Wednesday, October 24, 2007

Is Radiohead's Pricing Experiment a Sign of Things To Come?

By now, the Radiohead set-your-own-price-for-their-CD event is old news in the blogging world. 1.2 downloads in the first week at roughly $8 a pop. I'm not even a Radiohead fan, but I am intrigued by their unorthodox pricing experiment, and what it means to the future of transaction pricing.

Presumably, Radiohead wanted to tap into the emerging social networking phenomena. Their fans are likely an Internet savvy, texting-obsessed, MySpace lovin' group. It just so happens that this demographic is comfortable "sharing" digital versions of music with each other, or would maybe pay only for a song or two. Radiohead (and their label*) likely hopes to find extra album sales from these folks who would otherwise not have shelled out for the entire compilation. Their willingness to enter into this type of transaction is a proclamation that they respect and trust their fan base. As a financial consideration, it is evidence they are confident in their brand equity and reputation.

This pricing strategy is especially uncommon because it has to do with intellectual property. Simple economics dictates that if an owner of intellectual property is not compensated for their contributions, there is lack of incentive for future innovation (aside from artists, think pharmaceuticals).

However, as an adoption strategy, the logic behind this type of pricing isn't new. For example, weight management (and social networking) website (TDP) is a community of over 100,000 people using TDP's free on-line food tracking software to track their caloric intake. Users have the option of paying a fee for some lite-weight bonus features. And devoted TDP users do, despite the fact that the bonus features are little more than the addition of some cute graphics and priority for service requests. But their is no requirement, no hassling, no annoying emails, no pressure whatsoever to contribute. Those that contribute have determined there is value in TDP, and want to see it succeed.

Many websites offer free services, and (like get much of their revenues from advertising. But with online ads having questionable relevance and low click-thru rates, they may have to modify their business model to stay profitable. Has Radiohead shown us that if there is trust and respect between business and consumer, the goodwill will work both ways?

This is a level of participation and collaboration that is relatively rare. Web 2.0 principles are ushering in new behaviors between business and consumer. Beyond marketing and communication, traditional pricing for products and services may be challenged by this participation-driven phenomena. As an afterthought, I'm struck by the similarity between Radiohead's fans determining their album's value, and tipping a waiter or waitress for their service. Could the the future of payment be determined on value after the fact?


*Ammendement: According to The Week (11/9/2007) Radiohead released their album online with this pricing experiment without any help or guidance from their label. In fact, Radiohead frontman, Thom Yorke, says " have to ask yourself why anyone needs [a record label] anymore." The music industry's decaying business model is leading artists to explore new ways to distribute their work.