eBook pricing problems

by Eric Landes

First off, I want to make something clear: I have essentially nothing to do with the publishing industry. I’m a technical writer who has been in software my entire career. I’m experimenting with writing fiction, and as a prospective author, am very curious about where the industry is going during the largest crisis point in its history.

But as far as the publishing industry is concerned, I’m nothing more than a gadfly. I observe and care enough to comment, but that’s all.

I also have closely watched what’s happened with the recorded music and recorded video industries as they struggled with a transition to digital. Both industries were slow to realize what was happening. As is typical in an internet-focused society, customers took it upon themselves to fill a need the music and movie producers weren’t filling. And so we had Napster.

This isn’t an article about piracy or abusive copyright laws or anything like that, though. This is an article about business models and pricing. Or, the best I can understand them as an interested outsider.

During publishing’s struggles with the rapid rise of ebooks over the last two years, they’ve claimed that books are different, and they won’t have the problems switching to digital that other media have shown.

And, in some ways they’re right – I’d wager that three and a half years after the first market-significant ereader (the Kindle) hit the market, a higher percentage of newly released books are available as digital downloads than we saw with music, and particularly movies. Older books are becoming digitally available far faster than we saw with music and movies. But, the major publishers (who I’ll refer to from now on as the “big-6”) aren’t doing a very good job of managing the transition, and this article tries to figure out why.

I think most of you reading this know that the publishing industry makes most of its money through hardcover bestsellers. The actual costs to produce a hardcover vs. a paperback are not that much higher, yet the retail price is typically around double. Lots more revenue for the publisher, and as authors are paid a royalty based on percentages, everything scales nicely in the publishers’ favor on hardbacks.

Take note of the second word describing where they make their money: “bestseller.” For decades, lists have been made through reputable sources (New York Times, etc.) detailing which books sold the most over the last week. Authors lucky enough to get their names on these lists are now deemed “bestselling authors” and, once earned, that tag can fuel marketing hype on future books in an attempt to repeat the process. Not to mention the free publicity gained from being on those lists.

The profits gleaned from these hardcover bestsellers basically fund the rest of the companies’ efforts – works from mid-list authors, overhead, etc.

What’s happening now with digital publishing, however, is threatening both words in that money making product: “hardcover” AND “bestseller.” The savvy publishing CEOs are seeing this, but they’ve got some seriously tough choices to make in how to react. And from what I can see, most big-6 companies are reacting in a way that protects short-term profits over long-term viability.

First, let’s look at hardcovers. In the most recent industry sales figures reported by the AAP, ebook revenue went from $32.4 million in January 2010 to $69.9 million in January 2011. A 115.7% increase, and a $37.5 million increase in revenue.

Paper books (basically hardcovers, paperbacks, and mass-market books you see in the bookstore that aren’t young adult or kids books), simultaneously dropped from $216 million to $171.7 million at the same time. A 21% drop, and a $34.3 million decrease in revenue.

While these number cancel themselves out, publishers generally make less net profit on ebooks, so their overall profit is dropping. And they’re understandably concerned about it. Any business would be.

Now, let’s look at the trends: ebooks are growing at impossible rates (but rates which have been maintained for about two years), and paper is declining rapidly. If you were in charge of a business that had 23% of its market growing wildly, and the other 77% dropping quickly, how would you react? Figure out how to maximize your new-found revenue stream, or protect what has historically been the bulk of your business? It’s not an easy or obvious choice.

Until April of 2010, ebooks and print books were sold the same way: The wholesale model. The retailer pays the publisher a certain amount for a book (usually around half the cover price) and can sell that book for whatever price they see fit. Including selling it at a loss. Mostly due to Amazon, this led to books rarely being priced above $9.99. Publishers saw this as “devaluing” their product (read this as “taking away hardcover sales”) and, at the behest of Apple and it’s new iPad, changed the way ebooks were sold. They’ve switched to the Agency Model of ebook sales which allows the publishers to dictate selling price, in return for giving 30% of the revenues to the vendors (Amazon, Apple, Kobo, Barnes & Noble, etc.).

