The Digital Reader is carrying an article by Eric Landes, a technical writer dabbling in fiction, looking at the question of e-book pricing from an outsider’s perspective. Landes considers the changes that are taking place across the publishing industry, how the industry is responding by pricing its e-books, and how the industry ought to price its e-books.
Landes starts off by noting that the mainstream print publishing world has two major sales factors that account for most of its money—hardcovers and bestsellers. Hardcovers cost little more to manufacture than paperbacks but retail for twice (Landes is being conservative here, he should be saying “up to three to four times”—but on the other hand, I suppose few people pay full retail price for them these days) as much, and being a bestseller make those expensive books sell better.
The profits they make on hardcover bestsellers funds most of publishers’ less-profitable sidelines. But e-books are threatening both the “hardcover” and “bestseller” aspects of that profit channel.
On the “hardcover” side of things, paper book sales are dwindling, while e-book sales are going through the roof. After Amazon started discounting e-books to $9.99 as loss leaders, publishers instituted agency pricing so that they could dictate higher prices.
What the big-6 seem to be doing as a result is pricing ebooks in a way that attempts to protect hardcover revenues. While this has the initial appearance of pricing ebooks fairly (hardcover retail price is $28, ebook is $13) the effect on the street is to make the hardcover and ebook price nearly equal. This produces a disconnect with customers. (“Hold it, you have to pay real money to print the hardcover, and digital is produced for free, why do they cost the same?”) Many people will buy the hardcover in this case, but many won’t buy either. They want the digital, but at a cost they deem fair. Nearly equal to print in their eyes doesn’t equate to fair. There’s also cases where publishers have not dropped ebook prices after the paperback comes out, making the ebook significantly more expensive than paper.
And “bestsellers” are under siege by the vast number of under-$5 (and in many cases under-$1) self-published titles that are crowding out the more-expensive pro-published books. Publishers are starting to panic because they can’t afford to keep up (or, rather, keep down) with self-publishing authors who can keep a lot more per sale than traditionally-published authors so don’t feel they have to price as high.
Landes thinks that revenue rather than units sold might be a better yardstick for judging success of a book—since marginal costs for digital media are essentially nil, the publisher is free to price the book at a level that will maximize overall revenue—and past evidence tends to suggest that pricing between $2 and $6 maximizes revenue for an e-book. The problem is that publishers still make more money per sale on even a $14 hardcover, and see cheap e-books as cannibalizing hardcover sales rather than as generating more digital sales and hence more revenue.
And THAT is why publishers are freaking out. They see that revenue difference, and price the ebook higher – $13-$15 or so. They can then net the same revenue in the ebook ($5.80 – $6.80) that they get from the hardcover. They’re pricing the ebook to fit their existing, per-unit revenue model instead of fixing their model to fit a market with a rapidly increasing digital component. You know – the ONLY part of their business that’s growing…
The problem, of course, is that most of those ebooks aren’t making bestseller lists because they’re priced too high. They see $1 books on the bestseller lists, plug the numbers into their unit-based revenue model, and collapse from heart failure.
Landes suggests that publishers should bite the bullet and bring their e-book prices down to maximize their revenue. It might hurt their print sales quantities, but the print market is shrinking anyway—whereas e-books are growing. Cheaper e-book sales could not only sell more e-books, but could help the overall market for e-books grow faster, meaning even more e-books would sell eventually.
He points to Baen as an example of doing exactly the kinds of things he recommends—selling DRM-free e-books for $6 each (or cheaper if you buy them in a bundle). And yet, every time he sees Baen brought up in discussions as an example, other publishers say, “That model may work for Baen, but it won’t work for us.” Yet none of them seem to be trying very hard to make it work.
I find Landes’s post to be quite insightful, though that could just be because I agree with it. Either way, the more the e-book market grows and the print market shrinks in spite of publisher pricing, the more pressure publishers will be under to give up pricing to protect the hardcover market and price to maximize revenue from e-books instead. Sooner or later, it will have to happen if publishers want to stay in business.
I’m sorry Chris but I have challenged this statement before and do so again: “After Amazon started discounting e-books to $9.99 as loss leaders”. On what basis are they being sold at a loss ?
$26 hardcover, $13 wholesale price, $10 e-book? Oh, right, that $3 isn’t a loss, it’s just a negative profit.
I guess Landes has realised what many of us on Teleread have realised for quite a while now, and his article sets it out as clearly as any before.
