With iTunes' Variable Pricing, Fewer Hit Song Sales Still Mean More Money For Apple

itunes-logoWhen it comes to selling a song online, 30 cents means a lot. Sales of hit songs in Apple’s (s AAPL) iTunes store have dipped 6 percent since April, in part due to a new variable song pricing structure that has driven up the price of most hits to $1.29, data from a new study by Billboard’s Glenn Peoples shows. But popular tracks by Lady GaGa, Miley Cyrus and their ilk are keeping their market share in comparison with the remainder of the music market, and Apple’s revenue from sales of the more expensive hit songs appears to be rising faster than consumers are turning away. For Apple and other retailers testing variable pricing in the digital music marketplace, the early returns suggest that their six-month-long experiment is succeeding — and generating more revenue for labels and rights holders as well.

Hit songs account for more of the overall music marketplace today than they did five years ago, with the top 200 songs now making up more than one-sixth of digital track sales, Peoples writes in his extensive piece concerning sales patterns of hit records vs. works by less popular “long tail” artists. But the advent of variable pricing, which has boosted the price of most hit songs from 99 cents to $1.29 in Apple’s store, seems to have affected sales of hit songs over the past few months. “Higher prices have depressed sales of hits — in terms of units, not revenue,” he says. (Think of  a teenager using up a $25 gift card, and receiving 19 hit songs instead of 25.) Ultimately, he writes, “many music fans aren’t shunning hits because they don’t like them but because the price rose by 30 cents.”

A little quick math implies that Apple is reaping larger rewards by increasing the price of hit songs by about 30 percent. By my count, only 2 of the current top 50 songs, and 26 of the top 200, in the iTunes Store are still priced at 99 cents, with the remainder at $1.29. If the average price of a top-200 hit is therefore about $1.25, and track sales among the top 200 have fallen by 6 percent, sales revenue from hit songs would still be up by at least 18 percent compared with an all 99-cent store.

Apple also reduced the price of another subset of its songs in its store to 69 cents in April, and has seen a bump in overall transactions per user since that time, so its experiment may be working on both ends. (The majority are still priced at 99 cents.) Other retailers such as Amazon.com (s AMZN), RealNetworks’ (s RNWK) Rhapsody and Lala.com have begun using variable pricing in their MP3 stores as well, and Lala CEO Geoff Ralston mentioned to me recently that the company would consider variable pricing for its “web songs,” permanent streaming songs that now cost 10 cents apiece. The data suggests that even if some frustrated consumers are tuning out on higher-priced songs, Apple is still gaining more than it loses from the new pricing structure.