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How to set e-books prices? A trained economist speaks out
May 16, 2009 | 4:42 am
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By Michael Harrington
Just how to set e-book prices?
In preparing my e-book for Amazon Kindle I’ve been following the discussion at TeleRead and on other sites such as HarperStudio and iReader.
As a trained economist I’m somewhat surprised that people have focused on cost-plus pricing and a direct comparison with printed book costs. This is understandable, since print publishing and print books are what we know—but I’m not sure the accounting approach is really relevant.
Cost, both marginal and total, is an important information signal to the producer, who needs to know if the product is going to make or lose money at various price points (the supply curve) before he commits to production. But unfortunately for the producers, they doesn’t get to set the price at any level they wish based on costs. That would require a monopoly on supply and inelastic demand—every producer’s dream. Think of your local utility, unregulated.
What matters: perceived value
In most cases, the final price of a good is determined by the perceived value of the product to the buyer, not the production cost. This creates the demand curve that in a perfectly competitive market intersects the cost curve at the equilibrium price. But the demand curve is not a given—it can shift. This is why we have advertising and promo followed by blow-out sales. It’s why we should focus on value, not cost.
The competitive equilibrium assumptions don’t really apply well to the book publishing industry in its present state, in either print or digital formats. First, print publishing has been hammered by change, and its business model is under water (in other words, cost exceeds price), while the digital market is still far too dispersed for us to know where e-books will end up.
Forget about the old print pricing models
My point (and I apologize for the economic jargon of the previous paragraphs) is that e-books will eventually be priced not by the same yardstick as print books but for how they differ. I can easily imagine an e-book representing far greater value to me as a reader than a print book. (With the proliferation of the used-book market, my average cost for print books is probably around $6 + shipping while I have been paying zero to $9.99 for Kindle books. So far the Kindle books I have bought have been uninspired, if not negligently assembled.)
I have previously written here about how digital formats favor information-rich content; now the Kindle DX is wisely targeting the textbook and media market. Content that uses multimedia, including audio, graphics and interactive animation, also reaps value from digitization. Color will not be far behind.
If you really want to create value…
It will fall to authors to create reader value for their e-book products. I daresay the idea of taking an existing print book, turning it into ASCII characters, and throwing it up on the Internet is a rather primitive concept of an e-book. The price of these offerings will rightly be driven to their marginal cost, zero. True e-book value is created by friendly and extensive navigation and search capabilities, graphics, tables, references and notes, indexing and appendices. Even greater value will be created when the reader can manipulate content and share it easily with others.
Books are not temples of leather, cardboard and paper, they are living repositories of ideas and the reader wants to access and process those ideas to use in his or her own way to become part of a larger communal conversation. Digital technology empowers that motivation and the value can and will be realized. You can be sure price will follow.
P.S. At this point in time my e-book will be priced low. When greater value is perceived by e-book readers, that price can and will rise.
Michael Harrington is a writer, educator and policy analyst living in Los Angeles. His e-book that will soon be available on the Kindle is titled: The City of Man: Inferno; Purgatorio and Paradiso. A True Story of the Renaissance.
Image credit: CC-licensed photo from EvinDC.
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Comments:
I think it is natural to compare the print costs because there are the choices people have right now. When I wrote on this subject for Teleread, I estimated that an ebook will have to retail for 30-50% less than the print price in order to be worth it to me because I will not pay more for an ebook that I can do less with. For example I can pay $6 for a used paperback and loan it, sell it, trade it etc. and for an ebook, I do not have those privileges. I recently was interested in a book I saw at the bookstore in trade paperback for $11 (used bookstore had it for $6) and when I came home and looked it up, Fictionwise was selling the ebook version for FOUR TIMES THE COST of the used bookstore price. There is no way the ‘perceived value’ of a n0n-sellable, non-tradeable non-loanable book would EVER IN A MILLION YEARS be worth four times as much as the next cheapest option. Meanwhile, Fictionwise says it is not their fault, the author of the book (when I emailed him) said it was not his fault, and nothing changes…
Michael, I understand your thinking, and I would love to know what price you consider low, for what kind of e-book (lit, text, etc).
Re Perceived value: I’ve never agreed with the idea that part of a book’s “perceived value” is the fact that it can be traded or resold. To me, that’s like saying part of the perceived value of a baseball is that you can also break windows with it. So I don’t factor that into pricing e-books, any more than I believe publishers are pricing their books based on their resellability in the used market.
Still, the cost of an e-book simply should not equal the cost of a printed book, unless it is so full of extra e-specific material that it is essentially MORE than the printed book.
A traditional economic model based on supply and demand curves does give valuable insights to many market behaviors; however, I think this canonical model completely breaks down when applied to the ebook market.
There is a substantial cost incurred when producing the first instance of an ebook; however, the marginal cost of producing an additional ebook is very small as noted by Michael Harrington above. The easy near-zero cost of replication for a digital good such as an ebook means that the traditional upward sloping supply curve is severely flawed.
It is more plausible to use a downward sloping supply curve, but even this provides an incomplete model. The production of a material good such as wheat or gold is constrained by multiple brute physical facts. Yet, the production of digital goods is nearly unconstrained once an infrastructure of interlinked computational nodes is in place.
