Today, Trent Reznor, of Nine Inch Nails, announced a creative merchandising strategy for the band’s latest album, Ghosts I-IV.

Now that Trent is free from the vices of his traditional record label, he’s able to shed some light on how music should be sold in the digital age. The 4 volume, 36 song album will be available in several prices and forms:

For Free. The first volume of the album (9 songs) is being released under a Creative Commons license and are available via the album’s website (which, as of this writing, has fallen over due to demand) and BitTorrent (Trent personally uploaded the album to key BitTorrent sites such as The Pirate Bay).

For $5. The full album (36 songs) is available digitally from Amazon or from the Nine Inch Nails website.

For $10. Get a two-disc set packed with a 16-page booklet shipped on April 8th. Also includes immediate digital download.

For $75. The deluxe edition comes in a hardcover fabric slipcase with two audio CDs, one data DVD (multi-track), and a Blu-Ray disc. Also includes immediate download.

For $300. This limited edition version comes with four LPs on 180 gram vinyl, fabric slipcase, and two Giclee prints. The set is limited to 2,500 copies and is personally signed and numbered by Trent.

Fans, Collectors, and Followers

A couple months ago I conducted in-home focus groups with trendsetting 18-24 year old music consumers in NYC and LA. The music industry’s revenues may be crumbling, but I found that this generation of music consumers is more engaged with their music than any previous generation. They consume music and knowledge about music voraciously through iTunes, BitTorrent, Pandora, Wikipedia, Google, and others.

These avid consumers support their bands by buying t-shirts and going to concerts. They even claim that they prefer to purchase music to support the bands they love. So both Radiohead and Trent experimented with volunteer business models where consumers could download an album for free and then decide whether to pay for it (and in the Radiohead case, how much they wished to pay). Both experiments resulted in mediocre revenue (Trent, in particular, was disappointed by the results).

So if music consumers are more engaged then ever, why didn’t these experiments in voluntary commerce generate more revenue? Because they only appealed to one very specific segment of a band’s listeners - avid fans that are willing to jump the penny gap to support their favorite artists, and the product available to those consumers was drastically underpriced and underpositioned.

During our focus groups, we found that there are three distinct segments of consumers for a given band’s music:

Fans. Fans are the band’s most engaged listeners. They’ll consume all the band’s music and go to lengths to learn about the band’s members, history, and influences. They are also eager to support the band financially - and willing to spend a significant amount of money on concerts and limited edition product. These are the guys that will buy the $75 and $300 limited edition versions of Ghosts I-IV.

Collectors. Collectors love discovering music. They have an ear for the avant-garde and can rattle off 20 sub-genres of indie rock at a moment’s notice. They spend their time trolling Pandora and Pitchfork, and they make the best DJs. Even if they aren’t avid fans of a particular band, they’ll be willing to spend $5-10 to get a high-quality version of an album that’s important to their collection. These are the guys that will buy the $5 and $10 digital and physical box set of Ghosts I-IV.

Followers. Followers are, by far, the majority of music consumers. They find new music through their Fan and Collector friends or from the radio. They’ll happily grab their music off BitTorrent. Maybe they’ll drop 99 cents for a song they love or a ringtone they have to have, but they’ll be hard pressed to buy a full album. These are the guys that will download Ghosts I for free. If they like it, $5 isn’t too much to pay for another 27 songs. If they love it, they might be on their way to becoming full-fledged Fans.

Why will this save the music industry?

For years, the recording industry got away with a one-size-fits-all strategy. They got away with over-charging the majority of Followers and under-serving each band’s most avid Fans. Now that technology has marginalized the distribution power of the recording industry and the recording industry as demonstrated an unwillingness to respond to that transformation, its up to pioneering artists like Radiohead and Nine Inch Nails to come up with merchandising strategies that appeal directly to their consumers. Trent’s strategy provides a well-priced, well-positioned product to each of the three consumer segments: fans, collectors, and followers.

With Ghosts I-IV, Trent may just have hit the nail on the head.

Update: Nine Inch Nails made $1.6 million during the first week of album sales. Clearly, the rest of music industry is leaving a lot of revenue on the table by sticking to an out of date business model.