A stir was created recently when Sourcebooks announced the delay of the ebook version of a brand new title for fear of cannibalizing print sales. CEO Dominique Raccah said, “Hardcover books have an audience, and we shouldn’t cannibalize it,” adding, “It doesn’t make sense for a new book to be valued at $9.99.”
Is Dominique Raccah making a smart decision? There are a lot of factors to consider. Amazon has claims that sales of ebooks are 35% of the same print titles on Amazon.com. If the hardcover is priced at $25 and the ebook $10, then one can see Dominique’s point quite clearly – delaying the ebook version could mean that demand for 35% of the sales would generate $15 more in gross earnings.
This thinking is in line with what publishers have done since the advent of the trade paperback – engineering peak demand pricing. Publishers create a hardcover version first in order to extract the maximum return on the large investment required to do serious publishing. The economics of publishing is driven by large upfront costs that must be earned back as quickly as possible. The most effective tactic is to maximize units shipped (which drive up print runs and down unit costs) at the highest price point (which is best done via hardcover), during peak demand (when marketing and publicity crescendos).
Ms. Raccah is clearly protecting her peak demand pricing by withholding the $9.99 ebook. Further backing her decision is the economics of ebook sales models. Ebooks are not only sold at the much lower price, they are sold on consignment, and usually at the same discounts as print. From Dominique Raccah’s vantage points she wasn’t just giving away a peak demand sale at a lower price, she was also losing out on vital upfront income (and lower units costs) from selling print books. Dominique loses twice in the world described by her quote — but her quote isn’t quite an accurate depiction of the reality of ebook selling.
The implication of her statement is that Amazon sets the LIST price of ebooks at $9.99, which is patently untrue. Amazon doesn’t set the list or retail price of the books or ebooks they sell, nor do Barnes and Noble, Borders, Waterstones, Costco, Wal-Mart, etc. The publisher sets list price and the retailer sets purchase price. Just go to the Kindle homepage at Amazon.com (http://bit.ly/CiCrB) and see for yourself the 20 titles displayed with the list price on top (with a line through it) and the Kindle price below (all at $9.99).
So why are publishers bent out of shape by the $9.99 selling price if they are being paid by Amazon on list prices? Because at $9.99 Amazon is selling for a loss in most cases and every publisher in the world knows that when any supplier creates a singular success such as the Kindle store using a loss-leader strategy, it’s only a matter of time before there is a serious reckoning and push to swing the losses the other direction.
So why did Amazon set the ebook price at $9.99? First of all, that isn’t exactly true. Amazon set the $9.99 price for best sellers and other new, noteworthy, and hot titles. Many, many ebooks are much, much more expensive and some are less expensive. Publisher ebook pricing policies came in two forms when the Kindle was being launched– ridiculous or nonexistent. Amazon has sunk millions into scanning and converting files. They are also sinking millions more into developing, manufacturing, and selling a device for ebook reading. Logically Amazon figured that a low and consistent ebook price – at least as it pertained to the titles that people most desired – would be a great hook for pitching ebooks. Furthermore, Amazon was clearly looking at the iPod/iTunes success as a model – especially as Apple has had nearly unlimited success selling devices which completely changed its financial outlook.
It also gave Apple unprecedented power to control pricing and discounts over the music industry, which is on life support these days. But I wouldn’t get too worried about that, at least for the short term. The music industry was already half dead before Apple launched the simple business model consumers wanted, $0.99 songs not $20 albums, which the industry resisted over and over. Book publishing is hurting, but our products are what consumers expect and want and we don’t have a pathological history of platform changes that drove the repurchase of the same content over and over and over.
Book publishing has a new platform, as well and it requires a coherent pricing strategy. Amazon’s pricing strategy of $9.99 may very well make perfect sense for publishers, if it is primarily used for backlist books that are past peak demand, also known as the paperback moment. Paperback prices are not lower solely because of reduced manufacturing costs. Paperback prices are lower primarily due to the reduction in demand at the higher hardcover price point. This is publishing economics 101 and publishers needs to take this into consideration when setting the list prices of ebooks.
