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Demand Pricing for Ebooks

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.

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.

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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