Question 6: Radiohead strategy

Why was Radiohead so successful with their strategy?

Maybe because most of the people who have purchased their album were big fans of the group so lots of determinants such as loyalty, satisfaction and fairness have played in favor of Radiohead.

Selling online isn't costly so the marginal cost are low. If additional volume is inexpensive to serve, and you have available capacity the volume gain increases profitability. However, if you have fixed capacity or high-marginal costs, you risk replacing a higher-fee customer with a lower one.

Because Radiohead is an AWESOME band!

but seriously:) I agree with Betul, these fans represent certain attitude and approach to consumption. They are fans and they want to support their band. PLUS, they had to pay less than for CD in the shop, so any way it is a great deal for them, right? They do not have to pay any CD costs, marketing, CEO's etc., so it is profit for them as well.

Perhaps the novelty of the PWYW concept helped, but could fade away in
the future. If all bands had such an approach, none would stand out, so
only the fans would be ready to pay/contribute.

Also, was it really a "success"? Ok they made money, but were they
making as much as with a traditional selling approach? I see it more as
an advantage to appeal to fans, strenghening their loyalty for the
future.

Indeed they made more money with this selling strategy than with the traditional one. They sold more than 1 million albums online compared to a few hundred of thousands with their previous albums. They just didnt keep doing this because journalists were more focused of their pricing strategy than on their music. But I think that we will have more explanations on Wednesday with the group presentation about Radiohead.

Yes, maybe we should wait Wednesday without spoiling our whole presentation

Well, I agree with Aurelie's comment. Marginal costs on production, distribution, marketing, advertising were obviously lower with PWYW model than a traditional brick and mortar album release method. But Radiohead's success was also largely based on the fact that their fan base is so large. A band with a smaller fan base could never profit from PWYW.

Also, Radiohead had just finished their contract with their record label (EMI) around that time. Clearly, they were unsatisfied with their profit sharing model with EMI, which is why they decided to distribute it themselves. So, they cut out the middle man, cut out traditional album release costs, and retained greater financial control.

I think the PWYW strategy worked well for Radiohead in this case for two reasons. Firstly, similarly to what people already said, it's logical to assume that people who bought Radiohead's album have a high internal reference price, and believe that the product is of high quality, considering the fact that music is a matter of taste and people who buy a Radihead album like Radiohead to begin with, and were therefore willing to pay a decent price.

Secondly, the paper mentions that products with high fixed but low variable costs are more appropriate for the application of PWYW because low variable costs limit the risk of prices below costs for the seller. The music industry is the best example for such kind of products - what is called "digital products"- where almost all the costs go into making the first copy (writing the songs, recording the album, etc.) and the variable costs are basically negligible.

So- it makes sense that this strategy would work well in this industry, particularly when considering the fact that these days consumers have the option of downloading songs illegally for free anyway... so this strategy lets them download the music legally and not feel like they're being ripped off.

The other side of their success is that with PWYW strategy Radiohead has reaped enormous publicity, which is a matter of a critical importance in show business. It helped to increase group's popularity by word-of-mouth, attract new fans, who will potentially spend money on the Radiohead future albums.

BartekWu wrote:Because Radiohead is an AWESOME band!

but seriously:) I agree with Betul, these fans represent certain attitude and approach to consumption. They are fans and they want to support their band. PLUS, they had to pay less than for CD in the shop, so any way it is a great deal for them, right? They do not have to pay any CD costs, marketing, CEO's etc., so it is profit for them as well.

Yeah Bartek! I agree with you

The band just offered fans the chance to download its new album from its website and to pay as much as they wanted. The album was downloaded more than 2 million times, I think the variables loyalty (because most of the people who downloaded the album were fans of the band and they wanted to support them) and satistaction (because as they are fans, they already know the band and probably expect to be satisfied with their new album) have directly influenced their willingness to pay to download the album.

the operation was successful with Radiohead because they have a lot of fans but also because they were the first to do so...(well, I think they were..)
The novelty effect is, in my opinion, even more important than the satisfaction and loyalty of the fans

The PWYW is only successful is the 'buyers' want to support the 'seller'. In Beijing, when you buy something, you can more or less set your own price and the seller will do everything to sell the product to you (even if it means a 80% off the initial price). I never agreed to pay high prices because I knew they were achieving big margins by swindling customers.

you are right edith , it was the first major album whose price is determined by what individual consumers want to pay for. Considering the high cost of CDs in shops, the fans were definitely here to download their album. This srategy was a chance for the band to let their album available for every kind of customers , the buzz created around this event was also a good way to attract news customers

The key factor of Radiohead's success is that they acknowledge the realities of a digital society. They know that if they want to survive they have to follow the trend of the digital music and take advantage of it, for example, 160 kbps MP3 and digital delivery, rather than be the enemy of majority.

