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The state of ebook pricing

Loss leaders, the agency model and other factors shaping ebook prices.

This post originally appeared on Joe Wikert’s Publishing 2020 Blog (“iBooks Author: Appreciating Apple’s Intent“). It’s republished with permission.

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 Kindle 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 until the cash dries up. In the meantime, 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. By the way, 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 its 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?

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  • J J

    A propos:
    “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.”

    I understand that here Joe Wikert is talking about ebooks that Amazon sold when Kindle was first introduced, and not even all of those but “most”.

    However in those ebooks that cost more than $9.99, most of the price is made of fluff.

    For that reason, if Amazon sells an ebook for $9.99 and it is an ebook where the customer has set the price, or where Amazon has a deal with the publisher to be able to sell it for less, they will not lose money on it.

    Or perhaps they would lose money, in the same sense as a company whose workers are on strike “loses” money because the income is not “optimal”.

    Still maintenance and publishing costs in many ebooks are so low that there is really no need to sell them for more. Except perhaps in cases where the wages of proofreaders and editors come from the same book price.

  • http://www.y42k.com Ray Charbonneau

    We’re now in a state where many ebooks on Amazon cost MORE than a paper edition. Bizarre. But expecting the Justice Department to fix anything is even more bizarre.

  • Sydney

    Mr. Wilkert: Did an editor check your facts and logic before publishing your article?
    The comparison of razor and Kindle is a very inappropriate in itself but to bring a food item into it? Wow. Kindle is ‘WANT’ not a need. Milk and Razor are not just great to have but also a need. You should get the point!

    Your recommendation of Agency or Wholesale model is also devoid of logic. eBooks are cheaper to make. That part of the costs MUST be taken out of the equation.

    It is not a market place when Apple keeps the price high for the ‘snob’ factor. If someone is willing to pay for the snob factor for an Apple device/product that’s fine, but a book is neither a need or something I am willing to pay extra for the snob appeal.

    Obviously you are writing on an Apple! That is the only thing that will explain your logic. Anyone paying twice for a product that does the some thing as most devices on the market is not going to get that they are either a snob or a poor shopper. Marketplaces always gets smaller for sellers who count on people like you for too long!

    eBooks will get cheaper. People will stop buying at some point in the near future. Amazon will lower prices (BTW, they are not losing money) or another start up will come along to defeat Apple.

  • mark

    Mr. Wikert,

    Great column. I hope it gets you at least an expensive dinner from the publishers.

    Now, to reality: I’m not going to spend hundreds of dollars on proprietary hardware, which may or may not be discontinued someday, to then “buy”, no, rent books that, should I decide to take a different reader, I can’t transfer due to the hardware-linked proprietary DRM.

    And why should the publishers get that much? There are *zero* publication costs, or near to it. The authors send the ms. in digitally, all the publishers do is reformat it, and advertise it. There are *zero* printing or transportation or store space costs.

    Finally, how much actually goes to the AUTHORS? Are *they* getting any more than they do for paper, since the production costs approach zero as a limit?

    Fat chance.

    Yes, it’s collusion and price gouging… and royalty gouging.

    mark

  • http://www.joewikert.com Joe Wikert

    JJ: Most of those books you see on Amazon with $9.99 Kindle prices are being sold at a loss to Amazon.

    Sydney: Sorry to disappoint you but I’m actually an Android person now, not Apple. :-) I switched from iPhone to Android last year and from iPad to an Android tablet earlier this year. Given that I’ve been criticized for being anti-Apple, pro-Apple, anti-Amazon and pro-Amazon it seems safe to say that I’m just calling them as I see them. I don’t have any favorites and you check the history of my device purchases you’ll quickly see I have no loyalty to any vendors.

    Mark: I couldn’t agree with you more on your DRM point. DRM needs to go away, just like it has in the music industry. You’re really oversimplifying the publishing process though. Costs aren’t zero. In fact, if you look at the manufacturing, inventory management and other costs of handling physical books it’s a small part of the overall P&L. That $30 print book probably cost less than $2 to print. Distribution and inventory management might represent another dollar or two. So all you’re doing is removing about $3 or $4 from the print product when it’s sold instead as an ebook. There are editorial and production teams that take raw manuscript and turn them into finished products. The cost of those processes aren’t zero.

  • Anonymous

    I agree with most of this; but “The agency model prevents brand erosion” is just ridiculous. Publishers are not brands. Authors are brands, publishers are ecosystem players who are (or should be) part of the waste that’s being eliminated.

  • Colin Kuskie

    @Joe,

    The cost of those processes is not 0, but it’s fixed and in the case of books that have already been printed and are now being adapted as an ebook, it’s already been paid for! I think publishers are missing a huge opportunity by keeping the price of ebooks to be in the same range as soft cover books.

    For example, no one I know thinks twice about buying a song in MP3 format for 99 cents. But they think long and hard about buying an album with 12 songs for $10.00.

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  • Bisty

    How is a book publisher different from a ‘supplier’ in your walmart analogy? They’re both useless middlemen that do nothing but inflate the price. Your attempt to equate a book publisher with a “premium brand” is ludicrous. The brand is the author that wrote the damn book, the publisher does nothing but suck value out of the ecosystem.