What the big-6 seem to be doing as a result is pricing ebooks in a way that attempts to protect hardcover revenues. While this has the initial appearance of pricing ebooks fairly (hardcover retail price is $28, ebook is $13) the effect on the street is to make the hardcover and ebook price nearly equal. This produces a disconnect with customers. (“Hold it, you have to pay real money to print the hardcover, and digital is produced for free, why do they cost the same?”) Many people will buy the hardcover in this case, but many won’t buy either. They want the digital, but at a cost they deem fair. Nearly equal to print in their eyes doesn’t equate to fair. There’s also cases where publishers have not dropped ebook prices after the paperback comes out, making the ebook significantly more expensive than paper.

This model of ebook selling isn’t even a year old yet, so there are certainly kinks to work out. I wish them the best of luck with it, because, as I’ll detail later, it’s a model that’s completely missing the point.

Let’s switch over to that other half of the money making pair of words: “bestseller.”

Recently, there have been a rash of articles out decrying the “race to $1” and how digital self-publishers and independents selling books at $1 are completely devaluing their product by forcing prices down to unsustainable levels. Many of them read like panic. And that’s what they are. But not because of price. It’s because of what it might do to the bestseller lists now that ebooks are included. Let’s take a look at the Amazon ebook bestseller list.

In the top 20, there are 9 books priced at $1 or less, and 4 priced over $10. Two of those four, by the way, were priced under $10 before March 1st, and have been slowly dropping in the rankings since their prices rose. This article goes even further and shows 53% of the top 100 are priced at $5 or less, and 34% at $1.

This is a natural effect of bestseller lists being based on unit counts. If something is 99c, people will buy it on a lark. At worst, you’re out some time and a buck. No big loss. What’s happening, though, is those 99c books are taking up slots on bestseller lists that publishers want. If they can’t get their books onto bestseller lists, they’re losing both marketing cred and a tool that might generate further sales. Those lists are also very effective free publicity. Publishers see more and more cheap books on the bestseller lists, and automatically think “We’ll have to do the same thing to stay on those lists like we used to. We can’t afford to price at $1.”

So, how we’re at a conundrum. Price high to protect hardback revenue, or price low to remain on the bestseller lists? The problem is, the motivation for both answers is wrong. Why? Because success here is being judged solely by unit count. Of course, dropping print prices isn’t an option, because it’s subject to the same pricing issues any physical product must adhere to: you have to charge enough to pay for the item’s production.

In an environment with an ever-increasing digital component, judging success by how many you sold is doomed to fail. You have to judge success by how much revenue you took in. Why? Because after you’ve paid all the costs to get to the point of having an ebook to sell, everything after that is essentially free. Yes, there’s a small fee for digital distribution, and authors have a percentage royalty they’ve earned. But as that’s a percentage royalty, and not a per-unit royalty, it scales. The publisher’s job at that point should be to maximize revenue. In a way, this is the same for print, but as you actually have to plan how many copies you’re printing and pay for them in advance, there’s much more upfront investment risk involved every time you print more copies.

Digital has no production cost once you’ve reached the point of having something to sell.

Read that last sentence again. Once you understand that and its implications on pricing flexibility, you’re already ahead of big-6 publishing. Yes, there’s marketing and sales costs, but publishers are doing that for print, anyway.

Limited studies have been done on the most effective price points for digital books. It’s actually a very difficult thing to study because there isn’t much available data, and books aren’t easily replaceable by other books. As an example, I might pay $15 for an ebook of A Dance with Dragons, but I won’t pay $13 (or even $10, but maybe $8) for Brandon Sanderson’s next book. So, any study done along these lines has to be taken with a grain of salt. That said, it’s been demonstrated in one case that pricing ebooks between $2 and $6 provides the most revenue. It might not sell the most copies compared to other prices, but that price range will bring in the most revenue. Authors make the most (as they’re getting the same percentage of a bigger pie) and publishers make the most when the ebooks are priced in that range.

Which, of course, causes a big problem for publishers. If a customer has the choice of a $6 ebook or a $28 hardcover, which are most of them going to choose? Even if that hardcover is selling for $14 online, most people are going to choose the ebook. And the publisher will make less money from that customer.

