In late 2007, Radiohead released its album In Rainbows for downloading directly from its Web site. The band adopted an unusual pricing strategy: Let each consumer decide how much to pay. This looks like price discrimination with a twist. Suppose everyone pays a fixed fraction of his or her willingness to pay for the album, say half. Under voluntary pricing, Radiohead would continue to collect lots of money from people who are willing to pay a lot for the album, and also get money from people who are willing to pay only a few dollars. The twist is that consumers decide how much to pay, and we d expect some freeloaders. It turned out that roughly 60 percent of U.S. consumers simply downloaded the album for free, and the other 40 percent voluntarily paid an average of $8.05.
Worldwide, about 38 percent paid something, and the average price was $6.00. What are the-trade-offs in Radiohead s pricing strategy? Suppose for the moment that each downloader in the United States would have purchased a $15.00 CD if it were available, so the only effect of voluntary pricing was that customers switched from buying CDs to downloading. The typical music artist gets roughly 15 percent of the revenue from the sale of a CD, or $2.25 for a $15.00 album. Using the U.S. numbers listed earlier, the average payment from a Radiohead downloader (including the people who paid and the freeloaders) was $3.22. In this case, Radiohead s strategy would increase its total revenue, because it would get an average of $3.22 per customer rather than $2.25 from a music company. Across the world market, however, fewer people paid and the payment per person was lower. The average payment from a downloader was only $2.28, or just above the revenue from a conventional CD.
These simple calculations ignore two other possible benefits of Radiohead s pricing scheme. A switch to voluntary pricing could convert some freeloaders (people who exploited illegal file swapping) into paying customers. And voluntary pricing could attract new customers who were not willing to pay $15 for a CD. If voluntary pricing converts some freeloaders and attracts new customers, it will be lucrative.