As I stated earlier, publishers engineer demand through marketing and publicity in order to maximize the return on the steep investment made before publication. When peak demand ebbs, there is a second wave of demand created when the paperback is released. This demand has a far flatter curve as sales settle into the long tail aspect of book publishing. Ebooks throw a real curve into this time-tested formula, as they can be made available before the hardcover is even in the stores.
An ebook priced at $9.99 arriving prior to or at the same time as the $30 hardcover can look like a real problem. But I do not think traditional demand strategies — delaying the release of the less expensive version until peak demand has ebbed will work with ebooks. The problem with this strategy is that it disenfranchises ebook readers and renders most of the marketing and publicity efforts moot for fast a growing and important portion of the population. If one buys a Kindle, one wants to use it for all immersive reading. By delaying the release, publishers will irritate readers and being top of mind by the time the ebook is available. The golden rule in publicity is that one can NEVER run promotions until the books are in the stores. If it’s not in the Kindle store, it’s not going to get purchased and much of the publicity efforts will go to waste.
Furthermore, electronic media comes with a significant risk – easy piracy. One of the key factors in the downfall of the music industry was the consistent decision by record companies to withhold content from availability in formats and business models consumers wanted. If you wanted that hot new song, you couldn’t download it because the only way that the record company was allowing you to purchase it was via a CD that cost $20. If publishers withhold content from the ebook audience during peak demand, they risk abetting an already thriving underground of ebook piracy found in sites like Pirate Bay.
There is only one logical solution – figure out smarter ebook pricing models. We need demand-based pricing so that ebooks start at one price and then settle into a backlist price when peak demand has ebbed. If retailers want best sellers to be priced at $9.99, then they need to create some sort of “ebook co-op” program that effectively swaps in-store marketing for added discount. This only works, of course, if publishers have REASONABLE release prices for new titles and Amazon has REASONABLE pricing for content that is in high demand. The quid pro quo only works if it benefits both parties.
Both sides will soon have better motivation to figure this out with the launch of more devices and ebook retailers, and the coming of Google Editions. These events in the coming months will help level the playing field a bit, and engender a spirit of balanced negotiation into the process.
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Dan Holloway
on Jul 20th, 2009
@ 3:51 am:
I’ve come across this topic a lot in the past week. It seems that whilst the e-book is in its relative infancy we have a chance to get things sorted out properly so as to avoid falling into the endless problems that beset paper book pricing. Of course, there’s a problem, because “sort out” will instantly smack of cartels and price-fixing like the ludicrously protectionist Net Book Agreement. In fact, therefore, the only thing that can really sort the issue out is the market.
And what that means is that we have to debate lots, and try lots, and see what readers respond to. Thsi is the one thing that’s missing in this whole debate – a real focus on readers – on what they want and how they behave. I think the people who really engage with readers in the bottom-up market of e-culture are the ones who will succeed quicker.
To throw my opinion in as a writer – I give e-books of my novels away for free, and I always will. I am thoroughly committed to the 1,000 true fans model, and am also committed to my readers. I want as many people as possible to read my work. And I genuinely believe that if they read it and like it, enough will buy the paper book to help me earn a living – eventually. And if they don’t like it enough to buy the paperbook – at least I gave them the chance to find out before they spent their cash on something they really do want – which has to be good for them (and as a writer, my first thought is always for my readers), and for me, because I haven’t hacked someone of by getting them to shell out for something they then don’t enjoy. Win-win.
There is currently a lot of fear in the industry about e-books being free. I am at a loss to think of any reason other than the good old protectionism at which the industry is so good (always done in the name of the author, ironically – listen up, I don’t WANT someone fighting my battles; I’m gnarly enough to stand up for myself, thank you). If free books are no good, people won’t come back – so established authors have nothing to fear. If they are better than the works of establihed authors, then those authors don’t deserve their slice of the pie.
Thank you, Evan, for another very informative contribution to such an important debate. My blog on the matter is at: http://agnieszkasshoes.blogspot.com/2009/07/free-is-not-four-letter-word.html I will watch the discussion here with interest.
