Ebook pricing vs. revenue, by Dave Slusher
January 13, 2011 | 8:50 am
By Paul Biba
It’s amazing how often I see some variant of the phrase “We can’t afford to price our ebooks lower because we have costs to recoup.” 10 minutes ago I saw that in the current Locus magazine interview with John Picacio. He in general seems like someone who gets it, both here and in the Sidebar podcast interview with him that coincidentally I listened to last week. This is not to single him out, he is maybe the 10,000th person I’ve seen say this, only the most recent before I type this up. In his interview he says:
If pricepoints for e-books are forced down, do publishers simply slash budgets to achieve their margins? Does that inevitably mean a dramatic slash in quality of experience for the reading audience in terms of things like cover art, copyediting, and other services that readers take for granted?
This reflects a point of view so common in the publishing world that is received wisdom. No one questions whether or not lowering the prices of ebooks will make them more money in the end. They all know it makes less money.
I’m attaching to this post some graphs I generated. I did this early in 2010, based on then recent data that J. A. Konrath had posted to his blog. He’s a decent test bed for these numbers, as he had a number of ebooks out, some self-published and some published by a major publisher. These were priced all over the board. At the time, he was pricing his self-published books at $1.99, and the major publisher books were as high as the $8 vicinity. The commonality here is that none of them were getting much of a promotional push. There was no book tour, no advertising campaign so these numbers should be a realistic look at how price affects unit sales. It must be noted that I dropped two data points. He had two self-published books at $1.99 that sold so anamolously well that they blew out the chart. I dropped data to make the curve fit but the data I dropped would have biased this even farther to the low end of the curve. At the time, even Joe had no real explanation for why those books sold so well. He has since raised his price to $2.99 which is the same conclusion my data would lead you to. He’s a savvy cat, I’m guessing that sometime between then and now he also ran these numbers and raised his prices accordingly. (Update: yes, he did raise prices based on his observation of data.)
Let me disclaim my analysis by saying I am not an MBA or a business guy. I am however a scientist, once a chemist and now a computer scientist. I know a little bit about numbers. If you think I have a flaw in my analysis, please tell me where you think I’m wrong in comments. Civilly. Don’t bother flaming for I have a hard heart and admin rights.
Every single time I’ve heard anyone defend higher ebook prices, they cite the fact that “just because the publication is electronic, that doesn’t eliminate costs.” This fact is what I like to call “true but useless.” Yes there are costs associated, but all costs in ebooks are fixed. The publisher does whatever they need to do editorially, formatting wise, etc. When that is done, they push a file to Amazon/B&N/Smashwords et al and that is that. Whether there is 1 sale or 1,000,000 unit sales, the costs are identical. I’m treating promotion as a fixed cost although I can be argued on that. Regardless, the costs of promotion do not rise as a function of sales. They may drive sales, but if you sell 10x what you estimate, your promotion costs don’t expand ten-fold.
Since all costs that go into creating the publication ready file are fixed and there are no variable costs associated with providing copies to the market (from the publisher – Amazon et al are paying them) by my understanding the only factor that should be important is total revenue. If you lower the price of the book, you run the risk of pricing lower than a purchaser might have been willing to pay. That is an opportunity cost but not a hard cost. It’s not like in the paper world when publishers sell the remaindered book at less than the hard costs associated with the manufacture and shipping costs of those copies. That’s not possible in the digital world. Instead what is important is pricing the books so that the total revenue is maximized.
I took the Konrath data and did a logarithmic regression. You’ll see that the R^2 = 0.96, which is a pretty darned good fit. Then I used that equation to plot out the line that predicts the sales at any price point interpolated or extrapolated across the range and a little higher. I then made a second graph of the price multiplied by the unit sales (aka gross revenue) against the price. What you’ll see from the graph is that just a little over $3 per copy is where revenue maximizes. When you get under that, the per unit sales rise exponentially, but the price is low enough that the revenue drops. Around $3 is the sweet spot, again which I stress is for the data set that I have.
Now, I acknowledge the limits of the data I used for this analysis. Even better would be if I could get all of Konrath’s data for his history but a publisher or e-retailer could do much much better. Let’s suppose the standard price for a given Kindle book is $9.99. Have Amazon show 55% of the users that look at that page the $9.99 price. Randomly assigned, 5% of users each would see a price from $0.99 to $8.99 in $1 increments. Analyze that data for the conversion rate to sales at each price and you could generate much better statistics than I have because all of those numbers will be for the same book at the same time. This is ultimately my larger point – in digital sales, this kind of experiment is possible. If the major publishers haven’t done this and don’t understand what this curve looks like for their books then they really have no excuse for stating definitively why they can’t lower prices.