The Big 6 are demonstrating how senior management inside an industry bubble can be so caught up with their traditional way of doing business that they appear paralysed, and incapable of change. They share a lot with the management in Nokia, come to think of it.
They are demonstrating how supposedly senior and highly qualified business managers, MBAs, financial people can be so blinded by living within that bubble, that they can fail to see what is obvious to those outside.
They insist on trying to hammer the eBook market into fitting in with their own business model template. They focus obsessively on price and not earnings. They are stuck at being Book people instead of Business people.
Chris ..
“$26 hardcover, $13 wholesale price, $10 e-book? Oh, right, that $3 isn’t a loss, it’s just a negative profit.”
With respect, a “loss” is where the cost of getting something to market is more than the sales income for that item. I am questioning how ¢10 for an eBook is less than the cost of getting that eBook to the market.
You appear to be suggesting that the cost, for the publisher, of getting that eBook to the market is $3 more than the their percentage of the $10 ? I think not. In fact I am certain it is not.
Howard, it was a loss to Amazon, who paid $13 for the right to sell one (1) copy of an e-book, wholesale, and turned around and sold it for $10. They took a $3 loss on the sale, so that it would lead more people to buy the Kindle. That’s what a loss leader is.
When a store sells something as a “loss leader”, the store is the one taking the loss, selling something for less than they themselves paid for it. The publisher does not even come into the equation, save as the one Amazon paid $13 to for something they sold for $10.
@Howard — It is not the publishers who were taking the loss, it was Amazon. Here is how the wholesale model worked: The publisher set the list price at $26. Amazon bought the book at wholesale, which was 50% of the list price, or $13 — that is, Amazon paid the publisher $13 for each book. Amazon then sold the book to consumers for $10.
The loss came about as a result of Amazon paying $13 for the book and then selling the book to the consumer for $10, creating a $3 loss to Amazon. Again, it is not the publisher who took the loss, it was Amazon.
With the agency system, Amazon makes a profit on every sale, regardless of whether it wants to or not.
While there’s certainly little evidence that the Big6 publishers get what’s going on, and I’ve complained as much as anyone about them, to be fair, I’m not sure it’s possible for them to get it. To really get it requires them to turn into a completely different business, and a drastically smaller one at that. Historically, that seldom happens.
Publishers say they have low profit margins, and I don’t disagree with them, but those profit margins will decrease with the move to digital. No amount of protective pricing or appeals to customers to save publishing will change that, because the barriers to entry for being a publisher in the digital world are too low to prevent competition. We can talk about what ebook prices should be and whether authors should self-publish and all that, but while print isn’t going away, the world in which the Big6 built their business model is disappearing, and they can’t stop it.
Richard wrote:
“The loss came about as a result of Amazon paying $13 for the book and then selling the book to the consumer for $10, creating a $3 loss to Amazon. Again, it is not the publisher who took the loss, it was Amazon.”
So you are saying Amazon paid the Publishers $13 for each eBook ?
One of my writing acquaintances, Seymour Morris Jr., also holds a business degree from Harvard and has watched the decline of paper publishing industry with no small amount of consternation. He graciously offered some material (and some solutions) for one of my pieces last year for the San Francisco Book Review called Hit In the Hardback:
http://www.sanfranciscobookreview.com/featured/9-23-10-hit-in-the-hardback-2/
“Book publishers don’t know how to make money:” he said in the article, “they publish too many books and treat them like orphans. Big bookstores can’t make money because they create a shopping experience that is overwhelming and confusing. They think a book is like a soup can in a supermarket. It is not, it is a personal experience.”
I read a Michael Connelly book at full ebook price, then bought ALL of his 18 or so titles, many in three-ebook packages. I enjoyed a wonderful new (for me) author for a number of months, and his publisher, at zero overhead, sold books to a customer it would have never had.
That proves to me what this writer was saying about $6 or under ebooks. I also rarely will pay more than $9.99 for the stated reasons.
I have not read a printed book since the Kindle came out, and am now reading on the iPad and iPhone.
@Howard — You asked “So you are saying Amazon paid the Publishers $13 for each eBook?”