Very best
Dan
http://www.danholloway.wordpress.com
[Reply]
Aaron Pressman
on Jul 20th, 2009
@ 4:58 am:
Evan, very interesting post but I’m a little confused by your conclusion. In the pre-e-book world, the bigger and hotter the best seller the more likely it was to be discounted heavily by retailers. And only the super-sellers are sold at the biggest discounters like WalMart and Costco.
I’m not saying I understand this logic or that it fits very well with basic economic theories about pricing but it was/is the reality for print books. So it seems to fly in the face of the notion that ebooks should start out at higher prices to capture peak demand. What am I missing?
[Reply]
Karen Syed @ Echelon Press
on Jul 20th, 2009
@ 6:00 am:
The solution here is to understand that each business works on its own model and there will never be a solution to the problem that fits every publisher or retailer.
Amazon can work on a loss with their eBooks because it makes up it’s lost revenue in big ticket items like computers, cameras, other electronics, etc. They don’t bottom line those items, because they are tangible.
There is no middle ground when you have different publishing houses with different needs and requirements.
The eBooks I sell at http://echelonpress.com average $6.00 and they are every bit as good as the best sellers, in some case, I think better. That price works for us and we make money. But we don’t have the overhead that a much larger publisher might have.
It is difficult for anyone who does run a business to understand a businesses needs.
As for the demand. People also need to realize that there is a 90% chance that if a reader buys an eBook they never intended to buy the hardback so there is actually an increase in revenue, not a loss.
Karen Syed
http://klsyed.com
[Reply]
trav
on Jul 20th, 2009
@ 6:29 am:
Good post. You make a good case for demand pricing. I’m intrigued by the way you connect marketing/publicity in helping push eBooks and for eBook readers to be considered when plans are being made and specials being offered. It seems that eBooks are often just an after thought in a publishers strategy.
I’m hoping, maybe in a soon-to-be-penned post
you can follow up on your idea of
““ebook co-op” program that effectively swaps in-store marketing for added discount.”
This, to me, seems to be a key concept that would help many consumers and even some slow-to-rise pubs fully accept, demand pricing and eBooks as a whole.
[Reply]
Phil
on Jul 20th, 2009
@ 8:48 am:
You’re reading your Amazon/Kindle publisher contract incorrectly, Evan. They are paying publishers on net, not list. The contract I’ve seen is 35% of net, or $3.50/sale. Even though the publisher is not incurring PPB, inventory and warehousing costs, none can survive on $3.50/Kindle copy sold.
[Reply]
Evan
on Jul 20th, 2009
@ 9:11 am:
Just to be clear – I am not reading anyone’s contract – I am stating what is the most common trading terms between a publisher and a retailer such as Amazon. Every publisher deal will be slightly different, but I can assure you that the majority of major publishers will have terms similar if not identical to what I described.
[Reply]
Aaron Pressman
on Jul 20th, 2009
@ 10:21 am:
Phil – that’s the self-publishing term sheet. Major publishers are not selling to Amazon on those terms. They are collecting a fixed percentage of the retail list price they themselves set, and it’s been reported that it varies but is usually around 50% of the retail list price. That means on many $9.99 Kindle ebooks, Amazon is paying out more to publishers than it collects from the customer.
[Reply]
jc
on Jul 20th, 2009
@ 12:19 pm:
Great post. I’m curious though: If the book industry should be careful not to disenfranchise ebook readers by releasing titles in hardcover first, why doesn’t this apply to the movie industry where they release to theaters long before DVD/Netflix/iTunes? Or could you argue that we’re we getting to a point where that applies to them as well?
Much of the concern we’re seeing now surrounds consumer conditioning. If ebook buyers get used to purchasing books for $9.99, then that’s what they’ll expect forever more. If they become used to having the ebook available at the time of the hardcover, then they’ll expect that, too. In many ways, we’re already too late to do anything about ebook pricing or release schedule. Amazon made up our minds for us.
