Innovative price promotion strategies in the music industry

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1. Introduction

Once upon a time, live performance was the only way people could enjoy music. On December 4, 1877, Thomas Edison invented the phonograph, which changed the way the world consumes music. Through the 1980s and 1990s, from Long Plays (LPs) to CDs, record stores healthily grew with huge sales and profits (Shayo and Guthrie, 2003). After peaking in 1999, sales in the music industry have declined by an average 7% per year in the United States (Connolly and Krueger, 2005). According to the Recording Industry Association of America (RIAA, 2009), music sales declined from $13.7 billion in 1998 to $8.5 billion in 2008 (Sinha, Machado, and Sellman, 2010). This raised the question to many practitioners and scholars, what contributes to the fall in overall revenues experienced by the music industry for the past decade? (IOS press, 2005)

1.1 Background

Market Transformation

Introduction of Internet technologies have disruptively changed the traditional distribution channels and changed the way customers live and shop (Keller, 2010), forcing the music industry to rebuild its business model in order to survive. Today, the Internet has become a major source of music and video content acquisitions and distributions. With the creation of digital formats of music files, high-speed Internet connections, wide use-diffusion of computers, and the emergence of peer-to-peer (P2P) file sharing networks, music storage and distribution have been made inexpensive and efficient without national boundaries (Goel, Miesing, and Chandra, 2010). Consumers change in the perceived source of value of music moving from tangible to intangible formats (Burkart, 2008). In 1999, Napster was introduced, a large amount of digital music files were exchanged over P2P file-sharing networks illegally, songs that were protected by intellectual property rights were reproduced and transmitted without paying artists and music labels. Ever since file-sharing networks became a threat to the music industry, they have been accounted for as the major reason of declined record sales. While some studies blame the decreased record sales entirely on piracy, however, other researches attribute declined music sales to a decline in quality of new music, the emergence of new forms of entertainment businesses, and indicate that free P2P file sharing networks serve as a tool for sampling which ultimately increases music sales (Goel, Miesing, and Chandra, 2010).

Actions from the Music Industry

Despite the disagreements in the industry, while facing the significant changes in the market environment, music industry reacted in a relatively slow manner while technology continued to advance in a high-speed pace.  In the 1990s, the music industry perceived Internet as a threat and allocated most of its resources on combating and preventing illegal file sharing or downloads (Kunze and Mai, 2007). First, by adding encryption software, Digital Rights Management (DRM), to restrict duplication of music files and to control the distribution and use of digital music files. DRM took away the fears of music publishers to offer digital music files and offer customers a new way to legally purchase music and music services, such as Apple's iTunes and Microsoft's Zune Pass. However, DRM has the potential to impose stricter technical controls on how customers consume digital music, which is legally purchased, limiting customer's ability to listen to music (Lichtman, 2006). In February 2007, Apple called for removing DRM protection from all legal digital music files and started selling DRM-free music in June 2007. One year later, Apple was followed by Rhapsody, Verizon, Yahoo Music, MTV and iLike, removing DRM entirely from catalogues. Finally in January 2009, Apple signed agreements with all the major music labels, and started to provide DRM-free music files on its iTunes online music store, which was considered as a huge success (Sinha, Machado, and Sellman, 2010). Second, by lobbying for establishing and enforcing stricter laws and by filing lawsuits against P2P file sharing service providers, such as and Napster, which were shut down in 2003.  However, many other file-sharing technologies emerged, and made the way to avoid responsibility for copyright infringement, to name few, such as Grokster, KaZaA, Edonkey, FileNavigator, and Soulseek. Unlike Napster or, these service provider companies do not use a central server, and they only provide the software that allows any user computer to become a central server, so that these companies do not have the control of their users' actions and therefore do not have the accountability for copyright infringement (Shayo and Guthrie, 2005).  Third, by legal action against individuals, since 2003, RIAA prosecuted more than 3,500 individuals (Wingfield and Smith, 2003). However, the move is risky, since the industry is suing its own end customers, and such legal action has also been a public relation disaster, especially when RIAA filed a lawsuit against a 12-year-old girl. Customers perceive that CDs are too expensive and most of the money goes to the big labels instead of music artists. Moreover, they were able to copy songs from radio or from friend's tapes in the past, why not now? Fourth, by public education campaigns, encouraging legal use of artistic work, increasing customer's perceived risk, which plays a crucial role in consumer decision making and behaviors (Mitchell, 1999). However, a steadily increasing number of consumers have already become accustomed to downloading music illegally for free (Walsh et al. 2003). Only 5% of Generation Y consumers perceived that downloading music illegally was wrong or unethical (Freestone and Mitchell 2004).  As a result, consumers view the effort by the music industry as rigidity of its capability and resistant to change.

New Opportunities

The digital distribution channel enables new business models that were previously unfeasible (Casadesus-Masanell and Hervas-Drane, 2010): (1) Increase songs' searchability for individual customers. (2) Greater variety of music content, online channel allows retailers to have large numbers of songs and different artists, especially including new or basement recordings, which were not widely distributed before. (3) Low fixed cost. The cost of packaging and printing will be eliminated; and the storage and transmission cost will be minimum. (4) Music sampling. Music as experienced goods, which generally is consumed before it is actually purchased (Lacher, 1989). The digital distribution channel allows music sampling easier, cheaper, and more efficient, almost anywhere and at any given time.  Gopal, Bhattacharjee, and Sanders' (2006) research shows that lowering the cost of sampling music will attract more consumers to purchase music online as the total cost of evaluation of content quality and acquisition decreases. (5) Sharability. Digital formats of music files are capable for massive exchanges (Sterne, 2006). From the social networking perspective, sharability adds value to pure ownership. The digital format of music files makes file exchange to peers a lot easier; through sharing music files, creating a new sense of value to personal ownership of the music (McCourt, 2005).  With the advantages of the new distribution channel mentioned above, the music market has the potential to reduce content uncertainty, increase efficiencies, and move from superstart-focus strategy to a broader base of talented music artists to be successful (Gopal, Bhattacharjee, and Sanders, 2006). For example, the Icelandic band, Sigur Ros, earned huge success and high popularity with the help of P2P networks within the independent pop scene (Casadesus-Masanell and Hervas-Drane, 2010); Arctic Monkeys entered the music market without any help from the big labels, gained their popularity via Internet, and made the fastest-selling debut album in British music history in 2006.

