Sunday, May 20, 2012

Pricing Books and Ebooks

Some authors still seem to be confused about Agency pricing, what it means, and how does it compare to wholesale pricing on ebooks and paper books. They somehow think Amazon is a bad guy for trying to lower ebook prices.

Here's a deeper explanation.

Wholesale Paper Model:  This is the general pricing model for paper books. On a hardcover book with a $25.00 price printed on the cover, at a 15% royalty based on cover price, the author made $3.75. The publisher sold the book to retailers at a 50% wholesale discount, and so collected $12.50 on each sale.

Of that $12.50, I estimate about $4.25 went to the costs of paper production--printing the books, boxing them, shipping them to warehouses, the distributor's cut--leaving the publisher $4.50. So under the wholesale paper model, the author's profit ($3.75) and the publisher's profit ($4.50) on a standard $25.00 hardback book were pretty similar.

Both paper and ebooks have overhead costs. Employees, utilities, rent, advertising, etc. Some publishers may work these costs into the price of a book and claim they are making a smaller profit. As an author, I also have costs for advertising, utilities, rent, etc. That's just the cost of doing business.

Wholesale Digital Model:  This is the original model the Big 6 used when they began selling ebooks. On an ebook with a $25.00 cover price, the publisher sold the book to retailers at a 50% wholesale discount (same as for paper), and collected $12.50. The author then received 25% of the net amount the publisher collected, so 25% of $12.50, which comes to $3.12. That left the publisher $9.38 ($12.50 minus the author's $3.12.) In digital, there are no paper costs to deduct from the publisher's share of net amounts collected from retailers. So the publisher went from making a little more than the author in paper to making almost triple in digital--for no justifiable reason other than greed.

Publishers like to say that an ebook costs as much to produce as a paper book. This is bullshit.

Certain costs are comparable, like editing and proofreading. I don't know if typesetting a paper books costs as much as formatting an ebook (my gut says typesetting costs a lot more.) An ebook requires only front cover art, a paper book also requires spine and back covers, which costs more. But these costs are fixed. The more books that are sold, paper or ebooks, the more these costs are absorbed.

The main price difference between paper and ebooks is in copying, shipping, and distribution. A paper book has a tangible value. It costs money to print, and to ship, and a distributor often takes a cut. Ebooks have none of these costs.

Publishers may say that the cost of printing, shipping, and distribution is a fraction of the retail price. But it isn't. Those costs account for as much as a third of the wholesale price. Printing, shipping, and warehousing a hardcover may be a higher cost than the royalty an author gets.

If you're wondering why you never saw a digital book selling for $25.00, it's because the ebooks you see on Amazon and elsewhere are usually heavily discounted from cover price, just like paper books are. My guess is publishers knew Amazon would discount a $25.00 ebook, but not as drastically as Amazon did, in some cases selling under wholesale cost. This frightened publishers, who wanted to have some control over the selling price because it protected their paper sales where they had a quasi-monopoly. So the publishers (allegedly) colluded to make Amazon accept the Agency model.

The important thing for authors to remember, though, is that the publisher made $9.38 on wholesale whether Amazon or any other retailer charged customers $25, $15, $10, or $5 for a digital book, because no matter what the retailer charged, the publisher always collected 50% of cover price, and the author's cut was always 25% of what the publisher collected.

So the wholesale ebook model may look like the wholesale paper model, but somehow the publisher makes almost triple what it did before. It did raise author royalties slightly (from 15% to 25%) but hardly enough to justify the extra money its making.

Agency Model:  For comparison's sake, let's look at how much an author would make on a $25.00 ebook under the agency model. Under the agency model, the publisher sets the actual retail price for the retailer, and collects from the retailer 70% of that set retail price. The author then receives 25% of the net amount the publisher collects. So, with a $25.00 ebook under the agency model, the publisher collects 70% of the $25.00 from Amazon, or $17.50, of which the author gets a 25% cut, or $4.38, leaving the publisher $13.12.

But I haven't seen any $25 ebooks under either pricing model. The price publishers seem to be trying to enforce for new front list ebooks is $12.99, sometimes as high as $14.99. For a $14.99 agency-priced digital book, the publisher collects $10.50, of which the author gets $2.62 and the publisher keeps $7.87. At a $12.99 price point, the publisher collects $9.10, of which the author gets $2.28 and the publisher keeps $6.82.

Under the wholesale model, an ebook that retailed for $9.99 was earning the author $3.12. Under the agency model, an ebook that retails for $9.99 earns the author $1.75.

