Record Labels Waged War On Human Psychology…And Lost
he major record labels and the RIAA could have averted a PR nightmare and saved themselves millions of dollars by hiring a few behavioral economists instead of lawyers to advise them. The basis of all human economic transactions are psychological. Our animal spirits animate markets. The lawsuits the RIAA waged against consumers several years ago were designed to prevent people from downloading free, illegal music. They largely had the opposite effect. The obvious stupidity of the strategy is that you’re beating people over the head, then saying “Now, buy my product!”
The more profound aspect of that is that the RIAA could spend every last penny they’re worth and they still wouldn’t stop the inevitable death of the CD . Not because people don’t want to pay $17 for a CD, but because $17 doesn’t make sense anymore in the context of how human beings make rational choices. The whole file sharing phenomenon (and legal music downloading) is largely driven by a powerful psychological aversion to being cheated.
It turns out that free is so powerful not because it’s free, but because it allows us to minimize the risk of being cheated. Duke University behavioral economist Dan Ariely conducted an interesting experiment to understand “free”, which he writes about in his book Predictably Irrational. First, he and his colleagues sold random college students two kinds of chocolates. One was Lindt Truffles from Switzerland. The second was Hersheys Kisses. The truffles were 15 cents and the Kisses were 1 cent. The students reasoned that the difference in price between the two chocolates was due to quality. 73% chose the truffles and 27% chose the Kisses.
Then Ariely did something interesting. He introduced free into the experiment. He lowered the price of each chocolate by 1 cent, so the truffles were now 14 cents and the Kisses were free. All of a sudden, preference for the Kisses skyrocketed.
Ariely concluded that free is so enticing because it eliminates the risk of buyer’s remorse, or what I like to call the “Oh, crap!” factor. Nobody wants to buy something and then discover that it’s not what they expected. Even if the price of that thing is just a few cents, the psychological aversion still exists. When something is free, that risk is eliminated entirely. It may still not be what you expected, but at least you didn’t lose anything by paying for it.
The world of marketing is largely based on the concept of convincing people to overcome their natural aversion to being cheated. Companies hire high-priced consultants and agencies to help them craft brands that people will trust. Money-back guarantees are another popular tactic to get people to buy risk-free.
You can see examples of the “Oh, crap!” factor in everyday life. In his spectacular book Free, Wired Magazine editor Chris Anderson gives the example of zappos.com. Most people still prefer to buy shoes in stores because they want to try them on and make sure they fit and look good on their feet before buying . Zappos became a multi-billion dollar company by eliminating the psychological barrier to buying shoes online by letting people try out and return shoes as many times as they want. So it’s even better than buying shoes in the real world because some of the other costs associated with buying shoes like getting in your car, dealing with traffic, talking to a rude cashier, etc are eliminated.
The record industry has fared so poorly largely because it sells a high risk product that competes with copies of the product that carry far fewer risks. Everybody knows that labels fill CD albums with fluff. And everybody hates it. Sites like Amazon that let you sample albums for free before buying them take some of the risk out of buying. But why would you buy the entire album if you only like a few songs on it? That’s where the whole buy-one-song iTunes model has become a powerful force. Buy what you want, ignore the rest. Or even better, download it for free on some file sharing site.
But free isn’t completely free. Just because something doesn’t cost money doesn’t mean there aren’t other hidden costs. If you download a free mp3, you could be dealing with poor quality, viruses, problematic file formats or maybe the wrong song. And then finding a good version takes time. That’s a cost too.
The reason Steve Jobs and Apple have been so spectacularly successful at reinventing the music business is because they’re the only ones who’ve managed to invent a hardware and software platform that mitigates the risk factors involved in owning music. And they made it sexy and stylish. Apple didn’t win on technology. Nobody does, ultimately. They won on business smarts. And business is based largely on manipulating psychology.
Many younger people get all their music from free file sharing sites. Part of the reason is that they have less money and more time than older people, who’s busier lives encourage them to pay for things that save them time. Younger people are willing to spend time to understand technology and deal with the costs that come with free music. I think free music has also become an expectation for younger people. There’s an entire group of people under the age of about 30 who believe that music should be free because that’s the world they’ve grown up in. So that’s where the future lies.
The labels lost because they waged war on human psychology. Apple won because it adapted to human psychology.