Live Nation's decision to drop service fees on amphitheater lawn tickets purchased on select Wednesdays this summer is a classic case of a company pricing for profit, not for margin. So is Sony Music Entertainment's decision to license catalog (two years old and up) to eMusic. Both are welcome developments and further evidence that companies are warming up to alternative pricing strategies.

By taking less money for each ticket, the company will gain ticket sales from the more price-sensitive consumers, move unsold inventory and earn the chance to earn ancillary revenue from attendees. The existing tiers of venue pricing already allows consumers to self-select according to the value they place on a ticket - expensive seats up front, cheap seats in the back. Offering customers an occasional, one-day fee holiday for the cheapest seats effectively allows consumers to separate themselves even further according to their willingness to pay. The trick is not to lose revenue from higher valued customers. Because Live Nation is waiving fees only for lawn seats, only for select tours and venues, and only for occasional 24-hour periods, cannibalization should not be a problem.

How much will consumers save? Live Nation's press release said consumers will save 33% of the face value. Lawn seats are the cheapest of an amphitheater's seats but fees can increase the total purchase price considerably. A lawn seat for the Def Leppard/Poison/Cheap trick show at the Sleep Train Amphitheater near Sacramento, Calif., carries a $29.50 ticket price along with a $12.10 ticket fee and a $6 venue fee. For this particular ticket, fees represent 38% of the total price. The tour's stop at the Toyota Pavilion at Montage Mountain in Scranton, Penn., has the same price breakdown. A lawn seat for Toby Keith at the Shoreline Amphitheater in Mountain View, Calif., as well as the stop at the Susquehanna Bank Center in Camden, N.J., carries a ticket fee of $12.10.

Per-head ancillary revenue at North American amphitheaters was $17.46 in Q2 2008, according to the company’s earnings release. Recently, the company has focused sharply on increasing ancillary revenue – it is a cornerstone of the business model. Going by the letter of the press release, only service fees will be eliminated. Without a $12 service fee, Live Nation could bring in enough per-head ancillary revenue to exceed the waived fee. Even if one assumes some variable costs will increase due to an increase in attendance, there is still room for an increase in marginal profitability. When fees waived are $18.10, speaking hypothetically, incremental profits will be much lower or possibly nil.

The move to increase attendance to the detriment of ticket prices is the correct move. Sponsorships will have greater value when concerts have more attendees. Parking, merchandise and other revenues will rise. This increase is important due to the considerable fixed costs involved with a concert. More money pulled in by the same number or slightly more workers brings greater profitability for each incremental dollar. The parking lot, for example, costs about the same to maintain if there are 8,000 or 11,000 ticket buyers.

Live Nation's announcement came on the same day Sony Music Entertainment announced it will begin selling some of its catalog at eMusic. The move has a similar way of thinking to Live Nation's fee waiver for the cheapest seats. The goal is not to maximize per-unit margin but to reach more consumers and gain incremental revenue and profits.

Without going through an auction or name-your-own price system, Sony cannot tell the value a consumer places on a song or album if they all pay the same price. The most popular tracks are going to be more in-demand and have less elastic demand, meaning an increase to $1.29 from $0.99 should result in a net gain. For less popular and older titles, there is a wide range of values placed on a particular title by consumers. Those who do not want to pay $8.99 or $9.99 for an album at the more popular download stores will not purchase the title. Dropping the price for all consumers would lose out on the profits from those who put a greater value on the album.

Labels and retailers already have one tool at their disposal to separate consumers by willingness to pay: versioning, the creation of different versions of the same product. For example, a deluxe version of an album contains additional content and carries a higher price. This practice separates highest-value consumers from high- and medium-value consumers.

There's another way to determine what a consumer is willing to pay. The consumer signals to companies his willingness to pay based on where he shops. A person who doesn't want to pay more at iTunes may be willing to shop elsewhere to save money. How does Sony find this group? It licenses its music to a store known for offering downloads at relatively low costs to high-volume buyers. (To find the most price-sensitive consumers, labels license to free services like Last.fm and MySpace Music and its more profitable customers do not switch.) Per-unit revenue may be lower but total revenue and profits should increase.

Questions? Comments? Let us know: @billboardbiz

Print