Friday, September 24, 2010

Ebook Pricing

In my last post, we had a long comment thread where many folks chimed in about the price of ebooks.

I thought I would distill my thoughts into a new blog entry, and explain why I believe $2.99 is the new ebook standard.

There are a few ways to support this claim, but before I begin, we need some background.

It all starts with print.

Currently, the majority of authors are offered boilerplate contracts with fixed rates for print books.

Mass market paperback is 8% of the cover price (though some houses offer 6% or even less), After a certain number of books are sold, it can escalate to 10%.

Trade paperback is 7.5%.

Hardcover is 10% for the first 5000, 12.5% for the next 5000, and 15% for everything after that.

So, for a $7.99 paperback, the author earns 64 cents per copy sold.

For a $13 trade paperback, the author earns 75 cents.

For a $25 hardcover, the author earns $2.50 to start out, though it can get to $3.75 if it sells well.

It is worth noting that these royalty rates are low because there are a lot of costs built into a book sale. Besides the costs absorbed by the publisher (editing, cover art, marketing, advertising, factoring the the cost of returns, plus overhead from salaries, rent, utilities, etc.), there are also printing and shipping costs. The distributor gets a cut. The bookseller gets a cut as well.

But the time the writer gets their cut, there isn't very much left. That's why hardcovers are priced as luxury items. You spend twenty-five bucks to be entertained by something for eight hours--something that I spent months of my life working on--and I get $2.50.

Now let's take a small detour and discuss ebooks.

Ebooks are a tricky product. Their costs are much lower than their print counterparts. No printing or shipping, no distributor, and the bookseller cut is smaller. There is no need to inflate the cost to factor in returns, because returns don't require shipping, warehousing, or printing.

I'll also put forth that the marketing and advertising costs for ebooks are much lower, and fewer people are required to create an ebook, which means less overhead.

Bottom line: Ebooks cost less to produce.

This is a Good Thing. Especially because customers want ebooks to cost less.

There is an acknowledged bias against the worth of downloadable content. This bias is partly emotional, and partly fact-based.

Facts include:

Ebooks cost nothing to distribute or produce.

Ebooks are intangible--they don't exist in a hard copy.

Ebooks have restrictions like DRM and proprietary format, which makes them worth less because they can't be shared, copied, or transferred.

Emotional response to downloads include:

I get a lot of stuff for free on the internet, which must mean it is worth less.

If something can be copied, it has no tangible value.

Copyright is not enforceable in a digital world, so everything should be free, and intellectual property is worthless.

Bottom line: Ebooks cost less, customers know this, and customers want to pay less.

Ebooks should be a bonanza for publishers. They cost less, they require fewer people to produce, and entire wings of their business could be downsized or eliminated, saving a lot of overhead.

But I believe publishers have seen ebooks as a threat to their long-entrenched print book business. I've I've said before: publishers should be connecting writers and readers, but they seem more concerned about selling paper.

That means protecting their paper-selling business. They've done many things to ensure this.

-Push the agency model so they control the selling price of ebooks
-Window ebook releases until after the print version is released
-Keep ebook prices artificially high
-Refuse to release ebook versions of some books, or in certain markets, or for certain platforms
-Demand DRM, which consumers hate (iTunes no longer uses it for that very reason)
-Devote time and energy and money to combating piracy, which is a waste of time and energy and money

None of this embraces the future and prepares them for making fat ebook profits. Instead, it alienates their customers, angers their authors, and leaves them even farther behind as ebook domination draws closer and closer.

Bottom line: Ebooks cost less, customers want to pay less, publishers don't care.

So where are the authors in this?

The boilerplate for ebooks was 25% of the net sales receipts. Instead of basing it on the cover price, it is based on what the publisher receives from the seller.

So on a $9.99 ebook on Amazon (price set by the publisher) is sold to them for $7, which means the author earns $1.75.

Now compared to hardcovers and paperbacks, a buck seventy-five is a pretty good royalty.

At least, on the surface it is. But not when some other things are taken into account.

On a hardcover, and on a paperback, there are so many costs that the publisher earns very close to what the author earns--three bucks on a hardcover, about a buck on a paperback.

But on a $9.99 ebook, the publisher earns $5.25.

$5.25 for simply uploading it to Amazon? Sorry, that's way too much.

Not only that, but they do a lot less to bring an ebook to market, and pay a lot less to get it to market. Lower costs, lower overhead, but jack up the profit? I think not. A world where a publisher earns three times what the artist earns is simply messed up.

If I wrote the damn thing, I deserve the lion's share. A 25% royalty rate isn't fair. Especially compared to print.

It gets worse, though. We've established that ebooks should be cheaper, and customers want to pay less. They certainly don't want to pay ten bucks. So when a publisher prices a book that high, they're losing potential sales. No wonder there's a $9.99 boycott by readers.

My own sales have confirmed this, numerous times. The lower the price, the more money a book earns. This is because value has nothing to do with the list price, and everything to do with how much the author earns.

But it gets worse, still.

By working with a publisher, an author gets 17.5% royalty of whatever price that publisher sets the book at.

By self publishing, the author can get 70% royalty, plus set their own price.

I price my ebooks at $2.99, because I've found that to be the sweet spot. If I price them higher, I make more per sale, but have fewer sales so I lose money.