[Reply]
Jussi K
on Jul 20th, 2009
@ 12:20 pm:
This is a bit of a waste of time, isn’t it? Everyone with an eye to the future understands that all e-books will be pirated and distributed for zero dollars. Even if you set the price to 99 cents or whatever you are WISHING for.
Meanwhile, all the 5-to-10 dollar pricing strategies are just a marketing opportunity for the not-big and not-published writers and/or publishers to have their share of the limelight.
[Reply]
Barnes & Noble eBook Store Great News For Consumers | Gravitational Pull
on Jul 20th, 2009
@ 6:50 pm:
[...] questions in the comments of posts by publishing consultant Mike Shatzkin’s ruminations and Evan Schnittman, who works for Oxford University Press. I wonder what impact Barnes & Noble’s $9.99 [...]
The Sourcebooks experiment with Bran Hambric: publishers in the early “establishment” stage of ebook adoption - The Shatzkin Files
on Jul 20th, 2009
@ 7:57 pm:
[...] Evan Schnittman makes the point that holding back the ebook has consequences. It dilutes the impact of the publisher’s marketing efforts. It could encourage piracy. Evan’s solution is an introductory promotional price that is raised when initial demand has ebbed and he has a notion (which I don’t quite understand) of how publishers can get retailers to collaborate on that. I don’t think that’s the answer. First of all: it strikes me as backwards. The ebook price should be a dollar more than the print book for the 3 weeks or so before the print book comes out when an ebook could be available. Then it should be the same as the print book for the first couple of months so that it doesn’t disturb the bestseller list possibilities. Then it should drop sharply to reflect the lower cost (to publisher and retailer) of providing ebooks. [...]
Cathy Macleod
on Jul 21st, 2009
@ 1:40 am:
When I feel a hardback price is too high I wait a few months for the paperback edition, and I’m prepared to do the same for the ebook version. The market will eventually sort itself out. Meanwhile, interesting challengers on the pricing front are the Secondhand Booksellers. I was ready to pay $16 for an ebook novel, then bought it paperback instead at Abebooks for $1 plus $8 postage, condition as-new.
[Reply]
Dear Author: Romance Novel Reviews, Industry News, and Commentary » Blog Archive » Link Round Up Tuesday
on Jul 21st, 2009
@ 7:57 am:
[...] Schnittman of Oxford University Press disagrees with the delayed [...]
Dave Creek
on Jul 22nd, 2009
@ 5:10 am:
Seems to me that since you’re not publishing a physical book, that e-books should be less than the hardcover or the paperback price, and even less than $10.00. If I’m paying, say, $8.00 for the paperback and receiving a physical object that had to be manufactured and shipped somewhere, why do I have to pay more for just the words?
The price for an e-book should be a dollar or two less than the (eventual) paperback, and the money should be split 50-50 between the publisher and the writer. Talking about the hardcover bringing in more money makes no sense if the expense of making the hardcover eats up much or most of that money.
Dave Creek
[Reply]
Evan
on Jul 22nd, 2009
@ 7:29 am:
The basic problem with your suggestion is that you assume manufacturing costs are the majority of the cost of creating a book. The “words” as you say, are generally the greatest expense – if you are talking about general trade books. So if the value of the “words” are needed to recoup the costs, then it stands to reason that all versions should be priced to extract the maximum return on investment. Furthermore, ebooks are sold on consignment, where as print titles are bought in advance in bulk. The cash that generates is by definition more valuable to a business than the trickle of income that ebooks bring in. See the first posting on this blog, Why Ebooks Must Fail to get an understanding of trade book economics.
[Reply]
The Daily Square – Ako Edition | Booksquare
on Jul 22nd, 2009
@ 4:30 pm:
[...] Demand Pricing for EbooksEvan Schnittman makes an argument for demand pricing for ebooks — and smarter pricing strategies by publishers. [...]
Creating experiences out of content | Digital Business
on Jan 5th, 2010
@ 3:11 pm:
[...] being generated in the publishing sector continues to build when it comes to the pricing of ebooks (Evan Schnittman’s post in July) and digital rights management (DRM) where the publishing sector is seeking to [...]