Last fall, I had a post about a “pricing puzzle” in regards to the way Amazon prices its CDs and MP3 music. I asked the question, “Why do the MP3 versions of an album sometimes sell for a 50% discount and sometimes sell for a 50% premium compared to the CD version of the same album?” Some of the commenters provided some plausible explanations to that pricing puzzle:
Dan Hill: A lot of it has to do with the intellectual property rights. Different people can own the rights to different formats and have different views about pricing. Plus, pricing on physical products like CDs can be affected by inventory issues (clearance sales due to overstocking).
Tom Davis: I would guess that the copyright holders set the price for digital media, but Amazon purchases CDs from the distributor and gets to decide the price (including whether they will take a loss to free up warehouse space). Consequently, I doubt digital download music or videos fluctuate in price the same way physical media does.
Well, here’s a new pricing puzzle. In the previous example, consumers were given the choice between: a) buying a physical CD, or b) buying the MP3 version of the same album, and the MP3 version was priced at a premium in some cases, and at a discount for other albums. Today, when I went to buy the Etta James album “Time After Time” on Amazon I was given the following two choices: a) buy the MP3 version for $9.99, or b) buy the CD version for $3.99, which included a free MP3 download version of the album (see graphic above, click to enlarge)! In other words, you pay a premium of $6 to buy the MP3 version only without the added benefit of also getting the CD version. Or you get a $6 discount to get the bundled package (CD + MP3 version) compared to buying the MP3 version only. For another Etta James album, Mystery Lady, the pricing was similar, although the bundled package (CD + MP3) was $7.79 compared to $9.99 for only the MP3 version, so the discount for the bundled package was lower than for the other album (see graphic above).
How does Amazon’s pricing strategy make sense? It allows a consumer to spend less and get more with the bundled purchase, and spend more and get less with the MP3-only option. I can understand the inventory/overstocking explanation, which would lead to a discount for the CD, but then why give away the MP3 version for free? And the “different copyright holders” explanation wouldn’t seem to apply here. So the new pricing puzzle is why would a bundled package (CD + MP3) sell at such a deep discount (60% in the case above) to the MP3 version only?