Pandora: An Analysis of Consumer Incentives

The music industry is one that has been quite controversial over the past decade. Many recording artists publicly denounce fans that illegally download music and deduct from the artist profits.  Music streaming allows for music to be listened to even before it is finished downloading. While there is a variety of music streaming websites, Pandora is probably the most well known of the group. Pandora is unique in that the user creates a personalized station and is based on the try-before-you-buy model. Limiting the number of skipped songs per hour is Pandora’s strategy for abiding by copyright laws. Pandora prevents music from being captured with purchase and even has an obvious download button. However, this concept could be counterintuitive. Despite the goals of the business model, is it possible that free music stream sites like Pandora actually disincentivize traditional music downloads from iTunes, Wal-Mart, etc.? The answer to the question is one that would be of interest both to Pandora management and to many others in the music industry from consumers to recording artists. One way to analyze this could be to survey users and attempt to learn the number of “free riders” so to speak. Many of those categorized as Pandora free riders likely reduced their consumption of music downloads upon discovering the free music streaming site. An interesting question for a market analyst to examine could be: by what proportion did legally purchased music downloads fall after the introduction of free music streaming sites. If the results indicate a significant fall in traditional music downloads, which is Pandora’s way of generating revenue, could there be an end in sight for these free music streaming sites?

Pandora: http://www.pandora.com/station/play

Choosing a Brand Image

There are several considerations to be made when a firm is creating a brand. To which group or segment of consumers is the product aimed at appealing? What product features are going to be emphasized in advertising? What position with respect to a consumer image has the firm's competition taken? These are all relevant questions in strategically choosing the appropriate brand for a product. Deciding which consumer market segment to target with your brand is a key aspect. For instance: while some consumers may drink Gatorade mixed with alcohol, this market segment is likely so small (and therefore insignificant) that marketing is more productive when targeted at a larger consumer group like athletes. Another key aspect in choosing a brand is deciding what product aspects will be emphasized in the marketing efforts. Gatorade serves as a good example of a firm who strategically chooses which features to emphasize. Because the objective is to appeal to athletes, the most heavily emphasized feature of Gatorade is its ability to hydrate. Had the objective been to appeal to alcohol consumers, an aspect such as flavor might have been more heavily focused on.  It is also important for the firm to consider things from the consumer perspective or imagine being in the shoes of the customer. Many consumers put a great deal of thought into choosing the brand that is most suited to their style. The firm must try and decide which group of consumers represents the largest segment of the market for the product at hand. A third important consideration is the brand images of the firm's competitors. Some firms may want to establish a unique brand image with respect to competitors. A smart firm will take extra care to choose the optimal brand name, since consumers have a tendency to remain loyal to the first brand they deem suitable to their preferences.

Website Analysis: Gatorade v. Powerade

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These two sites, while having similar objectives in their design, took relatively different approaches to do so. The URL for each site is listed at the bottom of the page. It is quite evident that both sites are intended to appeal to a specific, and likely the largest, segment of sports drink consumers - athletes. Both Gatorade and Powerade list their sponsored athletes in hopes generating an image (this is also called positioning). Many firms will encourage customer engagement online, and one easy way to do so is by encouraging followers on twitter. Both companies have a portion of the site dedicated to social channels and following the company on twitter. There is also a portion of each site that lists the various products sold by each firm. Often times firms will attempt to grab the attention of potential consumers with appropriate graphics and videos. The differences in website layouts makes for navigation differences. For Gatorade, the initial website has a simple appearance with a navigation toolbar in plain view. There are also a couple of videos and an advertisement encouraging the viewer to follow Gatorade on twitter. To look at various pages on the website such as products or athletes, one must navigate using the toolbar. For Powerade, the initial website page displays the entire website. One may view everything on the site by merely scrolling to the bottom of the page.  There is a horizontal toolbar at the top of the page that also may be used to navigate to various parts of the website. So which site has a more successful appeal to that valuable customer market segment - the athletes? In the end, it likely becomes a subjective matter where the preferred sponsored athlete (Gatorade v. Powerade) is the deciding factor of the preferred sports beverage.

Gatorade: www.gatorade.com
Powerade: www.powerade.com/index.html

Network Externalities: Consumer Irrationality

Producers in different market structures generally have different strategies in terms of pricing, resource allocation and marketing. Often times in an oligopoly or monopolistically competitive market, there will be network externalities present. In other words, the purchasing behavior of consumers affects how much other consumers buy the good. When a positive network externality is present, also called the bandwagon effect, consumers’ perceived purchases and consumption have a direct relationship. A producer who spots potential for, or recognizes the beginning of, a bandwagon effect will likely try and capitalize on the opportunity. While these opportunities may not be very frequent, a successful creation or sustained bandwagon effect can increasingly generate sales. 

There are several steps a producer may take to try and capitalize on a positive network externality. Establishing a unique brand that differentiates a product from its competition allows for customers to quickly recognize the product. A likely result from this is increased perception of market purchases, due to easy recognition of the product when owned by peers.  Another important aspect to consider is influence of your competition on your sales. Often times several producers will simultaneously spot an opportunity for a positive network externality. When this is the case, said competitors will race to have their product become the “market standard,” or dominant product in terms of the bandwagon effect. The incentive to “win” the race is enormous, due to a couple factors. First, succeeding in creating a bandwagon effect for one’s product is likely to continuously increase market share along with profits. Second, competitors who fall short to the successful producer are likely to lose many of their sales to bandwagon effect. To further mass perception of a product as “the product to have, since everyone does” a producer may allocate a fair portion of his marketing budget to create such an image. If marketing is successful, perceived market purchases of that producer’s product will have risen – ultimately increasing sales if a positive network externality is present.  This example is one of many that illustrate how irrational consumer behavior can be manipulated to generate increased sales.