Amazon paid, under the original wholesale arrangement, approximately 50% of the publishers listed suggested retail price to the publisher. What was paid depended on the suggested retail price for each ebook. Publishers were setting the suggested retail price of the ebook as equal to the suggested retail price for the hardcover version. To determine what Amazon paid for a particular ebook and whether Amazon took a loss on the ebook when it set the price at $9.99, you need to see what the publisher’s suggested retail price was, divide it in half to get the wholesale price Amazon paid, then determine if that price was more or less than the price Amazon charged the consumer for the ebook. Amazon did not take a loss on every ebook but it did take a loss on most, if not all, of the New York Times bestsellers that it discounted to $9.99. As I recall, none of the bestsellers had a publisher suggested retail price (in hardcover) of $19.98 or less; the pricing generally was $26.95 and higher.
It is important to remember that the $9.99 loss leaders were (a) bestsellers, not midlist or backlist or nonbestsellers, and (b) that the pricing was fluid — some days Amazon charged $9.99 or less (remember the price matching “war” with Walmart?) and some days more. But when it charged $9.99 or less, it took a loss on the individual sale.
“After Amazon started discounting e-books to $9.99 as loss leaders”
What kills me about Amazon and the 9.99 e-book is that Amazon was paying full price for that e-book and selling it at THEIR loss. This was a really smart move on Amazon’s part since it pretty much gave them te e-reader/e-book market early on. The publishers weren’t losing a penny. They just felt “insulted” by the 9.99 price and kept rambling on about how it “de-valued” their product.
I’ll tell you what de-value’s a publisher’s product–over pricing! When I see an e-book priced higher than a paperback or really close to a hardcover, when I see an e-book continue to be priced high even after the reviews show that book is a dog and sales are in the toilet, I see the publisher thinking I’m a fool and THAT de-values their entire catalogue in my eyes.
Until this whole Agency thing started last April, I really wasn’t much of a 9.99 or die loyalist. I bought what I wanted to read…period. But now, I DO watch the prices and if the e-book is in the 12.99-14.99 range, I look for the audiobook at my library and enjoy it for free while walking the dog, driving…
I’m still buying lots of e-books every month, but I will not pay what I consider over-the-top prices. I will not feed the publishers greed.
As Chris, Richard, and others say, Amazon ‘s traditional wholesaler model did have them paying the publishers about 50% of the HC price and selling the bestseller e-books at a $3 loss.
What the Agency model did was make sure all ebooksellers online would get an assured 30% of the price set by the publisher, and no ebookseller could undercut other online store pricing, as the price is fixed (unchangeable) at a certain level by the publisher.
Store sales became taboo or at least not possible under the Agency rules. Competitive e-book shopping for Big5 books (now Big6 again) was/is no longer possible.
The often unsaid reality is that as a result, publishers get considerably less per e-book unless they priced the e-books very high so as not to ‘devalue’ their print-copies.
They get less on the bestsellers that they have agreed to price at $9.99 and therefore get LESS in their pockets to pay the authors, who are often on a percentage, which was lowered in many cases last year. This is what is generally not said.
The publishers admited to wanting to stop lower-ebook-pricing that guaranteed them the approximately 50% of their list-pricing determined by them, in favor of sustaining the current ‘value’ of the hardcover or paperback books. They accepted that people would feel resentful at the higher prices for non-physical books (sometimes higher than hardcover book prices because those are not controlled in the same way and booksellers can discount them as before) and customers would either pay a ‘good’ price for them or not buy those at all, therefore keeping paperbooks Un-“devalued.”
Another reason was to keep Amazon from getting too much of the market and having too much power over publishers during contract negotiations.
I am shocked that I have not seen this request before: why don’t they GIVE YOU the e-book for free when you buy the hardcover ?!! I want the convenience of reading the e-book whereever, but then I want the trophy book on my shelf for future reference, and as evidence that I read!!
I know you always have the rights to the ebook, but 100 years from now, the print book will still sit on your shelf and be readable!
Ahmed – no offence but … “trophy book” ? How sad is that ! 🙂
Loss leaders are common in every business arena. The biggest problems are companies being controlled by fossils that don’t “get” the digital age. The biggest difference between Apple and Amazon? None. This is the same battle that iTunes created with delivering proprietary versions of .mp3s. Now, if you want to use on a different device you need to pay a higher price. Apple knows that they own less than 10% of the ebook market. How can they gain control? Offer the publishers a deal that they couldn’t refuse (higher pricing) while creating an environment that does away with the competitive edge of Amazon, higher volume pricing.
The publishers also seem to forgot the losses they receive from printed materials in the form of sharing and second-hand bookstores.