'Babel' sales show deluxe digital albums outselling standard on iTunes, but discounting has key role.
Mumford & Sons' "Babel" is doing more than putting big numbers up on the board: It's also proving that if you have something consumers want, they'll pay full price for it.
Unlike the pricing strategy often wielded by Amazon, Google Play and 7 Digital, iTunes generally sells its music at full list price.
In the album's first week, iTunes sold 345,000 deluxe versions at $14.99 and nearly 45,000 copies of the regular edition at $11.99, while in the second week the retailer sold 62,000 deluxe and 16,000 regular copies. With a wholesale cost of $8.40 for the regular version and $10.50 for the deluxe edition, iTunes made nearly $2.1 million in gross profit off of "Babel" in its first two weeks of availability.
Daniel Glass, CEO of the band's label, Glassnote, told Billboard last week that the label didn't play the game of the crazy deep discount. "We held our ground," he said, meaning that he didn't discount the album to merchants.
When Amazon sold Lady Gaga's "Born This Way" for 99 cents in its debut week, Interscope also didn't give the merchant any pricing breaks. The promotion helped Amazon scan 444,000 units for the digital album. With an $8.40 wholesale price for a title that carried a $11.99 list price, Billboard estimates Amazon lost $3.3 million through its pricing strategy.
Since the Gaga offering, there have been other loss-leader pricing initiatives, with Google selling a slate of albums for 25 cents in May and Amazon matching, and then in July Amazon priced 20 titles at 99 cents.
Even though labels are the beneficiaries of loss-leader tactics since most times they don't supply pricing discounts to underwrite the retailers' loss-leader pricing strategy, label executives also decry that type of promotion, saying it devalues music.
So which pricing strategy is the wiser road to take?
Frank Luby, pricing consultant at Simon Kucher & Partners in Cambridge, Mass., says that iTunes' sales results with Mumford & Sons' "Babel" show that the industry should stop undervaluing music.
"Fans will pay, and pay full price," he says. "If I offer two options and the more expensive package looks better for me as a consumer, then this is a win for everyone -- for Apple, for the band, the label and for the fan."
Luby says that giving consumers options out of the box is a wise strategy. "Multiple offerings of the same album should be a fundamental part of the business," he says. But given the high percentage that went for the deluxe version, Luby wonders if Glassnote should have offered a third, more exclusive, high-priced version of "Babel".
"I would be shocked if there wasn't a group in there that would have went for something more exclusive and priced attractively," he says.
Luby notes that the higher-priced package didn't necessarily have to be just music.
So far iTunes has sold nearly 390,000 units of the 420,000 digital copies sold in its first week, according to sources. It has also sold 78,000 of the nearly 88,000 of the digital copies sold in the second week, and it sold them at the full list price.
In total, "Babel" has scanned 769,000 in its first two weeks of stateside availability, including 248,000 CDs, according to Nielsen SoundScan.
On the other hand, while Luby is no fan of loss-leader pricing, he also says it's a useful tool when used properly. He points to Amazon's Lady Gaga promotion, which he says was a tremendous advertising vehicle that resonated with fans. "We are still talking about that, and people still remember it," he says. "It helped raise Amazon's profile with consumers and given Apple's market share, their [Gaga] strategy was a successful thing for them to do."
Amazon's MP3 market share grew from 2.2% in 2010 to 3.3% in 2011. Despite Amazon's growth, iTunes is still growing in much larger leaps and bounds, with its market share increasing from about 31% in 2010 to 38% for 2011.
"Amazon is a very smart merchant, but it has a lot of pieces on the board," Luby says. "With Amazon you have to look at the big picture. Their endgame is to be the place for everybody to go for everything, not just music."