The assumption under all those statements is that the demand for these books is inelastic. If you price it at $14.99 you’ll get about the same sales figures at $9.99 or $6.99 or $2.99 so pricing it high maximizes revenue. For certain well known marquee writers this might be true but my suspicion is that the market is far more elastic than any publisher would like to think. I think that’s the root of this mindset. Publishers and authors ultimately have a worldview that is the opposite of this analysis. They don’t want to believe that they have a commodity product that is price sensitive. No one sits down to spend a few months or years writing a novel thinking “wow, if this book is priced too high the Kindle readers will just move on to another book priced more reasonably with which they’ll be just as happy.” I feel for them as a person who has tried to write fiction and will do it again. That’s a hard fact to face but I think accepting it would make everyone more money.
Let me state this one more time: I don’t think lowering ebook prices costs anyone money unless and until they drop under that magic point. I think authors and publishers would make more money if they’d understand these principles, experiment to determine the revenue maximizing points and then price accordingly.
Here’s a real world example from my life on how this principle worked for me and how I hypothesize it works for more of my fellow Kindle and Nook readers. I am interested in Greg Graffin’s book Anarchy Evolution. I heard the interview on Skepticality and went to buy it for my Kindle. At the time I looked, it was priced at $14.99. I came, looked at that and said “Well, screw this. That’s more than the book is worth to me. Pass.” I closed the tab in my browser and never thought about it again until today. When I needed a book I had previously passed on for high price for this anecdote, I thought of this one. Until assembling this post, I hadn’t even realized the price has been lowered to $9.99 for the Kindle version. HarperCollins had my attention months ago, got me to the page to purchase it but an excessively high price kept me from buying it. Iif the average book is priced above my impulse buy threshold, the purchase ain’t happening. If it were not for writing this post right now, I wouldn’t have ever thought about the book again so the one and only chance to flip me to a paying customer would have passed without conversion.
Publishers seem to fail to understand the low friction digital marketplace for ebooks. This is an impulse-buy driven mode. I am a reader of books and a lover of books but my wife has threatened physical violence if I bring in any more paper books without getting rid of some of the thousands that fill every available bookshelf in a house too big for two people. You will not sell me paper books except for those very few novels by special writers I must have in paper. On the Kindle, though, it’s fair game. The sad truth is that for my whole life, in any given time period I have always purchased more books than I read. Even though my physical capacity is exhausted, I still want to buy them. Even though I have every single Anthony Trollope novel you can get from Project Gutenberg on my Kindle, I still want more books. I’m a hoarder. Publishers have a chance to get my money even though I have more paper books and ebooks than I can reasonably expect to read in this lifetime. They have one and only one way to blow this, when I come to look at the page and there is a price above my impulse buy threshold for that item.
Publishers and authors continue to try to make this a moral argument. “What, you cheap bastard ebook readers don’t think we should get paid for our work?” I think if they suppress the ego driven umbrage reaction and instead get down to the realities of the market they are in, everyone can make more money and be more happy. The artistic goodness of the work isn’t tied to the price point, so don’t be offended if you make more money at $2.99 than $9.99. Instead, shut up and cash the check, friend.
I listened back to the first few minutes of a panel I moderated at Balticon 2010, and in my introduction I used the phrase “I’m done begging people to get in the lifeboats. If they don’t want in, that’s on them.” I’m not beating my head trying to evangelize to publishers why they should price appropriately. Some are and some aren’t; some will and some won’t. I have enough faith in the marketplace that in the long term it will all shake out. The question is, how much money are you leaving on the table while you get your shit together?
There are people who understand the dynamic of this marketplace, J.A. Konrath being one of many. He periodically posts about some of the other self-published authors who are following the same path, pricing reasonably and moving thousands of units per month. (Side note: the Nathan Lowell mentioned in that Konrath post was also on that Baltcon panel with me. He’s a talented, hard working guy.) That translates to thousands of dollars per month in the pockets of these writers, since they are keeping the full 70% of the retail price by self-publishing. These people are out there, they are filling niches in the marketplace. Established writers, you could be doing this. Existing publishers, you can be pricing to fulfill this demand and bringing in more money. There will be a day in the future where I will be one of those self-published authors. Will my book be as good and successful as Joe’s and Nate’s novels? I hope so. I’m willing to fill that niche at that end of the pricing scale. Are you?