Price as a Value Indicator

I came across an interesting blog post today by a software developer based out of NYC called Joel Spolsky. He talks about a recent statement by EMI boss-man Alain Levy who says that iTunes is going to begin selling older (less popular) songs for less money and recent big hits for more money. Joel’s argument is interesting and comes back to something I was taught a while ago. Basically he says that when items are less expensive you consider them to be of lower quality and value. Therefore people tend to stay away from the cheap stuff and by the premium material more willingly. Its an interesting argument and one I have debated on with a number of people when trying to decide what price to offer a product for.

I have always been one for offering products for free and building a community around them so that you can find out what your users really want and then charge for them for what they really want/need. However, the opposing side would say that you will have trouble attracting enough people to build a community for a free product because people will consider it less valuable. It’s an interesting debate and a very interesting quick read. I suggest everyone take a look at this one and let me know your thoughts in the comments section. Here is the article.

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1 Comment

Filed under community, consumer habits, pricing

One response to “Price as a Value Indicator

  1. Terry Tate

    I don’t know if I agree with Joel’s article. Though I understand the pricing theory that he brings up, I don’t think that it holds true for all cases. He brings up the movie example, but really shapes the argument to defend his point. It does not make sense to price movies at different price points because it is almost impossible to measure what a good movie is. Do you price a movie based on future earnings projections. If so, what do you do about a movie such as “the Love Guru” or “Water World” that had high projections but fell short of expectations. In such cases, these movies would actually make far less than the little that they already made since the price was even higher. As well, people value movies differently. A movie that does not do well in the box office (such as most Oscar winners) may be a masterpiece but does that mean you should charge less for it, or charge more. Movies are all kept at the same price because the fact of the matter is that it would be far too difficult to find a pricing equation that works for each movie. I don’t think that a low price necessarily even means that something is crap. This pricing argument by Joel has to be viewed on a case to case basis. I believe that quality and price are co-related in jewelry and clothing. For music, however, I do not agree. The pricing strategy makes sense for new songs that are just released. The reason is because it is less likely that people already own these songs, and people are ready to make impulse purchases. An older song should be priced less because the impulse purchase will require a lot less thought if it is 99 cents opposed to $2.50. The reason is because these songs are a lot more readily available and people will put in the extra effort to find them if it cost more to buy them. A good example would be my downloading Guess Who songs through ITunes when I already own the greatest hits CD. They are only 99 cents each and cheap in my mind. IF they were raised to $2.50 per download, then I might think twice about purchasing them, and instead take the time and effort to go to my basement, look through my dad’s CD collection and grab the MP3 off of it.

    The fact is that I believe that the price of a song will not affect the perceived quality of the song. It will, however, affect the demand of the song if the pricing is too high. The reason is simple, usually when songs are purchased, they have already been heard and the judgment regarding the quality of the song has already been made. An individual that wants to purchase an i-tune will perceive the low priced song as a bonus. I do not believe that it will affect the decision to purchase the song at all. To the contrary if a song is priced too high, in may affect an individual’s decision to purchase it. The individual will not purchase the song just because it is expensive. The only time that price will effect an individual’s perceived quality of a song is for those that have not been heard before. In most cases, however, people tend to listen first to a song before they blindly download.

    In the end, like the movie industry, I believe that all songs should be the same price. The reason is not because the quality will be perceived differently, but rather because the formula for find an accurate algorithm to determine the price of a song would be far too difficult to determine without affecting the equilibrium of supply and demand. If something aint broke, don’t fix it.

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