Ebook producers should harness the natural strengths of digital goods. Access to millions of ebooks should be provided at a low subscription price. Ebooks should be readable online and downloadable without DRM. Revenues should be split based on utilization history. Apparently the Google scanning project will attempt to realize part of this vision by providing access to a vast library online with at least one terminal for each library in the United States. The Google initiative is imperfect but it will be sad if it is litigated to death.
DRM and the fact that you’re actually only leasing the ebook changes the whole issue of economy. An ebook that I actually own is worth more to me, which is one of several reasons that ebooks are currently priced way too high.
All of this pre-supposes some data that most e-book publishers don’t have.
Very few print publishers do a supply and demand analysis before setting a price for a new title. That’s because most of the people setting those prices don’t realize that they CAN do a demand projection. Only recently has Bookscan made sales data for comparable titles relatively easy to get, and Bookscan’s numbers only apply to trade books (aka “bookstore books”). I’m sure we’re all aware that trade books are a minority of book sales.
And then, you need to have really solid comparables, in order to derive a projected demand curve.
For non-trade titles, you’re reduced to using the approximation you can pull out of Amazon. (Sales there are roughly inversely proportional to rank, over any narrow range of sales ranks. And sales through Amazon tend to be a fairly consistent fraction of total sales for any given type of book and audience served.)
And, given the huge error bars on the data and estimations we do have, many people who do know that this kind of analysis can be done argue that it’s not worth the opportunity cost of the time to do it.
For ebooks, it’s even harder to get data on the sales of comparable titles.
Yes, you should always price for maximum profit, or contribution margin, but it’s not so simple if you have no data.
Yes, it’s a flaky industry. But the lack of data isn’t just because we’re all idiots. There are strong economic reasons WHY we do such obviously stupid things. And when you see a group of smart folks doing stupid things, it’s likely that you’re missing some crucial piece of information.
I’m afraid I can’t agree with the statement:
“True e-book value is created by friendly and extensive navigation and search capabilities, graphics, tables, references and notes, indexing and appendices”
For me, at this time, e-books mean novels and I would get no added utility out of any of the above. This may not be true for all, or even most, people and it may not be true in the future but right now, true e-book value is created for me by providing me with the text I wish to read at the time (and as a non-American I will add place) I wish to read it in a format that means I don’t need or wish to reprocess it.
In this case, it’s because those smart people are too lazy to work out a new way of doing things, and too reliant on a stupid consumer who won’t notice.
Much of what Mr. Harrington says is essentially true from reference works and text books. Though value is only one ingredient in determining the price of a product, the other is how affordable it is to its intended audience. This is particularly true with respect to digital media. If the cost is too high, it creates an incentive for e-piracy.
As others have pointed out, few of the ways ebooks can add to value apply for fiction; only for non-fiction and reference works.
Steve,
I will probably price my book, which is dramatized history (more true to facts and character than historical fiction) at less than $9.99 (probably $5.99 and I have an idea to divide it into a trilogy so the total price will probably be higher than $9.99). I am not a bankable author so if best sellers are going to sell for $9.99 from publishing houses I need to reduce the risk of an unknown to my buyer. Perceived value should increase (or decrease!) with online reviews that reduce that risk.
This is all trial and error, but my concern is to sell the buyer on the unique things one can do with my ebook. I attempt to make the reading experience more interactive. I use extensive hyperlinks, historical information, maps, and many jpeg illustrations of iconic paintings and historical characters from the Florentine Renaissance. The nice thing is that Kindle books allow you to experiment with price with little downside risk.
David: Are we getting hung up on the physicality of books here? As far as I know you have licensed the book forever from Amazon, not leased it. Thus you have access forever from any internet connection or you can store the book on a harddrive at home. I’m not sure how this differs from having the book on your shelf except that you save a bundle on storage costs.
A bigger point is that Amazon is just a middleman, and we know what happens to middlemen in the digital world. Eventually I’d like to license my books directly to readers through peer to peer exchanges. At a certain price and value the free market exchange makes sense.
Steve: well, I agree, as I have argued elsewhere that digital formats favor information rich products. In other words, we don’t need Pets.com for dog food, but for Wikipedia the digital format is essential.
I would say that a vast majority of books are information rich and I expect the development of ebooks to favor nonfiction. That doesn’t mean a clever fiction author cannot use multimedia and interactivity to enhance the value of the novel.
We also should not discount the value of sharing digital information with book clubs and critiques. For instance The Great Gatsby (and the Da Vinci Code for that matter) has generated a library’s worth of related analysis and study. Instant access to this network of ideas? Wow.
Marion: I agree. Stupidity as an explanation usually reflects the analyst more than the subject. Pricing with a completely new technology and production/distribution chain is a trial and error/hit or miss endeavor. My feeling is that much of the existing print publishing industry suffers from being handcuffed by the former business model without a healthy flow of revenues to fund experiments. I witnessed the same thing with the record industry – these execs knew what was happening but, unlike Apple, they were helpless to respond. They just didn’t have the cash arsenal for such risk taking.
In my dealings with publishers I have been disappointed though with the lack of imagination and the natural tendency to look at the future through the rear view mirror.