The Growth of Digital Music

According to the RIAA 2006 year-end statistics report, sales of CDs have declined since 2001, while sales of digital music have increased dramatically since 2004; digital single songs in the US market increased by 443 million and digital full albums sales increased by 231 million from 2004 to 2006.  Apple iTunes, the current leader in the digital music market, expanded its consumer base from 861,000 in July 2003 to 4.9 million in March 2004 (Borland and Fried, 2004) and hit ten billion downloads in the end of January 2011.  Analysts project that more and more percentage of music sales will shift from CD to digital music. Forester Research predicts that whether in 10, 20 years, or even more, eventually physical media will become obsolete.Therefore, the research design in this paper will be focusing on online music setting.

Changes in the Market Structure and Value Chain

The traditional and digital music market structure and value chain are illustrated in Figure 1 and 2 respectively (Bockstedt, et al. 2006, p.16&19), in which the key players in the distribution process and the main value drivers in the value creation chain are outlined. In the traditional process, production and distribution of music is more complex and involves many players, which leads to higher costs; therefore, the record labels possess more resources and have the most control powers in the value chain. On the other hand, digital music is easily reproduced, distributed, searched, stored and modified, which offer new opportunities to version music files for different pricing and sampling strategies; and to add value through service, marketing, promotion, and licensing. 

1.2 Purpose of the study

As mentioned earlier, changes in the market structure and the growth of digital format music files offer new opportunities for the industry to rethink its pricing strategies.  Therefore, this research would like to examine the effectiveness of innovative price promotions comparing to the traditional Temporary Price Reduction (TPR), while further providing information for future price promotion development. However, under a specific type of price promotion, different consumer segments might react differently. By regarding music as hedonic product, Moe and Fader (2001) show that several different consumer segments exist, while each segment might have different forms of product acquisition behavior and different responses to marketing activities. Therefore, this paper will further explore the relationship between music type and a set of dependent variables, which are used to measure the effectiveness of a price promotion. Additionally, a recent study by Sinha and Mandel (2008) finds that a consumer's Optimal Stimulation Level (OSL) is one of the factors to influence his or her tendency to pirate. Therefore, this paper would like to compare the OSL between independent and mainstream music consumers, as a manipulation check, and then examine their responses to the marketing activity, namely the price promotions.

Music Types: Independent and Mainstream Music Consumers

The cultural construct is often divided by the popular culture and the subculture; the former is thought as mainstream, which is often tied to corporate, and the latter is considered as independence from the commercial entities. Applying the concept to the music industry, the types of music can then be divided into mainstream and independent music. Mainstream music, mostly produced by the major labels, is familiar to the general public and intensively promoted via mass media; independent music, less known by the majority, is either self-recorded or produced by independent labels and share the value of freedom of creation.

According to International Federation of the Phonographic Industry (IFPI, 2005), 71.7% of the retail music sales worldwide went to the Big Four (Universal Music Group, Sony Music Entertainment, Warner Music Group and EMI Group). However, with the development of digital music, a recent study (Bhattacharjee, et al., 2007) indicates that the gap between independent and major music labels is getting smaller. Blackburn (2004) finds that file sharing has a strong negative impact on CD sales of popular artists, but a positive impact on unknown artists. Furthermore, from a consumer's perspective, “music is less about an artist's self-expression than a consumer's desire for self-reflection” (Goldberg, 2005). In Western cultures, uniqueness and individuality are desirable (Kim and Drolet, 2003; Kim and Markus, 1999). For example, numbers of advertising campaigns in fashion industry highlight the concept of unique style to express the self; Hugo Boss created a section of Hugo Tracks under lifestyle eMag on its German official website, using independent music to diversify its consumer bases. Unlike mainstream music, consumption of independent music can serve as a way to achieve the purpose of expressing uniqueness. However, most of the researches were done in the field of mainstream music, not much of attention was put into independent music yet. Additionally, Apple's iTunes store, the current leader of digital music distributors, has signed deals with all the major music labels, and added more than 2,000 independent labels; however, the number of independent music records and artists is infinite; therefore, independent music industry is an interesting area worthy to be explored and will be the main focus of this academic research.

Positive Incentives

Most people would agree that so far neither the litigation nor public education campaign has effectively reduced illegal music downloads and substantially reduced the number of users on file sharing networks. The music industry is in an experimental stage. Instead of standing in a defensive position like what the industry used to be, the music industry should take a proactive position when we all know that file sharing networks are here to stay. “The carrot is often more profitable than the stick” (Lohmann, 2004, p.23). Therefore, it would be interesting to investigate how positive incentives influence consumers' behavioral intentions.

Price Promotion Strategy

One stream of literature suggests that with the existence of piracy, re-pricing the product may be one of the strategies to extract rents from the market (Liebowitz, 1985). With significant decrease in production and distribution costs, it offers new opportunities for the music industry to re-think its pricing strategy. Additionally, when using online music services, most consumers compare price first then other non-price elements; therefore, an online music service provider differentiates itself from competitors through its pricing strategy. However, how exactly the legitimate music file should be priced is a very difficult question, but yet to be properly addressed. Due to time and resource constraints, this paper will only focus on the price promotion strategy, but this author believes that this will shed more insights into the pricing mechanism for the music industry. The following innovative price promotion strategies are found in the music and relatively similar industry (e.g. journalism, publishing) and will be used to compare with traditional TPR in this research, more details will be described in the following chapter.

  • Advertising-supported price promotion
  • Share it and get for free
  • Pay what you want

However, in my understanding, no research has been done to investigate the effectiveness among these price promotion strategies in the music industry. Therefore, this paper will examine the impacts of music type and promotion type on the effectiveness of a price promotion in six different dimensions listed below, which offers more detailed information for strategic marketing development in the music industry.

  • Legal music file diffusion
  • Willingness To Pay (WTP)
  • Purchase intention
  • Customer return intention
  • P2P download intention
  • Positive word of mouth (WOM)

This thesis will further examine what other covariates might affect the effectiveness of price promotion strategies, and which of the following factors has a significant predictive ability. 