Do you see now why the wholesale digital model was so much better for authors? Publishers switched to a model (and apparently colluded to do so) in which authors, agents, and publishers all make less money than they made under wholesale--with publishers taking a dramatically bigger slice of the shrunken agency pie.

That's bad enough. What's worse is, the Authors Guild and the Association of Authors' Representatives want you to think this is good for you. Whose interests do you think the AG and the AAR really represent? Do you understand why I called my last post Exploited Writers in an Unfair Industry?

The Agency model that the Big 6 embraced is the worst one overall for authors. I go into more detail why in my post The Agency Model Sucks.

Publishers are also making less under Agency. So why do it?

Because publishers want to control retail price. And, in fact, they've been doing so for decades, long before the agency pricing model.

I'd like to direct you to a blog post by Mike Shatzkin called There's no level playing field without agency pricing.

This got me to think about--perhaps for the first time--why books have prices printed on them and if that's a good thing.

Off the top of your head, name ten other products that have prices printed directly on them.

I couldn't name any off the top of my head, other than books. Then I remembered magazines and newspapers.

Why do magazines and newspapers have prices on them?

If I had to guess, I'd say it is to make it easy for the retailer. Newspapers come out daily (years ago they came out twice daily) and magazines are weekly or monthly. They are disposable (they aren't normally kept forever and are thrown away after reading them) and those that don't sell are discarded. Magazines and newspapers aren't discounted either (at least not with the regularity that books are discounted.)

Having a price on something disposable that comes out in new editions frequently, like magazines and newspapers, makes some sense. Since these are constantly being replenished, and are sold in bulk to retailers, they don't have to be individually priced with stickers. And since many are still sold at newsstands--which up until recently were cash only--the price made it easy for merchants to sell to customers without extra work or extra thought. By extra thought I mean making the retailer set the price based on wholesale models.

In other words, the retailer doesn't have to think, "Let's see,  I paid 40 cents for this newspaper, and I mark up my goods by 50%, so I'll sell the newspaper for 60 cents."

But I believe the newspaper and magazine publishers had another reason for printing prices on their products. By doing so, they controlled retail price.

There are obvious benefits to controlling retail price. Doing so circumvents supply and demand. It also prevents discounting. It doesn't matter which newsstand you get the Chicago Tribune from, it's the same price universally. Have you ever heard of a case of, "Naw, I can't buy People Magazine on this street corner because they're charging full price, so instead I'll walk three blocks to another newsstand that has it 40% off."?

Should books be sold this same way? Unlike newspapers and magazines, books are pretty much permanent. I've met a few people who throw away paperbacks when they're done, but mostly books are held onto. Or given away. Or sold, as evidenced by the number of used bookstores in the world. (I've never seen a used newspaper store.)

I don't know the history of putting prices on books. I don't know who started it, or when it started. I can assume (perhaps erroneously) that back in the day, books, newspapers, and magazines may have had the same distributor, or were sold at the same retailers, so it made sense to print the price on all paper goods.

But is this still necessary today?

Books are more expensive than mags or papers. They aren't disposable. And, most importantly, they are discounted all the time by retailers.

Think about how harmful that is.

One of the reasons so many indie bookstores have been driven out of business is because of discounting. We've heard stories of a mom and pop store buying copies of the latest Harry Potter hardcover at Sam's Club because they got it cheaper there than through their distributors. But it goes deeper than just the wholesale cost. It's the price on the cover that signals to the consumer what the book costs, and because of that price, indies get screwed.

What if good old Harry Potter was like practically every other product sold in the world? What if it didn't have a price on it, and the wholesaler let the retailer price it according whatever mark-up they deemed profitable?

Except for a select few products that are the same price everywhere and never go on sale (Wii, Bose, Apple, Xbox) everything has a variable price. Things are cheaper or more expensive depending on who is selling them. Things go on sale. Retailers can discount, or they can jack up the prices dependent on location (the same bottle of Budweiser can cost you 50 cents or $10 based on where you bought it.)

This is how almost everything is sold. And this is how products find their natural retail prices. Supply and demand, market fluctuations, and locations all play a part.

So who ends up determining the price of a product? The customer.

Not so with books. With books, the publisher determines the price.

Does this sound familiar for some reason? Perhaps because the DOJ is currently investigating the Big 6 for price-fixing?

Why is publishing the only business so concerned with setting the retail price of its products?

Consider Harry Potter again. What if it didn't have a cover price? What if readers weren't conditioned to looking for prices printed on books, and instead they sold like everything else sells?

