Radiohead and flexible pricing for zero-marginal-cost goods

The Economist's Free Exchange blog has a good article on Radiohead's decision to let fans decide how much they want to pay for their newest album.

Radiohead's move is an idea I've had for a while - an idea which I think is pretty obvious and makes a lot of sense in the readily-available-MP3 world. By making this move, Radiohead are recognizing that any income they receive from their album is already reliant on that section of their fans who are honest and willing to contribute anyway; so they might as well let them decide what "fair" is and pay what they think reflects the enjoyment (or in economic terms, utility) they obtain from the album.

I am very interested in the outcome of this experiment, and hope to see other artists doing the same. As it is, my geographical location makes it largely impossible for me to get music in a legal way; all the online music stores are closed for customers from St. Kitts or Slovenia. As someone who abhors piracy and likes to contribute his 2 cents for enjoyable music, I hope the idea is successful and becomes prevalent.

I'd love to see a version of this approach become prevalent in software, too. I'd like to see software being licensed based on how much utility the user is deriving from it. For example, I can see how professional users of Mathematica can justify the $2,500 expense for the license; however, as an occasional hobbyist, the most I'd be interested to pay is $50. Still, the marginal value of Wolfram Research providing a license to me is $0. Wolfram Research recognizes this by offering a student version at about $50. But they won't license it to me, because I'm just a hobbyist, I'm not a student at an accredited university.

Given that the marginal cost of software licensing is 0, I'd love to see the world move to more flexible licensing models for software. The question is, can companies maintain their existing levels of revenue this way?

Most software revenue comes from businesses. But the ordering processes of large companies are rigid enough as it is; they generally assume simple, fixed per-unit pricing. Some of them even require that you don't sell your product at a better price to anyone else.

So how do you even begin to try and make a corporation pay based on the utility they derive from your software?


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