  • Perceived Novelty
  • Perceived Control
  • Perceived Equitable Exchange
  • Price of Legitimate Music

1.3 Problem statement

How can the music industry benefit from online distribution channels through innovative price promotion strategies in the presence of music piracy?

In this study, from existing literature in economics, marketing, consumer behavior, distribution management and psychology, the researcher would like to identify the certain characteristics among independent music consumers; using mainstream music consumer and TPR as reference categories to examine the impacts of music type, promotion type, and their interaction effect on the effectiveness of different price promotion strategies; and investigate the four covariates in assessing the effectiveness of price promotion strategies. This article is aimed at answering the following research questions:

  1. Do consumers who like independent music have a higher Optimal Stimulation Level (OSL)?
  2. Whether music type, price promotion type and their interaction effect have a significant impact on legal music file diffusion, Willingness to Pay (WTP), purchase intentions, customer return intention, positive Word of Mouth (WOM), and P2P download intention?
  3. Whether the four covariates: perceived novelty, perceived control, perceived equitable exchange, and price of legitimate music have a significant impact on legal music file diffusion, Willingness to Pay (WTP), purchase intentions, customer return intention, positive Word of Mouth (WOM), and P2P download intention?

By answering these questions to find out whether there is a difference in OSL between independent and mainstream music consumers, mapping previous research results of certain consumer characteristics to a specific type of music. Understanding the factors influencing the effectiveness of the price promotion in the music industry contributes to distribution channel management and brings insights to develop pricing mechanisms that music labels, online distributors, and artists can pursue. Furthermore, this study might help to establish new marketing strategies and build new business models for the music industry to increase royalties, sales, and profits. Ultimately, music labels and distributors can create new capabilities of enhancing each individual consumer to enjoy music in a unique fashion way.

2. Theoretical Background

This chapter provides the clarification of definitional issues, an overview of the concepts relevant to the thesis.

2.1 Optimal Stimulation Level (OSL)

Introduced in the psychology literature by Leuba (1955) and Hebb (1995), they propose that every living individual prefers a certain level of stimulation, which serves as a motivational cause of his or her behavior to adjust stimulation from the surrounding environment. When the stimulation from the external environment is below optimum, an individual will attempt to increase stimulation; when stimulation is above optimum, an individual will attempt to reduce it. According to the research by Berlyne (1960), most people tend to prefer stimuli, which are at the moderate level.  However, each individual has his/her uniquely determined optimal stimulation level, and there are reliable differences among individuals (McReynolds, 1971). An overview of OSL literature can be found in the research by Rogers (1979). Raju (1980) empirically examines the relationship between OSL, selected personality traits (intolerance of ambiguity, rigidity and dogmatism), demographic variables, and consumer exploratory behaviors, and finds several significant correlations between OSL and the variables examined. A study by Steenkamp and Baumgarner (1992) examines the role of optimal stimulation level in consumer exploratory behavior, which consumers actually engage in. They empirically examine the relationship between OSL and consumers' cognitive responses to an ad, ads repetition, information seeking, variety seeking, gambling, risk taking, and innovative behavior. The result shows that OSL is positively correlated to curiosity-motivated behaviors, variety seeking and risk taking. In summary, OSL has been suggested as a function of basic personality traits and consumers' exploratory tendencies. And a recent research by Sinha and Mandel (2008) finds that a consumer's optimal stimulation level is one of the factors to determine his or her tendency to pirate.

2.1.1 Measurements of Optimal Stimulation Level

There are several self-reported measures developed to assess OSL.

  • The Arousal Seeking Tendency (AST) scale introduced by Mehrabian and Russell (1973; AST-I), revised by Mehrabian in 1978 (AST-II)
  • The Sensation Seeking Scale developed by Zuckerman (1979)
  • The Change Seeker Index (CSI) of Garlington and Shimota (1964)
  • The Novelty Experiencing Scale (NES) of Pearson (1970)
  • The Stimulus Variation Seeking Scale of Penny and Reinehr (1966)
  • The Similes Preference Inventory of Pearson and Maddi (1966)

After reviewing the scales mentioned above, Zuckerman's Sensation Seeking Scale and Mehrabian's Arousal Seeking Tendency Scale are most commonly used to operationalize the OSL in consumer research. Figure 3 summarizes the studies involving empirical research of OSL in marketing. In this thesis, the Arousal Tendency scale is selected for the operationalization of OSL, because of certain characteristics and advantages it possesses. First, a variety of factorial analysis shows that AST has high reliability and validity. Second, it incorporates a wide range of arousal seeking behaviors and arousal causes, which are relevant in the context of purchase and consumption. Third, with 40 different statements scored on nine-point Likert scales, AST has fewer items in comparison with other measures; therefore, it is easy to administer.

2.1.2 Arousal Seeking Tendency

“An individual's preference for an environment is closely related to his preferred arousal level: Some persons characteristically prefer calm settings, whereas others actively seek to increase their arousal by selecting novel, complex, or unpredictable situations.” (Mehrabian and Russell, 1973, p.315)

A number of consumer researches show that consumer reactions to fashion, music, and advertisements are influenced by consumers' aesthetic or hedonic preferences (Sewall, 1978; Hirschman and Holbrook, 1982; Bell, Holbrook and Solomon, 1991). Individual's aesthetic preference is a function of arousal tendencies, which is determined by its collective properties (e.g. complexity, novelty and incongruity) (Berlyne, 1968, 1970; Berlyne and Lawrence, 1964). Many researches have examined the relationship between arousal seeking tendency and consumer behaviors (e.g. risk taking, variety seeking, information search, and tendency to try a new brand or service). However, the relationship between consumers' arousal seeking tendency and their reaction to marketing stimuli needs further research. In the study of AST on consumer preferences for product design, Cox (1994) reported that AST interacts with product complexity, and also calls for future research on the relationships between arousal seeking tendency, product design characteristics and consumer's aesthetic preference. Therefore, this paper is aimed at examining the relationship between music consumers' AST and their reactions to price promotions in the setting of online music stores.

