Thoughts on eBook Pricing

With all the buzz about the agency model, the Justice Department, allegations of collusion, etc., I figure the time is right for a post about ebook pricing. Here are some quick thoughts as both a consumer and a publisher:

Eliminating waste is always a good thing -- Walmart has mastered this for years. They squeeze every bit of waste out of the supply chain and generally end up with the lowest prices. I'm a frequent Walmart customer and I greatly appreciate this. In fact, the only people who don't like this are (a) other retailers who can't match those prices and (b) ecosystem players who are part of the waste that's being eliminated, including suppliers. 

Loss leaders are a great retail model -- Selling some products at or below cost is a great way to bring customers in the door, regardless of whether that door is physical or virtual. I'm sure I've bought many cartons of milk at a loss for the retailer who made it up by selling me other items at a nice profit. It's a model that works, but have you ever seen a store that sells most of their products at a loss, every day?

Taking loss leadership to a new level -- Remember when Amazon first launched the Kindle and pretty much every ebook was $9.99? It's no secret that Amazon was losing money on the majority of those sales. In fact, they still are. Prior to the agency model Amazon was free to set whatever customer price they wanted for ebooks, even if it meant they were selling every single one of them at a loss. That brings up the razor/blades model, where it's not unusual for the razor to be sold at a loss but the profit is made on the sale of the blades. So if ebooks are the razors what are the blades? The ereader device? According to iSuppli, the Fire's manufacturing cost is slightly higher than its retail price. How long can a retailer stay in business when they're losing money on both the razors and the blades? Presumably they're making some money on other products they're selling (e.g., shoes, electronics, etc.) Perhaps. Then again, if they have deep enough pockets they can continue selling all their products at a loss till the cash dries up. In the mean time, competitors will find it difficult, if not impossible, to compete, so they'll disappear. What happens after that? Do prices remain low as products are still sold at a loss? Not if that company wants to stay in business.

The agency model prevents brand erosion -- Think of the premium products you've bought or admired. Oftentimes their prices are higher than most of the competition's. What would happen if those prices were suddenly significantly reduced? Would those products retain the full value of their premium brand? Highly unlikely. And shouldn't the owner of that brand have a say in what price is associated with it? Again, it's OK for a short-term loss-leader model but I'm talking about selling something at or below cost for years and years, not just for a day or two. Over time the value of that brand is affected. That's why I think publishers should definitely have the option to go with the agency model so they can manage retail prices and not let their brand lose value. Btw, consumers will ultimately vote with their wallets. If they feel the publisher's prices are too high they'll stop buying and that publisher will either need to make adjustments or go out of business.

Fixed prices vs. price-fixing -- In the U.S. we're so used to competitive retailer discounts that we're surprised to hear of the fixed price models used in other countries. For example, in Germany the price you pay for a book doesn't change from one retailer to the next. They're all required to sell them at the same price. Obviously there's a huge difference between Germany's fixed price law and the price-fixing the Justice Department is alleging. Germany's model doesn't lend itself to squeezing out waste like the U.S. model but I'll bet it prevents one deep-pocketed retailer from putting their competitors out of business.

I don't work at a big six publisher but I believe publishers should have the option to choose between the agency and wholesale models. The key issue though is that the Justice Department has suggested that Apple and a number of publishers colluded to keep prices high. I think this article by Gordon Crovitz in The Wall Street Journal sums it up quite nicely, particularly in the closing two paragraphs. Read that piece and ask yourself if the Justice Department's efforts will actually fix or merely add to an existing problem.

What's your opinion of the pricing questions and allegations currently facing the book publishing industry?

Comments

[Sherri]

When Amazon was selling ebooks below cost, it was selling the Kindle for $399. That's not below cost.

[Joe Wikert]

Sherri, my point is that Amazon started the $9.99 model when the Kindle launched. I don't know what the manufacturing cost of the original Kindle was but it's reasonable to assume they made some money on sales of that device. That was more than 4 years ago, the Fire is the popular device these days and, as I mentioned in the post, iSuppli believes Amazon is selling them at a loss. Meanwhile, Amazon continues selling plenty of ebooks at $9.99, also still at a loss.

[Alan J. Zell]

It seems to me that as long as an author and the publisher is fairly compensatged -- the author for their talent/skills, the publisher for their costs of producing the book in its many formats, it matters not what the resellerwants to charge.

Resellers have their expenses and it is up to them what they want to sell the book for.

Alan

[Neil Gorman]

The cost of producing a eBook should be less than the cost of producing a paper book. I say this because an eBook takes out the cost of...

- Paper
- Printing
- Transporting the physical object
- and the cost of storing the book goes way down. Meaning, it costs far less to keep a digital copy on a server than it does to keep many physical copies in a warehouse.

Because the cost of an eBook is less to publishers the cost of the book should be less to consumers.

[Joe Wikert]

Neil, I never said anything about the price of print vs. ebooks. This post is all about how much a retailer should be able to discount off the publisher's list price. So I'm comparing ebook prices to ebook prices, not ebook to print prices. And while you're absolutely right that the total cost of an ebook is less than a print book, it's probably a smaller difference than you think. The manufacturing cost of a typical print book is a dollar or two, and that's the most significant cost in the items you list above. We're not talking about discounting by a couple of dollars. The discounts for ebooks are generally much deeper than that, often 2, 3 or more times that amount.