Why Radiohead Should Price Your Software

radiohead_533.jpg
If you are the typical software company, I have a hot tip for you. Call the guys in Radiohead and try to hire one of them to fix your pricing. I doubt they have the time, because they just did something that is turning the music industry on its head. As you probably know the recording industry is in serious decline, and it’s likely to get worse before it gets better. The record companies stuck to high CD prices like stubborn pit bulls for so long, iTunes became the only interesting game.

Pay attention to Radiohead’s new album pricing: users pay whatever they want from zero on up. I haven’t heard the album yet, but they deserve $25 for having the creativity and moxie to do this.

What does this have to do with traditional software pricing? A lot. Although the software industry is in much better shape than the recording industry, it has never been the same since the bust of 2000 – 2003. Enterprise software sales is a fundamentally broken model: it’s too expensive. I met with friend, and fellow musician, Fred Harman at Oak Investment Partners this week, and Oak has avoided software startups for years largely due to this phenomenon. Oak concentrates on larger growth investments to avoid the high cost of sales inherent in most software companies.

When I talk to experienced, traditional software sales and marketing people, invariably I get asked why Atlassian’s prices are so aggressive. “You’re leaving money on the table”, is the common refrain.

But it’s the high price tags that invariably command a squadron of Suits whipping out their Powerpoint presentations and flying all over the place. That’s expensive, and customers are tired of it. Tired of the high prices, tired of the secrecy behind pricing on websites, tired of having to register to get a white paper or request a sales call, tired of the whole process.

A new software company in the developer tools space approached us about a partnership recently. The CEO is a fantastic guy who I could easily see as a friend. When I asked what his software would cost, he said with big smile, “As much as possible”. I smiled back and said, “That’s exactly the wrong strategy.” Innovative companies like his will continue to struggle with faulty pricing strategies.

“This is the industry’s worst nightmare.” said music industry writer Bob Lefsetz about Radiohead’s bold and brilliant move. Although we certainly don’t think of ourselves in these terms, we do think there’s a _very_ different way to do business, to price, and to treat customers.

11 responses to “Why Radiohead Should Price Your Software

  1. Radiohead Radiowalker. Hmmm. I don’t know what to make of that, Jeffrey.

    I just love thinking about the possible applications of “pay-what-you-want” and “pay-what-you-can-afford” pricing models for digital intellectual property (music, software, digital art, etc.).

    This concept has already been a winner in fund-raising circles. By handing over trust and sharing responsibility, humans tend to respond (for the most part) with making the “right” decision.

    My (29 year old) co-worker yesterday downloaded the Radiohead album and opted to pay $10.00. Subsequently, he was asked by a co-worker (25ish) for him to share the files with her, at which point he naturally said “go get your own” pointing out that she could pay a nickel if that’s what she could afford. And, that’s what she did (although I’m not sure what she chose to pay).

    From a guy who has witnessed the demise of the music distribution model first hand, to witness this interpersonal dynamic was sheer poetry in motion; quite literally, this self-selection pricing model comes with anti-piracy features built right in.

    I’m super interested in seeing what the bell curve of prices folks pay for this album, and hope that this info becomes public one day soon.

  2. For sure this is the industries worst nightmare but it’s also the industries own fault. Charging whatever they want only because fans would buy the record regardless of its cost enrages not only fans but also the artists. The same principle applies to software, you should charge what is reasonable for you and your customers.

    Unfortunately the Radiohead concept will only work for bands who are already popular and don’t have to rely on the industry to put their name out there. But I can see this changing and with online distribution channels being so easily available, maybe there won’t be a record industry in 10 years.

    The only chance they have is to hope that the internet and accompanied distribution channels follow the electric car and quietly disappear, but wait… it might be a little late for that.

  3. I just bought a copy of the album, it’s downloading now. What they lack in UI, they made up for in innovation.🙂

  4. Jens has an excellent point and one that I was making to friends recently: Radiohead are leveraging a fame acquired based on their having been signed in the past. They are one of my favourity bands, extremely talented both live and in the studio, but there are a lot of other good bands that would be totally ignored (in fact are being totally ignored when the offer their music online (for whatever price).

    Why? Because most consumers don’t know how to find them. It will take clearing-house sites to broker a relationship between new bands and non-technical audiences, and what else would you describe such a space as if not the recording-company-without-the-recording-facilities. Are we looking at the worst of both worlds here? Somebody who takes a cut but doesn’t provide the artistic and marketing support that a lot of young bands actually need?

    Take a look at SellaBand for a completely different take on how young bands might get a start: in this case it’s a marketplace for funding. But the end prize is 50k worth of studio time and the dream is still ‘getting signed’. I think that there is every chance that the online music brokers will end up looking very much like the current recording labels. And , while running the risk of repeating myself, it’s because most internet users depend on big, central brokers. Google Music, anyone?

  5. Jeffrey, I am reminded of the Grateful Dead’s business model, one that has been around for quite a while: “Give the music away for free and charge for the t shirts.”

  6. Quite true, Brett. It’s been no secret in the music industry that every Rolling Stones album has failed to recoup costs over the past ten years. They profit handsomely on the touring, so the album becomes a promo tool to generate media coverage…before the inevitable tour is announced. But if the Stones can’t make a profitable record (and it would help if they were half listenable, these days) then what hope for the rest of the bands. Madonna’s deal with LiveNation is beginning to look very sensible indeed.

  7. Pingback: Tom Smith's the OTHER blog

  8. Pingback: Infovore » links for 2007-10-20

  9. I appreciate the comments on how other bands lesser known could not pull this off, and am aware that others have already done this with much less attention. I still think this is very cool.

    Software is fortunate to not have such a tremendously expensive distribution overhead compared to consumer products. Musicians [I am one although amateur] need to produce 100,00 transactions, or more vs. 100 or 1000. So the distribution is no analog to software.

    But breaking out of conventional mindsets on pricing is, and pricing with the customer in mind is.

  10. Very interesting Jeffrey. I made electronic music for a few years, and now develop web applications, with a view to picking up the music again at some point.

    I built a task timer app some years ago and along with many other people decided to release it for public use, but really struggled with pricing. Last year the notion of adopting the tipping principle as a pricing strategy took hold in my brain, and, even though everyone I spoke to about it thought the idea was completely bonkers, I haven’t been able to shake it.

    Radiohead doing what they did acted as a complete affirmation of my hunch, and so users can pay what they feel comfortable with, on top of a flat absolute minimum monthly tariff.

    It may well fall completely flat, but I’m excited by the prospect of the experiment, and suspect that there will be enough users who enjoy the concept to make it worthwhile.

    http://www.adderuppa.com

    As for the music side of the argument, very few people involved in the music industry, that I know anyway, ever made enough money to live on under the ‘traditional’ structure. If you go into the industry in order to make money you are in all probability setting yourself up for major dissapointment.

    People make music to say something. If what you are saying has enough of a resonance you will find that ‘some’ people will get to hear it, and you might make enough money to buy some bread occassionaly. For me, the idea that just one person listened to what I made was enough of a buzz.

    The fact technology now exists to disseminate your thoughts, musical or otherwise, and receive money directly without answering to any other party, is a revelation, and can only be celebrated.

    In my humble opinion !

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s