Some thoughts on ebook pricing

There has been much hollering and handwringing on all sides of the argument about ebook pricing. Traditional publishers claim that printing and distribution are a small part of their costs, and therefore, that ebooks must be priced as high as print books to make money. On the other side, independent writers and a lot of consumers point out that the marginal cost to produce an ebook is approximately zero, so ebooks should be tremendously cheap. The third side points out that retail prices are a matter of supply and demand, and have nothing to do with the cost of production as such.

All three sides are wrong, or at least incomplete. Publishers are lying when they say physical costs are a small part of their prices: typically, printing, binding, warehousing, and distribution account for about 20 percent of the retail price of books — higher when you consider the cost of returns. Editorial, design, and marketing costs (which do exist for ebooks as well as physical books) amount to somewhat less. The trouble is that the major publishers have enormous fixed costs, so every book has to pay a heavy tribute to corporate headquarters to keep the executives, lawyers, and middle managers comfortably ensconced in their high-priced Manhattan offices. The Big Six publishers are all owned by multinational media giants, which do not give useful information about the expenses incurred by their individual divisions or subsidiaries. But I have seen the latest income statement from one mid-sized British publisher (£100 million in annual turnover), and its largest single category of expenses is administration — about 30 percent of total revenues. I have no reason to suppose that the conglomerates get by on less.

Likewise, advocates of super-cheap ebooks are not telling the whole truth when they cite the low marginal cost of electronic transmission. It is true that the second copy of an ebook costs almost nothing to produce; but if the first copy had to bear the whole cost, no one would ever buy it. Writing the book represents a big cost in the author’s time, which he quite reasonably expects to be compensated for, or he would not have bothered to publish. Editing, layout, cover design, and (in some cases) marketing are also real expenses, of which every copy sold has to bear a share. Clearly, then, the price cannot fall to zero — as the Luddites seem to fear. On the other hand, the very low marginal cost of each additional copy means that the seller is perfectly free to set whatever price produces the greatest overall sales in dollar terms. That is a liberty that print publishers do not have.

The people who lecture about supply and demand, straight out of Economics 101, are also telling an incomplete truth. If I may be permitted to quote Economics 102 back at them, a product is worth producing and selling only if it pays its ownvariable costs and contributes something towards the seller’s fixed costs. Printed books have a much higher variable cost than ebooks — that 20 percent for printing and distribution. That means that different things happen at the bottom of the supply curve, where prices are lowest. If it costs $3 to print and ship a paper book, only an idiot will set the retail price at $2.99. If it costs 50 cents to transmit an ebook to the reader and bill his credit card, a book may be quite profitable at $2.99. Therefore, all kinds of books can be profitable as low-priced ebooks which would never find an audience as higher-priced print books.

Recently there has been a bit of a backlash against 99-cent ebooks in the marketplace, and the backlash has been coming not from authors, but from readers. A year or two ago, it was still necessary for a self-published author to sell ebooks at very low prices, because the old stigma against self-publishing persisted strongly. Most people would not pay ten dollars or even five for a book that (as they thought) was not good enough for a ‘real’ publisher to take on; but some of them would pay 99 cents. And enough of them found good books at 99 cents to dispel that stigma. Today, according to Amazon’s own figures, more than half their bestselling fiction titles are self-published. The stigma has largely gone, and the 99-cent ebook went with it.

Today, if you price an ebook at 99 cents, you are saying that your work deserves to be stigmatized — that there is a good reason why you cannot charge more. Two years ago, being self-published conferred that stigma all by itself. Now, the stigma must be coming from somewhere else. Where it is coming from is either the real quality of the work, or its perceived quality — perceived by the seller, I mean. Every book requires an investment by the reader, not only of money, but of time, which is far more valuable — and irreplaceable. By pricing a book at 99 cents, the author says, ‘This book is not worth more than one dollar of your money’: to which the reader replies, ‘Then it isn’t worth the time it would take to read it, either.’ And she goes and buys a book from some other author who shows confidence in his work and prices it accordingly. Based on this, you would suppose that if a self-published author raises his price from 99 cents to $2.99, sales should, counter-intuitively, goup; and indeed many authors have reported exactly that.

Amazon seems to have anticipated all this; or perhaps, at the low end, they were lucky. For retail prices below $2.99, they pay the author only 35 percent of retail; from $2.99 to $9.99, they pay 70 percent. This may be partly because Amazon needs to recoup the costs of handling each transaction and does not want to take an irrecoverable loss. Even at the 35-percent rate, Amazon takes only 65 cents from a 99-cent sale. They may not be losing money on that transaction, but after paying the credit-card company its fee, their profit must be very small. Whatever the reason, Amazon has decided that $2.99 is the lowest really viable price for an ebook. That sales drop off sharply above $9.99, they have already proved by trial and endless error.