It’s estimated that on a typical $28 hardcover, the publisher sees around $6 in revenue after production and royalty costs are taken into account. On that $6 ebook, they’ll see about half that ($2.70). Same customer, same book, half the revenue.

And THAT is why publishers are freaking out. They see that revenue difference, and price the ebook higher – $13-$15 or so. They can then net the same revenue in the ebook ($5.80 – $6.80) that they get from the hardcover. They’re pricing the ebook to fit their existing, per-unit revenue model instead of fixing their model to fit a market with a rapidly increasing digital component. You know – the ONLY part of their business that’s growing…

The problem, of course, is that most of those ebooks aren’t making bestseller lists because they’re priced too high. They see $1 books on the bestseller lists, plug the numbers into their unit-based revenue model, and collapse from heart failure.

There isn’t an easy solution here. The print book industry has a bunch of practices we’d find bizarre if instituted today (returns, advances, and year-long lead times are at the forefront) but can’t be easily unwound. In an era where digital is rapidly replacing print, new practices must be instituted to survive. Propping up the old models works in the short term, but market forces are bigger than that. Customers will figure out how to get their product in the manner and format they want. The publishers most ready to serve that need will be the ones to succeed in the long term.

What I think publishers should do is price their ebooks around $6. That’s the expensive end of the maximum revenue part of the curve illustrated in an earlier link. This gives near-maximum revenue from ebooks but still allows sales to occur without harming income. Price too cheaply, and you lose flexibility. Price too expensively, and you hurt your revenue. Six dollars seems to be the sweet spot. Yes, this might hurt print sales quantities. But do you want to maximize the amount of money you make overall, or the amount you make per sale? In a digitally-dominated market, you can’t have both.

Here’s some food for thought. Baen Books does everything I recommend. They sell DRM-free ebooks for $6. I believe there are no territorial restrictions on those ebooks, but I don’t know that for a fact. And they seem to be doing better than publishing as a whole, even in print, despite also giving away over 250 of their titles for free.

Many times, I’ve seen Baen brought up in discussions around ebook publication, and nearly every time the automatic response is “That model may work for Baen, but it won’t work for us.” Variations on that phrase are repeated so often, they’re taken as dogma. Nobody questions it.

I know for a fact there are small, indie publishers out there who, instead of writing off Baen’s model, are figuring out how to structure their company to make that model work for them. And they’re the ones that will benefit the most from the accelerating digital transition.

image by mindluge

21 thoughts on “eBook pricing problems

  1. I am seeing the same sort of mistakes that ended up with the birth of Napster over 12 years ago. Just to give you an example, J.R. Ward’s latest book in he BDB series was released yesterday. The hardcover price in Amazon was around $16 (they usually give a discount on hardcovers anyway). The ebook price? a WHOPPING $14.99. I then proceeded to follow my instincts and look for the “free” version … lo and behold, it was not even 9 am EST and the book was up for grabs… and no, no one was trying to sell it … it was being given away FREE… I found not one but two uploads from different people. They don’t get it…they have their heads firmly stuck up their assess. Then add the DRM issue (who are they to “lock” a book that I paid full price for”). Their original model didn’t consider readers as their end customers… things haven’t changed. Readers are still NOT their end customers. Hence, they keep chasing their own tails, trying to force readers to a behavior they want, and without even realizing that readers that read ebooks, are actually well educated and resourceful. The Napster phenomenon that pushed the RIAA to wake up was started by a college drop out, wasn’t it?

    Good luck to them. No matter how much they continue to try and screw readers, sooner or later they will have to accept that things have changed and that readers ARE their end customer.

    1. Your just too cheap to buy the book at the market price. Do you go to the grocery store and decide that bananas are too expensive and just steal them? I hope not.

  2. A bit of warning: it is best not to overgeneralize the miopia and failings of the 6 BPHs to the *entire* publishing industry as the aggregate share of the 6 does not add up to even to a majority market share and they are the face of publishing only to the extent that small and medium publishers let them. More, even within the mismanaged federations that make up the individual publishing houses there are quite a few autonomous units that are savvy, agile, and as consumer-focused as any independent. Of course, those units are effectively muzzled by corporate ties to their glass tower overlords. The best they can do is to take care of their (not so little) domains and hope to outlive the follies of HQ. I’m talking about the likes of Harlequin and its sibling, Carina, and to a lesser extent Tor, who have grasped at least some of the realities of the new marketplace and are running for the metaphorical high ground.

