Ecommerce Know-How: Using a Variable Pricing Model

Selling downloadable products online presents a number of special problems for ecommerce businesses, not the least of which is demonstrating the value of an intangible product that has no physical form and no glossy packaging. Certainly, software vendors and popular sites like iTunes have gone a long way in demonstrating value. But one online music site, Amiestreet.com, has become very successful using a dynamic or variable pricing model and paying customers.

That site is worth looking at since its structure may be applicable to other ecommerce businesses.

Amie Street has become a popular place to discover, download, and share new music (sometimes from unsigned groups or artists) from nearly any genre. While the site is an exciting place to find new artists, I don’t believe that Amie Street would have been nearly as successful without its variable price structure.

“Songs on Amie Street start free and rise in price based upon their popularity, up to a maximum of 98 cents,” explained Amie Street spokesman Joshua Boltuch in an email conversation. “The more popular a song, the more it increases in price. The price of the album is the sum of its songs, with caps at $5, $8.98, and $9.98 depending on the artist’s preference.”

In this edition of “eCommerce Know-How,” a recurring Practical eCommerce feature, we’ll take a look at Amie Street’s variable pricing and consider how it can be applied to other ecommerce businesses.

Video: Amie Street’s Variable Pricing Model

Every Song Starts Free

As Boltuch mentioned above every song starts as a free download on Amie Street. Many Amie Street users see the free songs as a sort of treasure hunt and an opportunity to find musical gems from tomorrow’s super groups before they land on the Billboard top 20.

As a song is downloaded more and more, its price slowly creeps up. For an independent (unsigned) artist, it may take 75 to 100 downloads for the song’s price to rise to the maximum 98 cents. As a song’s value rises, so does the number of times it is recommended.

When an Amie Street user recommends a song to a friend, the site pays them for passing the song on, creating a cadre of word-of-mouth marketers that are helping promote both the individual songs and the site.

“Say you discover a song when it is still free and you like it so much you [recommend] it,” explained Boltuch. “Then, that song becomes more popular and increases in price up to the maximum of 98 cents. You earn that difference [98 cents] back into your account to buy more music.”

Examining the Amie Street Pricing Model

At its heart, I believe that the Amie Street variable pricing model has three basic principles. (1) Amie Street sells a scalable and low-wholesale cost item. (2) It uses a very low introductory price to entice prospective customers. And (3) it rewards customers for marketing for the store.

Let’s take a look at each of these principles and think about how to apply them to other ecommerce businesses.

Scalable and Low-Wholesale Cost Merchandise

While Amie Street does not disclose its arrangements with record companies, it clearly does not pay independent artists for the songs its lists and sells. Rather, these artists upload their songs and Amie Street keeps 100 percent of the first $5 in sales plus 30 percent or more of all additional sales.

A very low (zero in many cases) wholesale cost allows Amie Street to offer merchandise very inexpensively and lets the company focus on marketing.

This same idea can work for many ecommerce businesses. For example, while software development is never free, it is a fixed cost and therefore affords the opportunity to develop a variable price structure like Amie Street’s. Imagine that it cost $5,000 to develop some new software tool. That cost is fixed. Whether a merchant sells one download or 1,000, the development cost is the same. So why not try using a dynamic, stock market-like model?

Use a Low Introductory Price to Spark Interest

Amie Street’s offer of free song downloads attracts a lot of interest. But it also develops a sense of urgency. When I was researching Amie Street for this article, I listened to a sample of a folk song. It was free to download so I called my wife (who enjoys the genre) in for a listen. She liked it and by the time I decided to download it, the price had risen to 13 cents (still a meager price). I felt a real sense of urgency and excitement. I needed to act fast. Hesitation was costing me money.

This kind of pricing model appeals to a person’s natural sense of competitiveness. I was compelled to download free songs and when I wasn’t fast enough, I even spent three dollars.

This kind of interest and excitement is certainly applicable to other ecommerce businesses. For example, what if an online store that sold formal dresses offered a variable pricing model for prom dresses? The store could promote the garb at a low introductory price (at which it could still make a profit) and move the price up incrementally as dresses sold, encouraging shoppers to make a buying decision.

Reward Customers That Market For You

Amie Street pays customers to recommend songs to their friends. And, frankly, this is my favorite part of Amie Street’s model. It reminds me of buddy or sharable coupons, which I advocate. Essentially, this sort of reward system encourages every Amie Street customer to become an Amie Street marketer.

The application to other ecommerce businesses is very straightforward. Establish a system to reward customers when they bring you new business.

Summing Up

Amie Street, which has been around for three years, is one of the smartest ecommerce businesses I know about. The company offers a compelling pricing model that other ecommerce merchants would be wise to learn from.