2.2 Independent Music

As mentioned in the previous chapter, independent music has not been amply addressed in the academic research. However, the Internet offers new opportunities for independent music to be discovered and distributed more widely than ever. Additionally, consumption of independent music can serve as a way to express uniqueness, which is commonly pursued by individuals in the Western cultures. Therefore, the researcher hereby presents a brief introduction of independent music, in comparison to mainstream music.

Independent music is a term used to describe independences and autonomy from major commercial labels.Within the development of music industry, independent music labels have a long history of promoting music. During the 1950s and 1960s, the major labels had most of the resources, made the most profit, and had the most control over production, manufacturing, distribution, and promotion. While major labels dominated the market, independent labels struggled to survive. From the late 1970s onwards, the number of independent labels started to grow, which have gained higher popularity in recent years. Nevertheless, the major recoding labels, which are now known as the “Big Four”, still accounted for approximately 70% of the music sales worldwide in 2005 (IFPI, 2005). The differences between major and independent label are that independent labels typically offer higher royalty percentage to their artists, and tend to focus less on marketing activities. Independent artists gaining their publicity and popularity mostly rely on word of mouth to attract a distinct audience who commonly disregard the commercial value of the music.

2.2.1 Independent Music Consumers

Independent music consumers prefer the music that is original and artistically created, which is the opposite of commercialized pop music. Independent music is used to describe the independence from major music labels. However, when consuming or purchasing music, consumers appreciate the music creation by the artist and the music itself. The majority of consumers does not pay attention or not even notices what record label produced the music. So how to define “independent music consumer”? One can expect that the most popular songs/albums/artists generate the highest sales, most of the music sales go to the major labels, and major labels continually increase publicities and popularities of their artists through intensive marketing exposure. Therefore, in order to define “Independent music consumer”, the billboard Top 100 hits, which make up the biggest share of all music sales, will serve as an indication in this paper. Therefore, the term independent music consumer used in this paper is defined as follows:

Independent music consumers are individuals who prefer to search, consume, and purchase the music that is NOT on the list of billboard Top 100 hits.

On the other hand, Mainstream music consumers are individuals who prefer to search, consumer, and purchase the music that is on the list of billboard Top 100 hits.

2.2.2 Independent Music Consumer Characteristics

By the definition of independent music consumers mentioned earlier, the researcher further discusses several characteristics they possess as following.

Curiosity-motivated Information Search

In general, there are two types of information search, acquisition of information to fulfill the further need (e.g. purchase of a brand) and information search to learn more about the environment based on curiosity (Steenkamp and Baumgartner, 1992). Music is an experienced good. It is almost impossible for consumers to predict the content of the music, even from the same artist who has been heard before. Music purchase is moderated by a consumer's response to a song or performer (Ouellet, 2007); therefore, music purchase is often unplanned, especially in the context of independent music since it is more or less unknown. Therefore, one can expect that searching for independent music is more like the curiosity-motivated behavior, as the desire for information for intrinsic reasons. Since independent music labels have fewer resources and tend to focus less on marketing activities, independent artists are more difficult to be discovered. With vast amounts of music content available and most of it not advertised by recording labels, independent music consumers need to put more effort to search, find and select the music that appeals to them.

Intolerance of Rigidity and Dogmatism

By this definition (Rokeach, 1960), rigidity refers to the reluctance to try new responses; dogmatism captures the degree of openness or reticence a person reacts to new and unfamiliar products, services, or ideas. With the fact that independent music consists of a great amount of new songs and artists, which are new and unfamiliar to consumers, independent music consumers who enjoy exploring music among unknown music, one can assume that they have a higher degree of intolerance of rigidity and dogmatism.

Innovative and Risk Taking Behavior

Innovativeness is defined as the degree to which an individual's early adoption of an innovation (Midgley and Dowling, 1978). And an innovative behavior can be modeled as an expression of an individual's personality trait, innate innovativeness, which influences a person's choice in product category (Foxall and Bhate, 1991). Innate innovativeness is the tendency of a person to make decisions independently, without being influenced by the communicated experience of others (Midgley and Dowling, 1978). Independent music consumers, who commonly disregard the commercial value of the music, select the music they like without the influences of mass media, or marketing activities by the recording labels; therefore, one can assume that they have a higher degree of innate innovativeness, which leads to innovative behaviors. Furthermore, in the independent music industry, since many artists or songs are unknown to the public, there is a higher degree of music content uncertainty and ambiguity; therefore, there is higher risk to legally purchase or illegally download songs with unfavorable outcomes.

Past research showed that OSL is positively related to curiosity-motivated information search, variety seeking and risk taking consumer behavior (Steenkamp and Baumgartner, 1992); rigidity is negatively correlated with risk-taking behavior (Kogan and Wallach, 1964; Schaninger, 1976); rigidity and dogmatism are negatively related to innovativeness (Robertson, 1971; Mikol, 1960; Coney, 1972; Jacoby, 1971); OSL is positively influencing risk taking and innovative behavior (Raju, 1980).

Therefore, based on the independent music consumer characteristics discussed above, one can expect that there will be a difference in OSL between independent and mainstream music consumers, and they might have different forms of music acquisition behavior and responses to marketing. This paper is interested to see whether the music type can have a significant impact on the effectiveness of a price promotion, comparing the responses to the price promotion between independent and mainstream consumers.

2.3 Positive Incentive

Sinha and Mandel (2008) find that participants who have higher Optimal Stimulation Level (OSL) (Leuba 1995; Raju 1980) decrease their WTP significantly when the perceived risk increases.  For consumers within this segment, neither the increase in perceived risk of getting caught, nor the increase in magnitudes of the penalties decrease their propensity to piracy. On the other hand, positive incentives, such as availability of rare recordings and easy payment method, can reduce their pirate tendency significantly, and ones with higher OSL may be willing to pay more for a rare recording.

