Like most free marketers, I strongly believe in the power of Adam Smith’s invisible hand. This is the notion that individuals operating in their own best interests tend to produce the greatest common good.

The music industry’s profits—the barometer of customer satisfaction—are plummeting. This means that either there is a flaw in the bedrock of modern economic theory or the music industry does not act in its best interests.
People want to buy more than their incomes will allow. As a result, purchases reflect priorities: consumers allocate their incomes roughly in proportion to what is important to them. When their budget is exhausted, purchases stop.

There are two ways for consumers to increase music consumption. The first depends on the labels. They must make music more valuable relative to its alternatives (substitutes include movies, videogames, etc.). In fact, the role of preferences is so strong that even an increase in income can decrease a product’s sales if that good is among the least desirable in its category (the inferior good phenomenon, often expressed as trading up to steaks from hamburgers as incomes increase; sales for hamburger, the inferior good, decreases). This is an important point, because it means that the recording industry cannot depend on an economic turnaround to save it.

The other way to increase consumption is to steal. Piracy provides strong feedback that music is still important to consumers, but not as important as other forms of entertainment at the price of music and its competing forms of home entertainment. Piracy screams that consumers want greater value.

The good news is that the music industry has tremendous influence over its customer relationships. It controls the delivery of customer satisfaction through marketing.

Some readers may have seen “price” a couple of paragraphs ago and determined that lower prices are good for the industry. Reducing price is seductive because it is easy to change and it may (or may not) provide short-term relief. However, price is often a false savior. It communicates value, so consumers often interpret lower prices as diminished quality. Cutting price can reduce the competitiveness of music versus other forms of entertainment, impairing sales and profits in the long-run.

The focus must be on the other marketing mix elements: product, promotion, distribution and brand. Here is where the music industry’s tactics are inconsistent with its strategy. Executives contend they want to avoid having music become a commodity, but they continually drive their best products in the form of exclusives to the mass merchants and large consumer electronics retailers. In most product categories, premium product is the domain of high-end retailers, often boutiques. Wal-Mart and Best Buy can move tonnage but not position music effectively.
Music also tends to try to compete against movies and videogames during those product’s peak selling seasons. Consumers are already demonstrating their preferences for DVDs and games during the Christmas selling season, so it defies logic to flood the music pipeline during the fourth quarter. Some titles, including those by superstars, may benefit from a street date during the first two quarters (see “Seasonal Marketing and Timing New Product Introductions by Sonja Radas and Steven Shugan as a starting point).

Music executives must focus on the elements they control: the marketing mix. Serving your market does not mean issuing subpoenas but offering a compelling reason to choose your product over the alternatives. Suing your target market—consumers that want music, but value other entertainment more—is hardly wise. Leave the discussion of morals and legality to the fields of theology, philosophy and law. Our domain is marketing. We are in the customer satisfaction business.

Barry Sosnick is the president and founder of Earful.info, a provider of strategic marketing and risk management solutions to the recorded music industry. He is also a professor at Five Towns College, teaching classes in music marketing, public opinion research, small business management and entrepreneurship. Mr. Sosnick was an equity analyst, most recently with Fahnestock & Co. (now Oppenheimer & Co.), where he provided research on the home entertainment and consumer electronics retailers, and assisted mergers and acquisitions, and public and private financings. Barry was a senior project leader with the prestigious political polling and market research firm Luntz Research Companies, where he guided political, legal and marketing strategies for Fortune 500 companies and elected officials.