DVDs do not have prices printed on them. I was just at a Best Buy, and new DVDs ranged in price from $2 up to $25 (more for multiple DVD sets or limited releases.)

Then I went to a FYE. It also had DVDs in those price ranges, but often the same title sold for different prices. A $10 DVD at FYE was $15 at Best Buy. Or a $3 DVD at Best Buy was $7 at FYE.

Prices varied. Retailers put things on sale. That encourages competition, which ultimately benefits the consumer.

I'm suggesting that Harry Potter without a price on it would have made readers less price conscious. When the retailer sets the price, the price seems fair, because there is nothing to compare it to. When I went DVD shopping, I didn't look at a $10 DVD and think "I wonder if Best Buy has it for $8. I think I'll go and check before I buy." If I wanted the DVD, I bought it.

But if the DVD had $10 printed on the box, and I knew that Best Buy always discounts by 20%, I'd buy it at Best Buy because I knew I could get it for $8.

In other words, a printed price on that DVD can hurt retailers. Printed prices on anything hurt retailers.

That's why no products have prices printed on them.

Except for books. Publishers could do what all manufactures do, and have a suggested retail price without it being printed on the product. But because they are so gung-ho about setting the retail price, they continue to print it on their books, and I believe this keeps the price of books artificially high, hurts competition, and hurts consumers.

I'm pretty sure of this. And so is Amazon.

When I got some advance reader copies of my thriller novel SHAKEN, published by Amazon Encore, it said on the back cover" On Sale February 22, 2011, Fiction, 270 pages, $13.95.

Then I got the final copies, and I thought, "Amazon screwed up." Because SHAKEN didn't have a price on it.

I chalked it up to Amazon being new at this and making a mistake. I forgot about it until a few weeks ago, when I went to the Romantic Times conference and had to sell my books via consignment. The bookseller needed to have a price on the books in order to pay the authors. So I had to make labels for SHAKEN.

I also had to make labels for STIRRED, because that also lacked a price. I'd never noticed it before.

Hmm. So this isn't accidental on Amazon's part. It's intentional. And it's smart. It allowed me to price SHAKEN and STIRRED as I saw fit. Instead of selling them for the $13.95 suggested on the galley, I priced them at an even $10. Not having a cover price gave me the power of pricing my books my way. And that's a power booksellers have never truly had. I believe that lack of power put a lot of them out of business.

If you have a true fixed retail price, you can't allow for discounting. Bose speakers and Wiis and iPads never go on sale. (They don't have prices stamped on them, either, even though every retailer who sells them must sell them for a set price.)

But Big Publishing wants it both ways. They want to set the price and print it on their products, yet they also allow discounting.

At least, they allowed discounting until they forced the Agency model on Amazon.

This incident made me remember KDP. Back in 2009, when I first got started self-publishing on Kindle, I put in my product descriptions "On sale for $1.59." Amazon made me remove that, because KDP didn't allow prices in product descriptions.

Again, I didn't really consider questioning why Amazon wanted it this way. Until I read Shatzkin's recent post.

Much of what Amazon does is smart. Not having a printed price on their published books, and not having prices in product descriptions, means Amazon can change prices when needed. They can put things on sale, price-match, and allow retailers to find their own price point depending on supply and demand, location, and market fluctuations. The customer doesn't ever feel like they're paying too much. It wouldn't be immediately obvious if a book is discounted or not, just like it is with all goods.

I propose that no books should have prices on them. I think it would benefit everyone.

But that goes against what publishers want--control over retail prices. They want to condition customers to pay more. That's always been their game plan, and it still is.

That isn't good for customers. It isn't good for retailers. It isn't good for authors.

But if you're a regular reader of my blog, that shouldn't surprise you.

88 comments:

Ellis Jackson said...

Do you not think it is better for an indie author to be able to control the price of their work - as they can with the Agency model - than to give that power away to the retailer? I can sell more books at a lower price point - particularly as an unknown author - and therefore I want to ensure I sell at a price that suits me. Amazon would like to sell at a price that suits them (whether that is to make profit or build the market at a loss), and that may conflict with mine. I created the work being sold - surely it is my right to do whatever I can to get sales, as far as is reasonable?

I understand and appreciate that the wholesale model works best for the trad publishers. But you spend a lot of time on your blog saying you think trad publishers are dinosaurs, and that indie is the way forward (unless trad changes of course). Surely where collusion is not possible (such as in a world of perfect competition, which widespread indie publishing would being) the agency model works best?