Leading strategies for online retailers in the presence of music sharing should include different pricing options, an efficient search engine, and new licensing structures (Bhattacharjee, et al. 2006). Based on prospect theory (Kahneman and Tversky, 1979), Nunes, Hsee, and Weber (2004) study how the effect of cost structure influencing consumers' perceived foregone gains and losses with failure to pay, and the effect on consumer purchase intention in the software industry. They find that simply manipulating the way to distribute the software can alter consumers' perceptions of cost structure and harm associated with piracy. They propose that to reduce intellectual property piracy by economical and psychological novel marketing rather than further legal action and stricter enforcement. The argumentations above motivate the author to focus on positive incentives in this paper. Additionally, under the assumption that independent music consumers have higher optimal stimulation level, using negative incentives cannot effectively reduce their tendency to illegally download music online. Therefore the paper is aimed at examining the effectiveness of three innovative price promotions comparing to traditional TPR and to investigate whether promotion type has a significant impact on the effectiveness of a price promotion.

2.4Innovative Price Promotions

Sales promotion is a very powerful marketing tool. While advertising is perceived as expensive and less effective, communication through promotions to reach consumers at the place and time of purchase gains more attention in recent year (Gedenk, et al. 2006). In the model presented by Watt (2000), he suggests legitimate producers to reduce their prices when facing copyright infringement to squeeze out pirates from competitions rather than turning to legal right enforcement or to maintain high prices.  To be effective, using different pricing strategies for different market segments is advised. Since different consumer segments might have different tendencies to pirate (Gopal and Sanders, 2000). The thesis is aimed at examining the effectiveness of different innovative price promotions in (1) increasing legal diffusion (2) increasing WTP (3) increasing purchase intention (4) increasing customer return intention (5) decreasing P2P download intention (6) increasing positive word of month and comparing between independent and mainstream music consumers.

2.4.1 Advertising-supported Price Promotion (Watch the Ad and Get It for Free)

According to McKinsey 2010 Quarterly report, advertising-supported business model is one of the top 10 tech-enabled business trends. An advertising-supported business model is based on the multisided business model, which creates value through information exchanges and interactions with multiple parties involved. In the media industry, advertising is a classic example to put this business model into practice, such as newspaper, radio, television station, magazine, and recently online social networking websites. With the development of Internet, this model is widespread in the digital world (Anderson, 2009). Advertising-supported model generates a significant amount of its revenue from advertisers, while providing service to its consumers for free. The underlying assumptions are based on information exchange (gather data from one group of consumers, and charge another group of consumers who requests to use the gathered data) and cross-subsidization or price discrimination (offer free services supported by premium users who need for special use). Based on network effects (Conner and Rumelt, 1991; Takeyama, 1994; Shy and Tisse, 1999; Peitz, 2004), as more people using the free online service, network effects can magnify the value of the service for all its consumers, such as facebook, which is considered as the most successful example in the modern history. In the context of music industry, YouTube, Google, Inc., which targets the mass market, is another example using advertising-supported business model, where users can watch and upload files for free. Now YouTube has become a platform for many unknown artists to publish their music to generate awareness. The real value of music does not lie in the product itself, but rather consumers who listen to the music.

For the experiment of this paper, “Watch the Ad and get it for free” will represent as the advertising-supported price promotion, which indicates the if a person chooses to watch an approximately 30-second advertisement, then he/she can download the music legally for free.

2.4.2 Share It and Get for Free (Share the Link and Get it for Free)

“Fans do a better job than the record labels of making music available to one another” (Lohman, 2004, p.21). Juno Download is an online music site from Juno Records based in London, UK. During the Christmas holiday season in 2010, it came up with a promotion strategy, stating that if you post the link to other social network websites, such as facebook, twitter, and myspace, you then can download the music file legally for free. During the panel discussion at the Future of Music Coalition Policy Summit in Washington D.C, many panelists point out that using social networking as a promotion channel is one of the most successful strategies, including giving away music for free (Cohen 2010). The main concept is to put the end consumers into the value creation process, inviting consumers to actively participate in the distribution chain. This approach rewards consumers who share the information with others and create network effects. Rewarding your own consumers provides an economic incentive for consumers to consumer, purchase, and distribute music legally (Evanglista, 2002; Slater, et al. 2005). Economic actions become a part of social actions. Based on the social utility theory, this approach enables consumers to demonstrate their tastes and expertise, and to build social links with others (Huang, 2005; Hennig-Thurau, et al. 2007). The value comes from communication and sharing information, which creates a new sense of personal music collections (McCourt, 2005). Additionally, since consumers know better about the music tastes of their friends, they can easily transform into effective marketers (Feng, 2009). For independent artists, the more widely they reach the audiences, the more widely their creations are being heard, and it is more likely for them to have financially rewarding outcomes. Increase in product diffusions through legitimate channels to enhance the demand for complementary products and services (e.g. concert tickets) (Sinha, et al. 2010) and to create halo effects (promoted items have impacts on sales of other products/categories) created by promotion; thus, ultimately increase the artists' revenues (Liebowitz and Watt, 2006). Lohman (2004) also points out that by giving consumers the freedom to publish what they like, the more extensive online music catalog will be available for everyone.

2.4.3Pay What You Want (PWYW)

Pay what you want is one form of participative pricing mechanisms, others like auctions (multiple buyers compete with others to buy the product) and Name Your Own Price (NYOP), which includes consumers into the price-setting process. The PWYW model enables consumers to have the maximum control over the price setting; the buyers can set the price as much as they want and sellers cannot reject them. There are two forms of the market in the exchange relationships: the monetary-market and the social-market (Heyman and Ariely, 2004).  By allowing buyers to have the final price determination, PWYW transforms the exchange relationship from monetary-market to social exchange norm, which influences consumers' buying behaviors. The most prominent example applied this model in the music industry is the rock band Radiohead, releasing their album “In Rainbows” in 2007. For two months, they generated revenues of an average $6 per album (ComScore, 2007). PWYW is also applied to other service industries, such as restaurants (e.g. and touring services. This pricing model increases interactions between buyers and sellers, and has increased its popularity recently; however, the literature is still limited. PWYW is characterized by the concept that individual consumers have heterogeneous valuation of a product and service (Spann and Tellis, 2006). Under this pricing model, the seller can serve consumers who would not buy the product/service at the first place, due to price concerns (Bakos, 1998).  For example, the album “In Rainbow” was downloaded approximately two million times, one could assume that many of those were not considering buying the album in the first place, but by PWYW the album was widely heard, and potentially attracted more new customers. Additionally, PWYW can measure consumers' willingness to pay, which provides information to forecast future sales (Spann, Skiera, and Scharfers, 2004). However, concerning the music industry, PWYW is only applied by high-profile artists in my understanding, the remaining question is the applicability of this pricing model to the independent music realm.

