Leaving money on the table

Bill Peschel, a commenter on The Passive Voice, suggests that Amazon is bound to stop offering independent authors 70 percent of the retail price on well-priced ebooks, and cut the wholesale price to 60 or 50 percent of retail, or even less. He asks:

‘Why would Amazon leave money on the table if they know that authors will accept less?’

I reply:

I’ll tell you exactly why Amazon would leave money on the table:

When the table it’s on belongs to the consumer.

Amazon isn’t in business to sell books. (Or electronics, music, movies, patio furniture, knickknacks, teddy bears, buggy whips, or anything else they have an SKU for.) Amazon is in business to lower prices. The company’s entire business model is about increasing efficiency, lowering overhead, and using that to cut prices so that consumers will shop there instead of the competition. This is a company that is perfectly content (and so are its stockholders) with a net profit margin of less than 1%. Leaving money on the table is what Amazon does.

Considered in that light, why does Amazon offer authors 70% of retail on ebooks? Because it can make a sufficient profit off of the other 30%. There is only one reason why Amazon would want you, as an independent author, to cut your wholesale price from (say) $3.50 to $2.10; and that is to enable Amazon to cut its retail price from $5 to $3. It’s already established that the 30% margin is enough for Amazon to break even and follow its well-known business plan. But note: If Amazon cuts the retail price to $3, then your $2.10 is still 70% of retail. So it doesn’t need to reduce your percentage of the retail price; it just needs you to voluntarily reduce the retail price on your own – which means that your income per unit goes down, but it also means that the savings are automatically passed on to the consumer. In other words, when you lower your prices, you are playing Amazon’s game for it.

Conclusion: When Amazon wants to reduce ebook prices, it won’t bother cutting that 70% rate. What it will do instead is lower the retail price range for which it offers that rate. Instead of offering it in a window from $2.99 to $9.99, it might do so from $1.99 to $6.99, or even from 99 cents to $2.99. And it will do so when its operations are efficient enough that even 30% of a 99-cent sale is enough to pay the overhead for that transaction.

At the moment, Amazon can’t make a profit by selling an ebook at 30 cents above wholesale; so it does not offer the 70% rate on 99-cent books. Credit card fees and other transaction costs, it would appear, add up to more than 30 cents per transaction in that particular line of business. However, the time will probably come when Amazon can make a profit on sales that small; and then it will offer an incentive to authors to price their wares in that range – which means offering the 70% wholesale price on 99-cent books.