JPF Home Page Forums General Messages General Message Forum CD price drop announcement deceptive

Universal Music Group (UMG) recently announced what appears to be a significant drop in the list prices of their CDs. UMG stated that the list price of most of their CDs will drop from the present $18.98 a CD to $12.98 a CD. They stated that, though they can't control what prices the retailers will actually charge for the CDs, they expect the typical CD to sell for under $10 in the future.

This price drop announcement, if carried through, is commendable and could help spur an increase in the sales of CDs. But the above claims are somewhat deceptive and contain a bit of hyperbole, for these same articles also claimed that the typical wholesale price was going to drop from the present $12.02 to $9.09 per CD. This is only a $2.93, or 24.4 %, drop in the wholesale price, while UMG claims the list price will drop by $6.00, or 31.6 %.

The list price is really not that significant. It is the wholesale price that counts. The distributors and retailers prices are based the wholesale prices they have to pay, plus their own expenses in selling the CDs, plus some profit. Most distributors and retailers are presently operating with very tight margins, barely covering their costs, with little, if any, profit coming from CD sales. This is particularly true for the smaller "Mom and Pop" retailers. Consequently, the distributors and retailers are probably not going to be able to come close matching the percentage drop in their portion of a CD's price that the record company announced in their wholesale prices.

What this means is that the drop announced for the list prices is way overstated and deceptive. If the distributors and retailers could drop their adder to a CD's cost by the same percentage as the record company's drop in the wholesale price, then the final cost to the customer of a CD would drop by about 24.4 % and the list price should also drop this same percentage. This would mean that the list prices should have been announced as dropping to $18.98 x (1 - 0.244), or to $14.35.

But since it appears unlikely that the distributors and retailers will be able to drop their adders at all, the actual price to the customer will only drop by about $3.00 (the $2.93 drop in the wholesale price rounded to the nearest dollar amount) and list price should also have been announced as dropping by $3.00 to $15.98. Though this is commendable and a step in the right direction, it is not the $12.98 list price announced. The announced drop in the list price to $12.98 has set up an expectation in the final customer that, for the more mathematically astute customer, the price to the customer will also drop by the same percentage as the drop in the list prices, or, for those customers less astute mathematically, that the price to the customer of CDs will drop by $6.00. Since these drops won't be seen, the customer will think that he was deceived. The record company will probably reply that they have done their part but the distributors and retailers haven't done their part. This will create a lot of animosity and finger pointing between the record company and its distributors and retailers.

Another way to look at this is to compare the new announced list price, $9.09, to the less that $10 cost for CDs to the consumer that the record company announced that they expect. If we assume that "less than $10" means a price to the consumer of $9.99, then only $0.90, or 9 %, maximum of the product's cost is allocated to the distributor and retailer, combined. How many businesses do you know of survive on just 9 % or less of the product's cost being allocated to the distributor and retailer, combined? For most products, the portion distributed between the distributor and the retailer of a product's cost to the consumer is at least 20 % and more often about 50 %.

What is the purpose of generating this potential conflict in the marketing chain? Is the record company setting the stage for squeezing out all the independent distributors and retailers so that this record company's CDs can only be purchased from the record company's own distributors and new soon-to-be-created retail outlets? Can anyone else suggest any other reasons for this ploy by the record company?


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