2.5Factors influencing the effectiveness of the price promotion

Consumers' responses to different pricing strategies may not solely rational but also driven by other factors, such as perceptions and preferences (Kim, et al. 2009).

Perceived Novelty

According to the Social Cognitive Theory (SCT) (Babdura 1986), there are different types of incentives, namely novel stimuli; enjoyable activity; economic; social status; and self-reactive incentive (Larose and Kim, 2007). Consumers' characteristics interact with these stimuli that motivates consumers' behaviors. Being unconventional and different from the usual way to set the price for a particular product or service can be perceived as innovative (Lucking-Reiley, 2000; Amaldoss and Jain, 2008; Chernev, 2003; Spann and Tellis, 2006). In the adoption-diffusion (AD) (Mahajan, et al. 1990) and the use-diffusion (UD) (Shih and Venkatesh, 2004) paradigms examine the process of consumers' adoption of an innovation, where personal factors are one of the determinants. Hirschman (1980) proposes the positive relationship between inherent novelty seeking and usage variety; Ram and Jung (1990) suggests innovativeness is positively related to usage variety. Therefore, innovative consumers are being experimental and have higher tendency to try different and new things.   Under the assumption that independent music consumers have higher OSL, they have higher tendency to seek for innovative and unusual stimuli. 

Perceived Control

Reactance theory (Brehm, 1966) examines people's reactions to the situation when their freedoms are threatened, restricted, or prohibited (Lessne and Venkatesan 1989; Thomas, Donnel, and Buboltz, 2001). Innovative price promotions allow consumers with higher degree control over the final transaction, which reduce reactance among consumers, and develop positive attitudes toward the industry. Furthermore, based on the concept of social form of emancipation, Giesler and Pohlmann (2003) propose “consumer emancipation as a conviction to difference, a difference which is being cultivated through social communication” (p.94). Independent music consumers attempt to maintain outside from the mainstream as a subculture community (Schouten and McAlexander, 1995), and have tendencies to stand against major labels, music corporations, and commodifications. This type of consumers might want to escape from the restriction of the music market, especially recording labels' control over music creations and music experiences (Firat and Dhalokia 1998). Jenkins (1992) finds the oppositional relationship between fan club and the entertainment industry. Additionally, Ringberg, Odekerken-Schroder, and Christensen (2007) empirically identify three different culture models (relational, oppositional, and utilitarian), which influence consumers' preferences and expectations to a service recovery. They find that consumers with the oppositional cultural model, to ensure a successful service recovery is to provide consumers recovery options to make they feel in control. Consumers with the oppositional culture model believe that market has more control powers, with the possibility to exploit vulnerable consumers. They prefer to have controls rather to be at the sympathy from the service provider. However, marketing literature regarding how consumers maintain control is limited. Considering the characteristics of independent music consumers, one can argue that this segment is more likely to have an oppositional attitude toward the music industry. Innovative price promotions enable consumers to have some degrees of control over the price of the transaction. Chandran and Morwitz (2005) find that increase the degrees of buyers' perceived control leads to an increase in consumers' purchase intention.

Perceived Equitable Exchange

According to the equity theory, fairness plays as a role to influence how an individual allocate his/her resources (Carrell and Dittrich 1978), the perception of relationships with his/her partners (Guerrero, et al. 2007). Individuals prefer to have a balance of equity with his/her relational partners (Roth, 1995). Whether the exchange relationship is equitable or inequitable is based on an individual's evaluation of the inputs and outcomes comparing to other alternatives available. Several researches provide empirical evidences that fairness and reciprocity strongly motivate human behaviors (Andreoni and Miller, 2002; Bolton and Ockenfels, 2000; Fehr and Schmidt, 2003). The evaluation of an exchange relationship could be based on the utilities given by the legal channel in comparison to other alternatives (Rochelandet and Le Guel, 2005; Hennig-Thurau, et al. 2007). In the context of online music, Kwong and Lee (2002); Plowman and Goode (2009) find that perceived equitable exchange relationships between downloaders (illegally) and copyright owners significantly influence downloaders' behavioral intentions. In summary, individuals attempt to maintain an equitable exchange relationship (Glass and Wood, 1996).

Price of Legitimate Music

Extensive studies find that price is the key factor to influence consumers' purchase intentions and inclinations to download music illegally (Gopal et al. 2002; Molteni and Ordanini 2003; Chiang and Assane 2002). Feng et al. (2009) suggest that the music industry is better to charge lower prices, which can lead to higher legal product diffusions; Plowman and Goode (2009) find that the price of legitimate music positively influences consumers' intention to pirate, and the result is significant for non-downloaders and for both heavy and light downloaders. Low prices motivate consumers to purchase counterfeited CDs; zero-payment motivates consumer to illegally download digital music files despite the low quality (Ang et al. 2001). Price is also a common determent in the software and motion pictures industry under the pressure of piracy.

Innovation price promotions discussed earlier in this chapter are characterized by (1) the possibility of zero payment, (2) which is unconventional to usual temporary price reductions; (3) higher degrees of control by the consumer, which lead to a more (4) equitable exchange relationship in comparison with temporary price reductions commonly used in the music industry. Additionally, with the existence of independent and mainstream music consumer segments, each segment might have different responses to the price promotion. Therefore, this research is interested of examining whether music type, price promotion type, their interaction effect, and the four factors have significant impact on legal music file diffusion, Willingness to Pay (WTP), purchase intentions, customer return intention, positive Word of Mouth (WOM), and P2P download intention.

3. Methodology

Due to time and resource constraints, experiment can be considered as the most appropriate method for this master thesis. An online questionnaire is created to collect data needed. The items complied in the questionnaire are created for each construct, and the items are created from existing scales, adding additional items, or modifying the existing scales to fit the purpose of the study.