  3. You said:
    “Paper books (basically hardcovers, paperbacks, and mass-market books you see in the bookstore that aren’t young adult or kids books), simultaneously dropped from $216 million to $171.7 million at the same time. A 21% drop, and a $34.3 million decrease in revenue.”

    that’s $44 million decrease

  4. It seems to me that the biggest problem for the Big6′s strategy of protecting short-term profits is that they are overlooking the fact that the decline of print removes a huge barrier to entry to the publishing business. Without the need to print and distribute physical books, it takes much less of a capital investment to set up a publishing company. By pricing their ebooks to protect their legacy print investment, the Big6 is creating a big market opportunity for new digital publishers.

    In other words, I don’t think they can actually protect their print business as long as their current ebook pricing indicate that they think they can.

  5. Without addressing the real topic, I wanted to pick on one small point: “What the big-6 seem to be doing as a result is pricing ebooks in a way that attempts to protect hardcover revenues.”

    My opinion is that’s not what’s really going on. The traditional publishing business involves a large up-front cost to the publisher — for royalties, the prep work like editing and covers, tons of legal and operational paperwork, etc. The hardcovers are priced to try to recover those sunk costs (the actual recovery is averaged across all released titles, since some titles will sell well and others won’t).

    So here’s the thing. E-books are now being released simultaneously with hardcovers in most cases. If the publishers believe that a reader will buy either an e-book OR a hardcover, the e-book sales obviously will have to do their part in recovering the publishers’ sunk costs. Add in author expectations that royalty percentages on e-books will be adjusted to give them about the same net per copy.

    1. You’re probably right to at least some extent (high overhead alone does not explain, much less justify price fixing of eboks while retaining price competition on print books) but even if it were the sole rationale all it does is highlight the disconnect between the BPHs expectations of the market and the looming comoditization of books.
      Like it or not, for good or ill, the mainstreaming of ebooks is not just lowering the barriers to entry for new content but it is also bringing hundreds of thousands of quality books from decades past back to market. (Witness the big flap over Google’s “orphan books” land grab.) And consumers know there are abundant quality reads to be found in the public domain, the backlist, the midlist, and smaller publishers.
      The unavoidable reality is that new releases no longer have to compete with the thousands of high profile new releases in a given year or the tens of thousands of titles warehoused somewhere (burning inventory costs) but rather *every* book that *ever* saw print.
      Millions of known-good reads.
      In the face of this flood, old-school pricing will not hold.
      So, either the BPHs learn to control costs or they will be swamped.
      Sadly, most industry insiders, when confronted with consumer price complaints simply shrug, comforted by their certainty that *their* content will sell at *their* prices regardless of the pricing of other content.
      This will not end well.

      1. Hunh. Your point about new releases (both print and e-) suddenly having to compete with older titles is a big one, and somehow it’d never occurred to me.

        My immediate (minimal-thought) reaction is that this doesn’t mean that publishers are using pricing to try to stifle new-release e-book sales so that new-release hardcover sales stay up, but it certainly could mean that they might raise prices on the older e-book titles to protect new-release revenues (p- and e-) and to compensate for lost new-release revenues (p- and e-.

        I’m going to have to think about that some more, and keep an eye on reports and numbers.

  6. Thank you for this very interesting and educational article.

    For the record, Baen’s e-books aren’t geographically restricted: I buy and download from their site from France. In fact, I believe Baen Books is the publisher I’ve bought the most e-books from yet, precisely for the reasons you mention: no territorial restrictions, no DRM, low price, great choice (and, of course, the fact that I dig science-fiction.)

    Also, your article reminded me of an on-going experiment on a French publishing platform (run by an authors’ co-operative society that splits e-book revenues 50-50 between authors and platform): Their e-book prices were already aligned on paperback prices (5.99 €), and they decided in January to price them down to 3.49 € (2.99 € for shorts). (You can also read and download unlimited e-books for 95 € a year or read online only for 65 € a year.) The platform’s founding author, François BON, explains the move on his blog at the following address: http://www.tierslivre.net/spip/spip.php?article2408 (FR).