Somewhere in between those figures there must be a sweet spot, where revenues are maximized; but where? Of course this depends partly on issues like the quality of the work and the size of the book; but these things had little effect on the prices of mass-market books in the days when the paperback was king. In the U.S. and Canada, those days ended for good in the late 1990s, when the independent distributors and rack-jobbers collapsed, and books disappeared from convenience stores and drugstores. The economics of paperback publishing changed. Print runs grew shorter, which meant that the fixed costs had to be recovered from fewer sales; and the books were sold mostly by bookshops, which did not want to fill their shelves with fiddling cheap books when they could make more money per square foot off trade paperbacks and hardcovers. So prices went up until they found a new equilibrium, in the range of eight to ten dollars a copy. As an inevitable side-effect, the paperback business shrank, in volume terms, to a tiny percentage of what it had once been.

But let us suppose that the $10 paperback is rationally priced to maximize sales volume; and let us suppose that most readers will pay as much for an ebook as they would for a mass-market edition. I think both those assumptions are questionable, and err, if anything, on the high side. If paperbacks were cheaper, they would probably sell in much greater numbers, as they used to; and the optimum price for ebooks is probably even lower than that. But let us be high-minded and generous, and grant that print publishers know exactly what they are doing, and doing it well and efficiently.

Very well, then: I go to my local bookshop and buy two $10 paperbacks. I am now poorer by $20 and richer by two novels. But not only that: I am richer by twophysical copies of novels. Let us suppose that these are middling books, adequately amusing, but not so good that I want to have them in my permanent collection. (Like the bookshop, I have my rent to pay; I haven’t got room to keep all the books I buy.) So I take them to Fair’s Fair, a local chain of second-hand bookshops, which is conveniently located at the bottom of the hill I live on. (Not quite so convenient for walking back home, but that’s gravity for you.) Assuming I haven’t spent my money on schtrops, Fair’s Fair gives me a store credit equal to a quarter of the cover price, so I can use my two paperbacks to make a $5 purchase. Since they generally sell used books for half the cover price, I can buy another paperback that would have sold for $10 new. In the end I have had three books to read for my $20, plus a used book that I can redeem for another $2.50 in store credit. My out-of-pocket expense has come to about $6 per book.

With ebooks, I don’t have a physical copy to resell, and can’t resell the copy on my reader. In fact, if the publisher puts DRM on the ebook, as most still do, I can’t even give it away. Every dollar I spend on ebooks is an unrecoverable expense. On top of that, I have to supply the equipment to read it on, and electricity to make the equipment run. On the other hand, the books are available for instant download and I don’t have to travel to a retail store; so we’ll call that even. If I spend more than $6 per book, except for those special books that I want to keep permanently, I’m not getting a good deal. So, I conclude, as a platform-agnostic reader, I don’t want to be paying more than $5.99 for a book that I can get in paperback at $9.99. Yet major publishers insist on setting their ebook prices as high as paperback, and sometimes even higher. Is it any wonder that I generally decline?

Now, I may consider $5.99 a fair price to pay, but that doesn’t mean I’ll turn up my nose at a bargain. I have bought enough ebooks by now to notice a pattern. If I see a book that interests me, and the ebook price is about four dollars or less, I’ll buy it on impulse. Above that price, I have to think, to quote the poster from WWII days: Is this trip really necessary? Once the price tops $10, I begin to think something quite different: You’ve got a nerve! This is not a reaction that you want to elicit from your customers, whatever business you may be in.

Out of all the ebooks I have bought so far, only two, I think, were significantly more than $10. One was Steve Jobs by Walter Isaacson, which I would have bought in hardcover, but having it on my iPhone instead seemed so appropriate that I was willing to pay the hardcover price to do it. The other was Story by Robert McKee, which was a required textbook for the workshop I attended last June. I had to have it in a hurry, and no retailer within driving distance had it in stock.

There you have my thoughts on the matter, for what they are worth; and some data to go with them, which is worth a great deal more. The numbers are derived by several different methods from several different sources, but they fit together in a sensible and harmonious way: which suggests that the sources are reasonably valid. It seems that $5.99 is a fairish price for a book that would normally sell well in mass-market; $2.99 or $3.99 is a bargain and a potential impulse buy; 99 cents is a tacit confession that the book is not worth buying. On the other hand, anything over ten dollars had better promise something special and deliver it.

Such, it appears, is the state of the market in the first week of May, 2012. No doubt it will have changed beyond recognition in the strange new worlds of June and July.

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