On a $2.99 ebook, I earn $2.04.

In other words, I earn three times more than I do on a $8 paperback, and almost as much as I do on a $25 hardcover.

And guess what? Ebooks are easier to buy and sell than paper books. Kindle owners can buy my ebooks and get them instantly, without going to the store, or without even turning on their computers. No hassle, no wait.

I like the $2.99 price for other reasons as well. A hardcover requires thought before buying. In this economy it's a big purchase.

$2.99 is an impulse buy. It's no-guilt. It's a bargain. It encourages people to buy, rather than discourages.

Bottom line: I can make more money selling $2.99 ebooks on my own than I can selling $7.99 paperbacks or $25 hardcovers with a publisher.

The fact that I keep the rights, control cover art and titles, and can release the book as fast as I can write it rather than waiting 12 to 18 months, is all icing on the cake.

So let's hear from the opposition:

1. Joe, don't you think books are worth more than $2.99? People have always paid more than that.

Joe sez: A book is worth what it earns the author. Selling a bunch of $2.99 books is more profitable than selling almost as many $25 hardcovers. The public believes downloads should cost less, and the author makes more than they would in print. I think $2.99 is a perfect price to satisfy everyone.

2. Joe, don't you think part of the reason you're selling so well is you're undercutting other authors with your low price?

Joe sez: This isn't a zero sum game. Kindle owners don't buy just one book. They read more than they did before buying their ereader, and if they seem happy to buy more ebooks if they cost less. It isn't a choice between my book or your book. Readers can afford both.

3. Joe, but what happens when publishers start selling at $2.99? Won't you lose sales?

Joe sez: I don't believe publishers are going to go that route for a while. But if/when it happens, I can easily see my sales going up. When people can buy the new James Patterson for $2.99 instead of $9.99, they'll have money left over to spend on me.

4. Joe, ebooks have been around for ten years, and they've always been priced higher than $2.99.

Joe sez: The past is the past. Currently, people want to pay less. I say, give the customer what they want.

5. Joe, books shouldn't be an impulse purchase. Many writers spend years toiling over their manuscripts. Books have integrity and gravitas, and people are willing to pay more for that.

Joe sez: Books are entertainment. We can spend a lot of money to be entertained, and we can also be entertained for free. If you feel your ebook should be priced comparably to a hardcover, or a Broadway show, or a Picasso, knock yourself out. As I said, it isn't a zero sum game. You're free to price however you desire.

6. But if I price my book high when everyone else listens to you and prices their books low, I won't sell very many.

Joe sez: Then write a Broadway show, or take up painting. Then you'll get paid what your masterpiece is truly worth.

7. Your books suck, and the only reason you sell so many is because they're cheap.

Joe sez: I've long stopped caring about what people think of my writing, good or bad. I get enough fan mail, and make enough money, to no longer be concerned about bad reviews, negative people, or the obviously envious. My ego and bank account are satisfied, and I'm lucky I can find an audience while doing something I love. Also, you're an asshat.

8. Aren't you worried about piracy?

Joe sez: No. I'll eventually post long term results to my piracy experiment, but so far I've concluded that piracy hasn't hurt my sales. The way to fight piracy is with cost and convenience. Three dollar ebooks that can be purchased and delivered with the press of a button are the ultimate in cost and convenience.

9. Don't you think publishers will eventually figure out what you have? Some smaller, independent publishers already have.

Joe sez: I erroneously group all publishers together under the "Big 6" banner. If anyone can adapt and survive in this brave new world, smaller publishers are much better suited for it. But if the brand is the author, all publishers, small and big, need to figure out what they can offer their authors to justify taking a percentage of royalties forever. It has to be more than a cover and editing, because authors can get those on their own, and pay one-time costs for them.

10. What happens when Amazon lowers the royalty rate for authors?

Joe sez: What happens when it starts raining acid and aliens invade our planet and the crickets stage a coup and win the majority of the seats in Congress? I'll worry about it when it happens. But if it does happen, we live in a capitalist society. Other businesses will spring up and offer authors more... which is why Amazon is currently taking authors away from Big 6 publishing.

11. The only reason this works for you is because you already have a platform and a lot of books. Other authors can't follow your example.

Joe sez: How many authors get rich, whatever path they take? Very few. A fraction of a fraction are able to make big money selling fiction.

It isn't a question of either selling 100,000 ebooks or selling zero. Everyone falls somewhere in between. This isn't a competition, or a sprint. It's a marathon, and the race is with yourself.

Set realistic goals, experiment, learn from mistakes, keep and open mind, and most of all, write a lot of good books. I believe 99.9% of writers have a better chance to make more money in this new market than they did in the old one.

If you do get offered a print deal, congratulations. But make sure that there is a clear reversion of rights clause if the publisher goes bankrupt before the book comes out (or during its shelf life.) Make sure there is clear language about what "out of print" means. Make sure you get a decent ebook royalty rate. And above all, crunch the numbers and compare what you could potentially make on your own, especially in the long term.

Also you have to remember that I'm just one man following my own path. Your results may vary. You can, and should, form your own conclusions based on your own experience.

I'm sure this is my future. You need to figure out what your future is, and act accordingly.