Anyway, great blog entry again. I'm not saying you're right or wrong - you've been in this so much longer than me, I was reading this blog when writing my first book, so please don't take anything I've written personally - I'm just very interested that you think Wholesale is better for everyone. I agree it is best for a writer with a contract, but I'm yet to be convinced it is best for the indie author that many who read your blog are.

Joe Konrath said...

Surely where collusion is not possible (such as in a world of perfect competition, which widespread indie publishing would being) the agency model works best?

I would be VERY willing to sell my ebooks to Amazon at a wholesale price.

First of all, they have access to more data then I do, so they can best decide which price-point is most profitable, which is better for everyone (them, me, readers.)

Second, they could put my ebooks on sale without me losing money per unit sold.

Third, they already price-match with competitors, so as long as at least 1 competitor has Agency pricing, I still can have some control over my prices. But even if no retailers used agency, I believe the prices would sort themselves out.

M.A. Beghtel said...

Joe, I think you have hit the nail on the head once again, but it seems to me that the strict pricing that the publishing companies put on the books was originally intended to make sure the author was getting his fair share (at least in a perfect world) and also to help protect the company's profits. If they didn't establish some form of control they wouldn't be able to determine how much each level in the chain was paid (author, publisher, printer, distributor, etc.) I can see where some 'guidelines' were originally needed. But, on the flip side of that coin, changes definitely need to happen as the publishing business is changing and leaning more toward digital platforms. The big guys HAVE GOT to reform this system, or they will be out of business soon, with the author's ability to self-publish, and create a product that is every bit as good as the major companies can put out.

Joe Konrath said...

If they didn't establish some form of control they wouldn't be able to determine how much each level in the chain was paid (author, publisher, printer, distributor, etc.)

I dunno. My legacy ebook royalty statements can track wholesale sales just fine without the need for a cover price.

JonathanH said...

Your gut is correct - typesetting a paper book costs a lot more than formatting an ebook. Here's why:

Everything about a paper book is fixed (font, size, line spacing, etc), so a good typesetter will put a lot of effort into tweaking the exact layout to avoid orphan lines, poor word-breaks, "ladders" of white space running through text o na page, and on and on and on. This is both an art and a science: good typesetting is serious business, and is paid as such.

But in an ebook, the reader gets to control font, size, and line spacing, and there's really nothing that a typesetter can do to make the resulting layout look any better than the default. You just throw the text in and hope that the e-reader does a reasonable job of laying it out in whatever form the reader wants. (The one exception is fixed-format ebooks for e.g children's books and graphical comics)

And that's why you can get an ebook formatted for $100 or less...

Anonymous said...

So is this how mom and pop bookstores can stay in business? By selling more self-published author's books who offer them a discounted price for a bunch of books to sell at their store?

Jill James said...

Joe, I'm never surprised by anything you post anymore. The world is changing so fast that I rely on you and a few others to help me make sense of it.

Joe Konrath said...

So is this how mom and pop bookstores can stay in business? By selling more self-published author's books who offer them a discounted price for a bunch of books to sell at their store?

I think, if no books had prices on them, mom and pop wouldn't have to compete with B&N and Sam's Club on price, because it wouldn't be immediately obvious if a book was discounted.

A while ago, Blake an I did a post on what indie stores could do to compete. Why should I sell my books to indies at a discount? They'd make more money if I sent them the files, and they published the book themselves POD.

http://jakonrath.blogspot.com/2011/05/indie-bookstores-boycott-konrath.html

Ellis Jackson said...

[i]First of all, they have access to more data then I do, so they can best decide which price-point is most profitable, which is better for everyone (them, me, readers.)[/i]

Fair point - they know better than you do what price sells best, I will take that as a point I hadn't considered, but I have to say I'm still slightly concerned about giving all the power to set prices to the retailer, just like I'd be nervous giving all the power to a publisher. Publishers also have much more data than you do, but I bet if I search on here I'll find one or two posts that say that publishers don't know a damned thing about pricing a book properly.

[i]Second, they could put my ebooks on sale without me losing money per unit sold.[/i]

In the same vein they could decide that they want to cut the price of your main competitor (for some spurious reason that I can't think of right now but may still be entirely plausible) and that may well eat into your sales. Under the Wholesale model you don't have the control to fire back by cutting your price for a short time. Also, I appreciate that you're a professional author and I'm not, but how exactly do you manage to lose money selling an ebook? I know there are costs involved, but they aren't per-unit (or to be technical, "marginal") costs.