3.1 Instrument Development

The questionnaire consists of six sections. In section 1, the interest of this paper is to examine whether independent music consumer have higher optimal stimulation level; therefore, in this section a filter question is developed to divide respondents into two groups: independent music consumer and mainstream music consumer. Section 2 uses Arousal Seeking Tendency (AST) scale to measure music consumers' optimal stimulation level. Section 3 randomly presents one of the four scenarios of different price promotions, using Temporary Price Reduction (TPR) as control group. Section 4 measures the degree of legal music file diffusion, respondent's WTP, purchase intention, customer return intention, tendency to download from other P2P file-sharing networks, and positive word of mouth to asses the effectiveness of different price promotions. Section 5 examines the explain power of four covariates on the effectiveness of price promotion. At last, section 6 gathers respondent's demographic information, and his/her past experiences in music purchase and download. The complete questionnaire can be found in the Appendix A.

3.1.1 Filter Question: Music Type

Music type as one of the important elements for this thesis, in order to gather information from independent and mainstream music consumer segments, the questionnaire starts with the filter question to screen the respondents and split them into two groups. As defined in the previous chapter, independent music consumers are individuals who prefer to search, consumer, and purchase the music is not on the list of billboard Top 100 hits. Therefore, to split the sample, respondents will be shown a list of top 10 singles (including the song title and the name of the artist), and be asked their preferences regarding the listed music.  Due to the fact that most respondents are unwilling to put a lot of effort to fill out the questionnaire, it is impossible to present the entire list of billboard top 100. To minimize the effort required, only top 10 singles from the billboard top 100 hits will be presented.

To determine respondent's music preference, the filter question is developed based on the scales designed by Costley and Brucks (1992). The original scale is a three-item scale, which is used to measure a consumer's brand preference. The analyses of the scale reported its reliability with alphas value ranging from .90 to .97 (Costley 1993). Since in the eyes of consumers, an artist can be viewed as a brand; the application of this scale is deemed appropriate. In order to increase the response rate and to keep the questionnaire as simple as possible, respondents will only be asked regarding their attitudes toward the top 10 singles. To split the sample by simply asking respondent's attitude in music preference, “In general, do you like the music listed above?”

3.1.2 Arousal Seeking Tendency

As mentioned in the previous chapter, arousal seeking tendency scale will be used to measure independent and mainstream music consumer's optimal stimulation level.  The 40-item version is developed by Mehrabian and Russel (1974), and reported a Kuder-Richardson reliability coefficient of .87. And a revised version with 32-item was developed by Mehrabian in 1978; however, due to copyright issue, researcher can only obtain the 40-item version using 9-point response scale to conduct the experiment for this thesis. In this paper, the Cronbach alpha coefficient is .87, indicating very good internal consistency reliability for the AST scale used with the sample.

Reliability Statistics

Cronbach's Alpha

Cronbach's Alpha Based on Standardized Items

N of Items




Table 1: The Reliability of AST Scale

3.1.3 Development of Price Promotion Scenarios

Four price promotion scenarios are created to represent four different price promotions: Watch the Ad and Get It for Free (Ad); Share the Link and Get It for Free (Share); Pay What You Want (PWYW); and Temporary Price Reduction (TPR), using TPR as control group. Researches find that the design and layout of the website affect consumer purchase intention (Vijayasarathy 2004; Richard 2005). The purpose of this thesis is to assess the impact of music type, promotion type, and their interaction effect on the effectiveness of different price promotions; therefore, to rule out website designs as a factor influencing consumer purchase intention; verbal descriptions are deemed most appropriate. Other functionalities, such as the extensity of product catalogues, easy payment methods, and a search engine can positively influence consumer online purchase intention (Poddar et al. 2009; Hausman and Siekpe 2009; Liang and Lai 2002; Sinha and Mandel 2008).  Therefore, in all four scenarios would provide the identical information regarding website functionalities: iBeatz is an online music store, which provides (1) extensive independent music catalogues offer by independent labels and artists; (2) free sampling services; (3) a recommendation engine based on purchase/sampling/viewing history; (4) high quality of digital music; (5) gig/concert information and ticket service; (6) fast downloading time; (7) easy payment methods; (8) high information security; (9) easy navigation of the website.

After viewing the current online music stores, Amazon MP3, Beatport, Grooveshark, imeem, iTunes, Jamendo, Juno Download, Kroogi,, MagnaTune, Musicload,  Napster, Pandora, Rhapsody, Spotify, the original price of a single on iTune is slightly lower, commonly sets at the price $0.99/$1.29; while for other independent music stores, the original price is commonly between 1.20€/1.50€/2.50€. For the music files on sales, the common discount price on iTune is $0.99/$0.69 and for other online music stores, commonly set at the price 0.99€. After considering the data collection process, geographic components of the respondents, and the discussion with the professor in the university, researcher decides to use euro currency for the price setting in the scenarios.

For “Watch the Ad and Get It for Free” and “Share the Link and Get It for Free” price promotions, respondents can choose to download the music legally for free by first watching a 30-second commercial or share the link on the social network website only once, respectively. Otherwise, they can also purchase the music at the discount price 0.99€. For PWYW, if a person decides to download the music on iBeatz, he/she can pay as much as he/she wants. For TPR, the original price of the song was 1.20€, and the current discount price is 0.99€; respondents will simply be asked, “Would you purchase the song on iBeatz?” The detail description of each scenario can be found in the Appendix A.

3.1.4 Dependent Variables: Effectiveness of the Price Promotion

An effective price promotion should be able to (1) increase legal music file diffusion (2) increase consumer's Willingness To Pay (WTP) (3) increase consumer purchase intention (4) increase customer return intention (5) decrease P2P download intention and (6) generate positive Word of Mouth (WOM). After presenting the scenario of the price promotion, which is the manipulation of the experiment, respondents will be asked several questions to assess the effectiveness of the price promotion.