    LCNR

  7. From what i have read the publishers actually make more money on an e-book sale than on a hardcover while the author makes less. It really does depend on whose perspective you look at this from.

    1. I think there is a big point missed here that most people do not consider. There is a whole industry that has been built upon printing and shipping books. Think what is in the process of making a book.

      You have lumber companies that harvest the trees. There are papermills that make the paper. There are companies that produce the inks. There is the writer and writer’s agent. There are book publishers themselves. There are the shipping companies. There are probably more people than I know involved in the process of making the book shipping it to the bookstores.

      All of the people are paid through the price of a printed book. Can we just terminate their jobs today because of ebooks? No. It is a process that will happen over the next few years as the market decides what it is going to happens to books.

  8. Thanks everyone for the insightful comments! I’ll try to address them all here.

    @fjtorres, I hope I came across as not generalizing to all publishing. I’m specifically talking about the big-6 here. I’ve spoken to some VERY savvy indie and small-press publishers that GET this. In spades.

    @Raul – thanks for the math correction. Dangers of doing math on the fly. I’ll fix that in my original post.

    @Sherri – I mostly agree with one slight modification: I don’t think it’s the decline of print that’s opened things up. It’s the combination of the rise of digital and the technology that makes print-on-demand affordable. This is having the effect of forcing traditional print to decline.

    @Doug – I don’t think you realize it, but you fell right into the thinking-by-unit trap. As an author, would you rather make $3.25 each on 10,000 copies, or $1.50 each on 30,000? Because that’s the effect the revenue curve I linked to portrays.

    You’re right – there’s a ton of sunk costs in getting a book to market. Those costs increase slightly when you’re doing print AND digital. However, why would you spend the extra money to produce a digital version and then hamstring it by requiring it to bring in the same income (copy-for-copy) as print?

    There’s no study at all (that I know of) to confirm this, but I believe the following to be true: Let’s say a book would have sold 20,000 hardcover copies at $25 if no digital version was available. If there is a digital version priced as we’re currently seeing with Agency pricing ($12.99), I feel the numbers change to 15,000 print and 8,000 digital. If you priced the digital as I recommend ($6), I’d feel the numbers move to 12,000 print, 25,000 digital. (Yes, I believe there would be a significant increase in customers at lower prices.)

    Gross publisher revenue in each case? Print only, $250K. Print + pricey digital: $291K. Print + cheap digital: $300K. Author royalties? (assume 15% MSRP in print, 25% digital): 75K, 82.2K, 82.5K. Keep in mind that the fewer print copies there are, the fewer physical costs the publishers have as well. (The dynamics here completely change for paperbacks. I haven’t looked into that.)

    @LCNR: I’m going to have to try to read up on that experiment. Thanks for the link!

    @Dragon: My understanding is the publisher’s take after typical retailer discount and royalties deducted is around 35% of the hardcover retail price. For a $25 book, that’s $8.75. For the $12.99 ebook, after vendor cut and royalty, they make $5.85. Now, from the hardcover take, they have to pay printing and shipping costs. It ends up about equal. EVERY other expense should be covered by total revenue received, not accounted for per copy.

    1. Problem with the way that you figure your pricing structure is that you do not take in account how many people are reading with e readers compared to how many are not. You can not just pull numbers out of thin air and decide that is what is going to sell. In the next few years, the number of e readers will climb and we probably will see similar results to what you state but it can not happen over night.

      There is also a devaluing going on that the industry does not want to see happen. Lets not discuss books but take a look at music.

      Apple has set the price for full music Albums generally at 9.99 and individual songs at 99 cents. CDs right now cost around 11.99 to 13.99 (more if you buy from Borders or Barnes and Noble).

      They could easily have decided 6.99 for albums and .49 for music but chose what would not make music seem too cheap and keep the amount inline with the price of CDs. I am sure there was a lot of heated debate about the price of music too.

      If you are Tom Clancy, Stephen King, or Dean Koontz and know you are going to sell a crapload of books just because your name is on it, then are you going to sell for $6.00 right off the bat? No. Once you do, then every other books becomes less priced.

