Today Apple officially launched its new three-tiered pricing system for its iTunes digital music store and eliminated the “one price fits all” model. Back in January, the company announced it would implement a new variable pricing structure in which songs would be offered at one of three pricing tiers: 69 cents, 99 cents and $1.29.

News of the new pricing structure has caused some to re-examine the digital music download market and pricing strategies. The instant popularity of iTunes has no doubt changed the way consumers and the music industry look at purchasing and selling digital media. However, according to Nielsen Co.’s SoundScan service, growth in paid downloads slowed significantly in 2008, rising 27 percent, compared with a 45 percent increase a year earlier.

While it’s unclear whether or not consumers will embrace the new pricing structure, the question ultimately becomes, what will be the impact of this new variable pricing structure? Is this the answer to the long-fought battle between music labels and download service providers (DSPs)?

One of our newest clients, Digonex, a provider of real-time, demand-driven automated pricing solution believes a variable pricing model provides a win-win solution for consumers, retailers, music labels and artists; and iTunes’ move to a variable model validates the company’s stance that not all music is worth the same amount.

For consumers – Variable pricing enables download service providers (DSPs), labels and retailers to offer music to consumers at a price they perceive to align with the value of the music. It also gives consumers a way to participate in the price setting of music. If consumers believe prices are too high, they will not purchase the music.

For retailers – variable pricing finds the sweet spot (optimal price) for all products based on different levels of consumer demand.

For music labels – much like the “Long Tail” concept, variable pricing enables music labels that sell small volumes of hard-to-find items to experience a significant profit. Variable pricing models optimize pricing for an entire catalog to maximize returns.

For artists – variable pricing models provide an incentive for consumers to purchase an entire album as opposed to a single track. This in turn, benefits an artist as more consumers experience the full body of work, not just a portion of it.

Dynamic Pricing Models
While a variable pricing model is a step in the right direction, Digonex believes the optimal model for the marketplace is fully dynamic pricing. Unlike variable pricing models, dynamic pricing models allow pricing to adjust up or down based upon consumer demand. This enables music labels and retailers to offer prices that are market-driven, and consumer and seller friendly. Dynamic pricing models ultimately help reduce the cost of albums thereby increasing the value for consumers, and empower those listeners to explore albums and discover tracks they might not have otherwise.

As a longtime fan of iTunes and a self-proclaimed download junkie, I welcome the new pricing structure and would furthermore support a dynamic pricing model. When Kelly Clarkson’s new album came out I would have paid any price (say up to 18 or 19 dollars) to get the full album because I’m such a fan. But more often than not, I find myself browsing for music based on my moods. A dynamic pricing model would certainly give me more incentive to do so – and after all, wasn’t music discovery the original purpose of iTunes?

What do you think about iTunes new pricing structure? Will you still continue to download music from Apple? Will you be more inclined to purchase albums? Tell us your thoughts or send us an e-mail at info@communiquepr.com.

For more information on this topic, please see the article which Reuters published about Digonex.