Radiohead was so successfull because they are a well established band with a lot of fans. Still, they were the first to use this system for the music. 'The buzz' created by this pay what you want model is surely one of the key success.

They were successful not only because costs are rediculously low for online sells, but also because they had first mover advantage and all the hype from their PWYW strategy caused a lot of media attention, which inturn made for free marketing! Also, they didn't have to pay a share to a record company and all the revenue recieved was mostly profit.

I'll like to mention that Trent Reznor (the GREAT Trent Reznor from Nine Inch Nails) also did an equivalent to this strategy almost simultaneously to Radiohead.

He did so because he was so fed up with record companies dictating his "artistic direction" and to encourage other bands to abandon their label.
Here is a breakdown of Trent Reznor's marketing: http://createdigitalmusic.com/2008/03/03/pay-what-you-will-for-nine-inch-nails-from-free-to-300/

Trent reported 3 million US$ revenue from this album, this is 100% his. So it works.

BUUUUUUT I also believe that in order to see a profit from this strategy, you need to be a very well known product (band)... The Rattlebrains from TW wont be getting 3 million bucks even if they sound as good or better than Trent Reznor.

I don't agree that it could only work for well known artists. I actually think that it's a really good way for beginning artists to reach customers without having to go through the traditional channels of record companies, but still make some money. I know many new artists upload their music on Youtube, Myspace, etc., and people can usually download it for free. But I think that if those artists would add the option to pay with a PWYW strategy, they could actually make a profit (under the condition that they are actually good ...) and maybe even get a sense of how good/popular their music is (not the same thing, I know).

TOTALLY AGREEING WITH NAOMI! it will not only work for known artist but will work more for the unsigned and emerging artists. Instead of just downloading for free from sights it will allow them to make money and create fan base without having to spend the tremendous some of money that they would using traditional channels. According to a Harvard business review called Polyphonic HMI: Mixing Music and Math (just using as a reference to my point) traditional channels will cost them as much as $300,000 just for a new single for new artists which is much less than the known artists expenditures.

And do you think such a strategy could work for new artits/bands to be discover?
Don't you think it might only help them being discovered by a certain amount of people, but not be really profitable for them, since we just said that this strategy might be really profitable thanks to several determinants, such as loyalty, degree of celebrity ..?

One point that has not been mentioned yet is the user data that Radiohead could gather using their PWYW approach. It is a big asset for future sales to know your fans' names, e-mail addresses AND even their individual willingness to pay. Even people who paid nothing for the album at least left their address. (please correct me if I am wrong. Did users have to register online to download the album?)

In belgium, we have a website where we can bet on new artsists. We can put the amount of money we want to launch the artist and pay the money that we want to buy the album. If the artist became successful, we recover the money that we put and generally make profits on it. Even it's new band, even the customer loyalty is law, even degree of celebrity is law, some bands became really successful with that kind of method. Of course, it doesn't work for every new alternative band and cannot be compared to the success of Radiohead but still it's possible to use the same strategy for new band combined with the bet strategy that I mentionned before.

I think it was successful because the cost structure that they have. Sell one song more on line has a very low variable cost, there is just a transaction cost behind, they just had high fix and sunk costs during the production of the Album.

Additionally, the customers of Radiohead are persons who are indentifyed with the band, so their sense of fairness, loyalty and satisfaction play a great role in the value of the purchasing.

The PWYW strategy helped to Radiohead to reach almost every customer gaining from their willingness to pay!

Alexandra_Engel wrote:Why was Radiohead so successful with their strategy?

I think because the real fans are willing to pay more than the regular price of the cd. And for people who normally are not willing to pay the price of the regular cd, they can choose their own price and thus are now more willing to pay, which will increase revenue.