[i]
Third, they already price-match with competitors, so as long as at least 1 competitor has Agency pricing, I still can have some control over my prices. But even if no retailers used agency, I believe the prices would sort themselves out. [/i]

So effectively you'd still rely on Agency pricing to maintain control, or you'd let the market sort it out. Given the current economic climate (which was more or less started by allowing market forces to do their thing) I'm less convinced I'd like to trust market forces completely. Particularly in a perfect competition model, where almost by definition profit decreases to zero. Also, you say that prices will sort themselves out - but for who? The reader? I don't want the prefect price for a reader, as that is free. Right now I want the price point that sells as many books as possible (to build readership), but in the future that should change to the price that makes me as much money as possible. That isn't the same goal as Amazon and it almost certainly isn't the ideal price point for the reader either.

Again, not saying you're wrong, and if my wording sounds rude, it isn't meant that way. I like a grown-up discussion (heated where required), as I honestly believe it is the best way to get the facts out there and get to the truth.

Ellis Jackson said...

(Okay, I should either learn to code properly, or just read the hints at the bottom of this box...sorry!)

Joe Konrath said...

I have to say I'm still slightly concerned about giving all the power to set prices to the retailer, just like I'd be nervous giving all the power to a publisher.

If you control wholesale price, the retailer can decide which price point maximizes profit. It is in the retailer's best interest to do so. And if they discount below wholesale, which irritated publishers, it would be great for authors.

In the same vein they could decide that they want to cut the price of your main competitor

Ebooks don't compete with one another. I've gone into detail on this many times.

Ann Voss Peterson said...

Ellis--

One thing you're forgetting is that you will still decide what price to charge the retailer for the book(what Joe is describing as setting the wholesale price). So you are determining how much you earn. The retailer would only decide how much to charge the reader(and as a result, determine what the retailer earns).

I think there's a lot of confusion about how the wholesale model works. Thanks for the great explanation, Joe. Now I can just send people a link instead of trying to explain. :)

Ellis Jackson said...


If you control wholesale price, the retailer can decide which price point maximizes profit. It is in the retailer's best interest to do so. And if they discount below wholesale, which irritated publishers, it would be great for authors.



It's their profit they are attempting to maximise, not yours. The two may not be one and the same. Obviously if they sell at cost or even discount your books then it is great for the author, but what if they don't? What if they sell it at a higher price (because, for whatever reason, they believe they will make more money from few high priced sales than many low priced ones)? What can you do to force them to adopt a price that suits you (or you believe suits you) better? I know it may be a stretch, but once you've given them the power you won't get it back. The Agency model isn't better for the publishers, as they are losing sales while trying to protect paper sales, and it isn't good for the author who has a publisher, as they make less money. But what is the downside of the Agency model for the indie author?


Ebooks don't compete with one another. I've gone into detail on this many times.


I know, I have read the blog several times over, but even the best economist (I should know, I have an Industrial Economics degree) would be very very hesitant to talk in absolutes. My recent experience would suggest that for new authors at least, they do compete. I refused to take part in Kindle Select (for any number of reasons that I won't go into), and saw my sales stop completely once there were thousands of unknown authors' works available for free. My book is only 99 cents, so hardly a big stretch for anyone, but still, when the alternatives were available for free there most certainly was competition. Why would anyone pay 99 cents for a book that may turn out to be crap when they can pick up another that may also turn out to be crap for nothing? My sales on B&N picked up at the exact same time, because there was less competition in the same segment (Kindle Select exclusivity etc etc).

When we are as established as you are (and we ALL want that!) then the rules may be different and I would gladly put my hand up and say you are almost certainly right, but there are many segments of the indie book market that you aren't involved in that may well play by different rules, and in which the Agency model may actually prove a better fit. For publishers and authors with publishers then yes, Wholesale is a better model for them and the consumer, but for some of us it may well not be.


(Hopefully I have got the html tags right this time!)

Ellis Jackson said...

Ellis--

One thing you're forgetting is that you will still decide what price to charge the retailer for the book(what Joe is describing as setting the wholesale price). So you are determining how much you earn. The retailer would only decide how much to charge the reader(and as a result, determine what the retailer earns).

