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UMG To Launch U.S. Pricing Test
March 18, 2010

By Ed Christman, N.Y.

The Universal Music Group could rewrite U.S. music pricing when it tests a new frontline pricing structure, which is designed to get single CDs in stores at $10, or below.

Beginning in the second quarter and continuing through most of the year, the company's Velocity program will test lower CD prices. Single CDs will have the suggested list prices of $10, $9, $8, $7 and $6.

To accommodate the lower pricing, UMG labels also plan to step up deluxe versions of albums that can sell at higher prices for the more devout music fans and collectors. UMG is also banking that the lower price points will at the least be offset by increasing CD sales volume.

Most new releases will carry the new price points, although there will be the occasional exception, UMG sources say. At deadline, it was unclear exactly when the program would begin, because Universal Music Group still hadn't relayed that information to accounts.

"We think [the new pricing program] will really bring new life into the physical format," Universal Music Group Distribution president/CEO Jim Urie said.

25% profit margin

Retailers should respond well to the new price points. But the level of their acceptance will likely depend on the profit margins that the new UMG wholesale prices afford. According to sources, the new pricing structure will carry a 25% profit margin, which means that $10 list CDs will wholesale for $7.50; $9 for $6.75, $8 for $6, and so on.

Consequently, retailers who buy from wholesalers will likely be less enthusiastic about the move.

Newbury Comics CEO Mike Dreese gives the initiative "two thumbs up." But he adds that the industry still needs the other major labels and independents to make similar pricing moves for overall CD sales in order to be positively impacted.

"We are happy to see that a major music vendor has made a decision to lower his price substantially, because it's what the customer wants today if we are going to see a viable CD business," Trans World Entertainment CEO Bob Higgins said.

Reaction from industry

On March 16, executives at the other majors were nervous about the UMG move, calling around to accounts for information on the move. Privately, some appeared annoyed by the move. "Why does Universal feel the need to get below $10?" a senior distribution executive at a competing major asked.

Yet merchants have long clamored that lower pricing will prolong the life of the CD, which is down 15.4% so far this year. Album sales were down 18.2% last year, and 19.7% in 2008, when CD sales totaled 360.6 million, as opposed to the 706.3 million units CDs scanned in 2000.

In response to declining sales, the majors and indies have responded by lowering catalog pricing across the board -- either formally, like Sony Music Entertainment's Accel program does (Billboard, Sept. 5), or through promotional vehicles like UMG's XL promotion -- to bring wholesale cost price down to the $7-$8 range. Frontline pricing, however, still remains a mixed bag, with UMG main wholesale price point at $10.35; Sony at $10.50, EMI at $12.04 and the Warner Music Group at $12.05.

Between all the retail circulars touting hit titles at $9.99, and iTunes selling albums at that same price point, it became conventional wisdom among merchants that $10 is the magic price point that will induce consumers to buy more CDs.

The new UMG pricing structure for CDs won’t impact its digital pricing; the company plans to keep its current pricing for digital.

Pricing programs

UMG was the first major to address declining sales when it initiated Jumpstart pricing in September 2003, which put frontline pricing at $10.35. But the other majors condemned that move and refused to lower prices until years later.

As CD sales continued its decline, merchants began renewed requests for the labels to respond yet again beyond the catalog pricing moves, JumpStart and Accel. In the last few months, Trans World Entertainment began testing the $9.99 price point in over 100 stores, while Wal-Mart has been telling the majors to release shorter albums at lower prices more frequently.

The Trans World test -- in which most independents and every major except for the Warner Music Group participated -- produced units sales increase of more than 100%, according to label executives who participated in the tests. The Trans World test helped sell the new pricing model to the Universal labels, sources say.

On the reluctance by other majors to so far address the $10 retail price point issue, one source says, "The definition of idiocy is doing the same thing over and over and expecting a different result. Things are not going to get better for CD sales unless the price point is addressed. One thing that the Trans World test shows for sure, $10 will drive sales and traffic."