(1) To examine the process of legal music file diffusion, respondents will be asked, “Would you legally download the song on iBeatz?” (2) Directly or indirectly measure consumer willingness to pay. For TPR, by asking respondents “Would you purchase the song on iBeatz?” If the answer is yes, his/her willingness to pay will be 0.99€; if the answer is no, then his/her willingness to pay is zero. Similar methods are used for Ad and Share. First by asking respondents “Would you legally download the song on iBeatz?” if the answer is no, then his/her WTP is zero. If the answer is yes, then further ask respondent “If you decide to legally download the song from iBeatz, you will watch the ad/ share the link to get the music for free or you will purchase the song at the discount price 0.99€; if he/she chooses to legally download music for free, then his/her WTP is also zero. For PWYW, directly ask the respondent to state how much he/she is willing to pay. (3) To measure purchase intention of each price promotion, by simply asking respondents their likelihoods to use iBeatz to legally download the music. (4) Since one of the major goals for most of the firms, both offline and online, is to ensure consumer return (Pine, et al. 1995; Reicheld and Sasser 1990), in accessing the effectiveness of price promotion it is important to measure customer intention to return. Therefore, respondents are asked to indicate their likelihoods to revisit iBeatz in the next 3 months. (5)To measure respondent's tendency to pirate, by asking respondents to indicate their likelihoods to download the song from other websites, such as P2P file sharing networks that might not be legal.(6) Finally, it is to measure the positive word of mouth. The general agreement is that WOM can be a significant factor influencing a firm's sales, growths, and marketing returns. A great deal of evidences shows that WOM can have a significant impact on consumer product choice (Danaher and Rust 1996; Wangenheim and Bayon 2004). Many business managers have widely adopted the Net Promoter after it was introduced in 2003 Harvard Business Review. The widespread adoption of Net Promoter lies in its simple construct. Respondents simply rate their likelihoods to recommend a company to others. Based on this construct, measure the positive WOM by simply asking respondent “How likely are you to recommend iBeatz to a friend, family member, or colleague?”

3.1.5 Four Covariates

Perceived Control

Perceived control is measured using a three-item, seven-point Likert scale adapting from Bateson and Hui (1992), measuring the degree of control a person feel in a particular setting which might influence the outcome. Results of their research confirm the importance of perceived control on the delectaion of the service experience and the consumers' responses to the service provider. And they report an alpha of .61 for the reliability of the scale. Since online music store can be seen as the service provider, it is suitable to use this scale.  The perceived control construct (Ajzen, 1985) includes a self-efficacy item (i.e. items concerning the difficulty to do the way he/she desires) and controllability items (i.e items regarding people's feeling that things are under their control or they feel that they are able to influence the outcome through their behaviors).

Perceived Novelty

Adapt from a three-item, nine-point scale, which is used in measuring the perceived novelty of a specific advertisement exposure. The scale is developed by Cox and Cox (1998) after reviewing the relevant literature, and reported the reliability with an alpha of .77 by the authors. By asking respondents to indicate the fitness of the words (Unusual/Original/New) describing the price promotion they experienced. In this paper, the respondents are exposed to one specific price promotion scenario, and to my reading, advertising is part of the promotional part of the marketing mix; therefore, using this scale is considered appropriate.

Perceived Equitable Exchange

Oliver and Swan (1989) develop a three-item, seven-point statement to measure the degree a person perceived “advantageous inequity” (p.25) from an exchange with the other party with a LISREL estimate of .78 in its reliability. Adapting from their scale, this research is to measure the degree to which a respondent's perceived equity that he/she gets from an exchange relationship with iBeatz, by asking respondent's degree of agreement or disagreement of either iBeatz or he/she gets more out of the sale under a specific price promotion.

Price of Legitimate Music

With different final transaction prices possible in different scenarios, using the scale developed by Petroshius and Monroe (1987) to measure the perceived value offered by a particular product for a particular price. For the two products examined in their research, an alpha of .87 and .92 are reported for the reliability of the scale. For the purpose of this thesis, price of legitimate music is to measure the perceived value offered by a particular price promotion for a particular music file, for example, by asking respondents: considering the song under the price promotion is very good/poor value for the money; very economical/uneconomical; very expensive/inexpensive, etc.

3.1.6 Other Variables

Besides the predictor variables listed above, there are other important factors might also influence the effectiveness of a price promotion. Kwax, Fox, and Zinkhan (2002) find the positive relationship between Internet usage, product information, and the possibility of online purchase. One can further infer that online music purchase requests some degrees of experiences. And in general, consumers' purchase behaviors are, at least to some degree, based on their past purchase experiences.

A study into music consumption behaviors in Germany, the authors investigate music downloader' motivations and their tendencies to various commercial models (Walsh et al. 2003). The results show that the level of experiences a person has in music downloading directly and significantly affects his/her music consumption behavior. The level a consumer is in, influences his/her buying process of online music and his/her attitude toward the marketing offerings (Kunze and Mai 2007). Furthermore, a person's past download experience influences his/her perceived harm with music downloading to music labels and artists (Levin, et al. 2004).

Additionally, young people construct the biggest proportion of music consumers, but at the same time among the most prices sensitive (Tom, et al 1998). Many researches have shown that young male students have higher tendencies to download music (Ang et al. 2001; Kwong and Lee 2002; Gopal and Sanders 2003). Further, disposable income can also affects piracy behavior (Ang et al. 2001; Chiang and Assane 2002; Kwong and Lee 2002). Therefore, respondent's age, gender, occupation, and education background information will be gathered.

In order to see the impact of music type on the effectiveness of a price promotion, the variables listed below will be gathered for descriptive analysis to see whether independent and mainstream music consumers have similar online music purchase experience, P2P download experience, and demographic information.

  • Online music purchase frequency
  • Average online music spending
  • P2P download frequency
  • Age
  • Gender
  • Educational background
  • Job

3.2 Pre-testing and Sampling

Before collecting the data, the instrument is pre-tested (Moore and Benbasat, 1991). The online questionnaire is sent to a test panel of 12 students of Maastricht University, including 7 males and 5 females to make sure that there is no confusion or misleading question in the questionnaire. All 12 respondents complete the questionnaire, and are asked to give suggestions regarding grammar, spelling, layout, word choice or content adjustment. Only minor revisions are made.

To collect data for the research, convenience sampling and purposive sampling techniques are used. In general, everybody listens to music every once in a while, either in public or private, and everybody likes music to some extents; therefore, convenience sampling seems appropriate. The online questionnaire is sent out to the students of Maastricht University. The first research question of this study is to compare the OSL between two types of music consumers: independent and mainstream. Using a sample of conve