      If you want to figure out the industry, do some research as to why pricing is the way it is. It is not just corporate greed. There are many business models out there being analyzed to try and get the max profit based on price of books and number of units expected to sell.

  9. First: I think You overestimate the thoughts publishers are spending on pricing. In general, the price is set by habits, without any calculation. Booksellers say, 12,99 is better than 14,99 so publishers take 12,99 without really calculating the effect of such an decision. If there is no reason to change price-settings, a publisher would never do, because he is NOT good in margin optimizing but much more in content-producing. Thats why books in general are much to cheap, compared with the pricing of other goods. Publishers were never good in explaining, why an book is worthier than a 10% share of the price of an pullover.

    Second: to base the pricing of an book on the production cost is a funny idea that hoover around for ever. Who cares about production costs of clothes, red wine or marmelade? The price is set by the want and need of the customer and the intelligence of the producer to create this want or need. And is there any product, where the production of this want and need is better and clearer than books? But the idea of production costs as factor for book price will stupidly hang around for ever…

    Third: we are moving in a complete new market. And there is effectively no statistics or experience for eBook pricing up to today. Every publisher would like to know more. And every publisher would like to do it right. But it is to early to give the right answers. We have to experiment. And we have to build habits. And of cause it would be nice if we could avoid the problem of printed books: that the general pricing level is much to low. Thats why it is worth fighting for some years to introduce a higher pricing level for eBooks, even if the market starts a bit slower than possible. This is an investment in future pricing levels.
    There are some publishers taking a huge part of the market by using low prices and moving faster than any other publisher? Thats ok. On the long run, publishers sell content, not market shares.

  10. Personally, I think the best pricing move traditional publishers could make would be to give the eBook away for free with the hardcover and/or trade paperback. That would get a lot of people on the fence between the eBook and the hardcover to get the hardcover, which opens up room to be more creative and more aggressive with eBook pricing.

    On the eBook vs paperback question, I think the eBook should cost more than a paperback. It may be cheaper to produce, but it is a substantially superior product. I don’t know how many people will agree with me, though.

    1. You have read my mind! Ever since I got my eReader I have been extremely annoyed that publishers don’t package a physical and digital copy together. I value books and enjoy their physical form (in my hands or on my shelves) so I’d prefer to buy a hardcover, if I could also get an eBook for convenience sake.

      As to the superior quality of the eBook, well that’s debatable in my mind. Some of the eBooks I’ve read are little more than scans of physical pages. Illustrations, maps, etc. have been very poorly optimized for eReaders in most of the examples I’ve seen. It’s incredibly annoying.

  11. Good article, and yes most ebooks are overpriced. Re Tylers banana analogy, no I don’t steal the bananas if they are too expensive in the shop, but I certainly look around all of the shops before I buy; and if they are still too expensive I may just not buy at all. Or perhaps buy some apples instead.

  12. Why cannot both the publisher and author put the same amount in their pockets for an ebook as they do for a hardcover and simply pass the production savings (all of it) on to the reader? Another much overlooked fact is that it is a practice of many readers to buy a book and share it with friends and or family members. This is not easily done with ebook s, thus my family, for example purchases four or five ebook s where we would have purchased one hard cover to share before. The result of fair pricing is a win for all stakeholders. The publisher and the author sell more units making the same on each unit as they do on hard cover and the reader gets a price that takes into consideration that he has purchased ONLY intellectual property and has NOTHING concrete to line their shelves or share with friends and family.

  13. Just thank you for this article i have read several regarding this issue but this was very clear. Having just written last week march 2012 to both penguin and hatchette usa pointing out that Australians read and have access to the internet and ereaders. I actually had reponses from both this time, in the last 4 years i have sporadically written to them complaining and they ignored my emails.
    They both sell hard copies to Australia but not a very broad range. They both told me there was territorial restrictions to selling to Australia and it was basically illegal to for sellers to sell ebooks to Australia (i have read forums before of how to get around the purchasing issue but as a very honest person have not implemented these measures). As usual they totally missed the point (it is so totally out of there paradiam) and the sales money particularly of hard copy books they dont send to australia any way (they are very limited to what they send us down under).
    Thanks again

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