Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 1563

When I was looking into grad schools as an undergraduate at the University of Toronto, I specifically wanted a program that would allow me to study both architecture and real estate development. My goal was to combine the disciplines and create a new hybrid profession.

In my pricing class this morning we looked at the strategy used by Radiohead with the release of its In Rainbows album. For those of you who aren’t fans, what they did was offer up the new album via their website on the basis that customers could pay whatever they want .

At first blush this probably sounds ridiculous. But if you break it down, it turns out to be pure brilliance.

First, it’s important to understand how pricing overall works in the music industry. In the olden days when people still bought CDs, an artist might make 15% of that sale price. So if you buy an album for $14.99, the artist’s royalties would be in and around the range of $2.25. The rest goes to the record label, their overhead and so on.

With the advent of iTunes, artists still make around 15%. But now a typical album costs $9.99. This is because overhead costs are lower for an online-only store. Still, the artist now only makes $1.50 or so per album sale.

In case the of Radiohead, their record label contract had expired and so they decided to self release In Rainbows. This obviously means that they were able to cut out a lot of overhead and other expenses. But would it not have been better to just sell the album for a fixed, but discounted, price?

The thing is, when you give people the option of paying nothing, you maximize your potential distribution. This is good when you’re trying to sell concert tickets, merchandise and other revenue producing items in the future.

But interestingly enough, when you give people the option you also maintain a business model. In this case, it turns out that, on average, people paid over $3 per album. This may sound irrational, but people do it for a number of reasons: because they’re big fans, because they want to support the artist, etc.

Whatever the reason, Radiohead actually brought in more per album than if they had gone through a record label and/or sold through iTunes. In fact, In Rainbows netted the group over 8x more than their previous album Hail to the Thief - which was released through a record label. 

This got me thinking.

What other markets would be well served by a pricing model such as this? Could you make parking a pay what you want service? I know that Shakespeare in High Park uses the model. So does it only work for artistic markets where people feel an emotional connection? I certainly don’t think we could sell condos using this approach.

Urban Capital has just unveiled its new  Smart House condo  project here in Toronto. With units starting at 289 square feet, the project is all about ultra-compact and ultra-smart living.

While micro-apartments are trending right now, they’re not a new idea. Architects have been fascinated by modular, adaptable and compact living for ages. Here’s an example of 100 square foot living capsules built in Tokyo in the 1970s.

Tokyo, of course, is a unique example. There you have the entire population of Canada living in one city. But that doesn’t mean that Toronto isn’t feeling the pressures of urban intensification. Apartments are getting smaller.

But the interesting thing about space is that it’s a relative thing. I personally live in 650 square feet and find it more than enough space. Though I also place a huge value on my time and try to minimize the amount of traveling I need to do.

And this is really the trade off you make with space. As you move further away from a city (and housing costs drop), you’re effectively shifting those housing costs to transportation costs. Which includes real costs like gas and time, as well as more intangible costs like quality of life.

However, I know many people that are willing to make that trade off for more space. But I wonder sometimes how much of that incremental space is necessity versus perceived necessity.

How much space do you need?