It happened this year, too: Sales of all tracks, most of which have the same price, declined 5% during the six-week period following the introduction of variable pricing. The top 200 digital tracks dropped 8.5% during this time. Making the situation more complex, the price changes took place gradually. On April 7, 33 of the top 100 tracks on iTunes were priced at $1.29; by June 11, 72 of the top 100 had that price.

To measure the impact of price changes alone, Billboard examined more than 70 catalog tracks from popular acts with consistently strong sales -- Stevie Wonder, Bob Marley, Bon Jovi, Jack Johnson, Billy Joel, Creedence Clearwater Revival, Sublime, Norah Jones, ABBA and others. The songs were chosen because they sell steadily but haven't seen spikes from TV exposure or media coverage. So looking at their sales should isolate the effect of price changes.

It's important to note that the size of Billboard's sample is too small to have statistical significance given the thousands of catalog songs sold on iTunes. But it offers a compelling picture of how variable pricing has helped labels so far.

In the six weeks after iTunes introduced variable pricing, the songs that Billboard looked at sold 20.9% less than they did during the previous six weeks. That's a much steeper drop than that of the most popular titles. By way of comparison, the top 40 tracks on Billboard's Hot Digital Songs chart declined only 10.8% in the same time frame. But even this deep drop in unit sales resulted in a net gain to the bottom line. Consumer spending on the catalog tracks dropped about 2% and net revenue to labels rose around 6%.

The revenue increase from those catalog tracks has only a fraction of the weight of the top 40 tracks. In a typical week, for example, the number one track in the country will sell many more copies -- sometimes twice as many copies -- as the combined total of all the catalog tracks in Billboard's sample. Billboard also looked at track sales from albums in which some or all tracks were raised to $1.29. The results varied but each example showed a decline in unit sales greater than the total market's 2% drop during the six-week period.

That's the forest. To really gauge the impact variable pricing can have on sales, one has to examine the trees. Individual results for specific artists show how careful labels have to be when they use their newfound pricing power.

Take Sugar Ray's 1999 hit "Every Morning." On the iTunes listing for the album "14:59," the song is priced at 99 cents; on "The Best of Sugar Ray" it costs $1.29. (Both are priced at 99 cents on Amazon.) During the six weeks after variable pricing started, sales of the $1.29 version dropped 41% compared with the four weeks before the price change.

Revenue from the 99 cent track increased 102%, suggesting that the price difference drove fans to the cheaper option. The decline in revenue from the more expensive version was roughly offset by the gains in the less expensive version. Overall, sales for the two tracks dropped nearly 17% and net revenue dropped by about 6%.

Expect similar fluctuations on individual tracks as the labels continue to experiment raising prices for different songs. The decision to raise the price of a song is "a mix of art and science," according to one label source, meaning that it's based on sales data and gut instinct. But label executives wouldn't say more about how those choices are made.

Some labels, including Warner Music Group and Nettwerk Music Group, as well as the digital distributor INgrooves, have used pricing analysis services like Digonex to help inform their decisions. So far, though, most variable pricing decisions have been made through a process more akin to throwing pasta against the wall to see if it sticks.