Radiohead Unplugged

Radiohead Consumer Surplus
So let’s think about Radiohead’s new pricing strategy a little more.  It’s certainly generated a fair amount of press.  What do you think?

Ah yes, looks like the old “capture consumer surplus” strategy, doesn’t it? Makes sense, but perhaps Radiohead is more profound than we might think at first blush, not only in their musical talent (which is amazing) but in their business savvy.

Reminds me of a famous behavioral experiment done in the late ‘60’s: giving assembly-line works the power to stop the line did not result in more stops. Instead, it led to fewer stops – and increased productivity and higher job satisfaction.

That experiment may be analogous to Radiohead’s strategy: it shouldn’t be an automatic conclusion that music lovers will all download the new album and offer to pay next to nothing. Instead, the move could easily lead to more buzz, more loyalty, more touch-points to new potential customers and yes, increased total revenues from other (more profitable) products like concert tickets, merchandise, shirts, etc.

Radiohead is simply capitalizing on what the record industry is only now grudgingly starting to acknowledge: it’s a new game out there. Digital downloads eviscerated the old business model, turned the economics upside down, and radically altered the channels by which consumers can be reached. It used to be: make money selling albums and live shows support album sales. Now it’s the opposite: albums are quickly becoming the give-away while live concerts and merchandise are where the big money is.

Radiohead may be giving us a lesson in marketing (and not one of them has an MBA). Digital downloads are virtually zero marginal cost, put it out there, let people pay as they see fit. Studies in human nature indicate that many will pay what the price would have been. Others may pay less, but those probably wouldn’t have bought at the regular price anyway.

But then the strategy kicks into overdrive. Existing fans respect Radiohead more for being gracious to their audience. New fans take notice from all the buzz. And you see, music lovers have this cult-like quality about them. They tell their friends in hushed, euphoric whispers, “hey, you gotta check this new song out!” like they found the keys to the universe in a burned CD. The digital waves spread, momentum builds. Fans increasingly feel they’re part of a secret community that has the inside track on something special. And where does that community congregate? At the concert. Maybe they’ll have a few beers or pick up a shirt or two. They round up their friends. And together they make a road trip to see the concert again in the next city.

So let’s put this in terms marketers can understand. Downside: some foregone album revenue (and that’s debatable). Upside: customer satisfaction. Loyalty. Brand building. Buzz. Community. New customer acquisition. Add-on sales. Repeat sales.

Radiohead, as musicians, are astounding. Check out their albums OK Computer, The Bends, or Kid A if you need any proof of that. But if you ask me, they’re showing us some pretty great marketing chops as well.

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