I think there's a lot of confusion about how the wholesale model works. Thanks for the great explanation, Joe. Now I can just send people a link instead of trying to explain. :)


Hi Ann,

Thanks for this comment (and I loved your post about Harlequin by the way - really made me glad I chose to go indie!). I do understand the wholesale model as compared to the agency model, in that we charge what we charge and they sell it for what they sell. For a publisher with high costs to cover I think it makes a whole lot of sense to do it that way, and as a big company they have a certain amount of clout when it comes to disagreeing with the price set by Amazon. however for the little guy like me, who feels he has sweated blood over the words, the cover, over every part of that book, to then give away the ability to price the product seems crazy. Although Joe says he doesn't know of anything apart from books (and magazines and newspapers) that put the price on the product, over in the UK the price is on a whole lot of things. Cans of Coke have it written on them, cartons of juice, packets of crisps, all sorts of things. It is a way of the manufacturer keeping the price at a level they want it at, so they still have some measure of control: Coke uses it to stop Pepsi from undercutting them. with the wholesale model it's nice to know I'll get a set amount for every book sold, but it leaves Amazon to decide the price that is best for Amazon, even after I've decided what price is best for me.

Anyway, hopefully this is a mildly highbrow debate about the issue at least, rather than slinging insults which seems to be the de rigeur way of disagreeing with Joe!

Joe Konrath said...

We also have prices on certain food items in the US, Ellis. Mostly snack foods sold at convenience stores.

That's not the same as books, for two main reasons.

First, like newspapers, snacks are temporary.

Second, price is announced on snack foods as a sales gimmick. A big bright "99 CENTS!" on the package announces to customers that it is possibly cheaper than a competitor's brand.

Book prices aren't meant to do that, for the most part (I do recall some pricing experiments publishers have done that are similar, but that's the exception instead of the rule.)

A retailer wants to find a product's sweet spot when pricing. The sweet spot is where a product makes the most money (profit per unit vs. units sold.)

Amazon is an in unique position to know what the best price for products are, and they'll naturally price there to make the most money.

Ellis Jackson said...

I just want to hammer this home before I go to bed (I'm not yet successful enough to quit work!!), but I would like to say first that it has been an interesting debate so far, and one that has certainly given me insight and information I would not otherwise have had. Thank you.


A retailer wants to find a product's sweet spot when pricing. The sweet spot is where a product makes the retailer the most money (profit per unit vs. units sold.)

Amazon is an in unique position to know what the best price for products are, and they'll naturally price there to make the retailer the most money.

Amazon is not a charity. They are not trying to make you rich. They are trying to make their shareholders rich. while these two goals may converge at times, if they diverge significantly, what can you do about it under the wholesale model? What if their most profitable price point is a high one, that results in good profit for them but few sales for you?

(To be continued - probably, because I get the impression we are both fairly resolute about our positions - tomorrow after my time in the rat race...)

Joe Konrath said...

What if their most profitable price point is a high one, that results in good profit for them but few sales for you?

Then you raise the wholesale price and make more money.

It all comes down to how much the customer is willing to pay. And Amazon is pretty good at figuring that out.

Anonymous said...

"Wholesale Digital Model: ... On an ebook with a $25.00 cover price, the publisher sold the book to retailers at a 50% wholesale discount (same as for paper), and collected $12.50. The author then received 25% of the net amount the publisher collected, so 25% of $12.50, which comes to $3.12."

"Agency Model: ... a $25.00 ebook under the agency model. Under the agency model, the publisher sets the actual retail price for the retailer, and collects from the retailer 70% of that set retail price. The author then receives 25% of the net amount the publisher collects. So, with a $25.00 ebook under the agency model, the publisher collects 70% of the $25.00 from Amazon, or $17.50, of which the author gets a 25% cut, or $4.38, leaving the publisher $13.12."

"Under the wholesale model, an ebook that retailed for $9.99 was earning the author $3.12. Under the agency model, an ebook that retails for $9.99 earns the author $1.75."

Following your percentages, a $9.99 book under the wholesale model earns the author $1.25. Which is LESS than under the agency model.

While I find your reasoning for the wholesale model in regards of discpunting plausible, either your math is wrong or I'm an idiot who didn't see something obvious.

Frank Dellen said...

3:43 PM was me, clicked the wrong identity option. So maybe I AM an idiot.

Jude Hardin said...

I think it has to do with perception of value. Most manufacturers don't print the retail price directly onto their merchandise, but they do deliver it with the retail price printed on the tag or sticker.

That's supposed to tell consumers what the "regular" price is, i.e. how much that item is "worth." Then, when the retailer marks the item down, consumers feel as though they're getting a bargain.

The same psychology is used with books.

And books, i.e. paper books sold through traditional channels, aren't much more permanent than magazines, because most of them are only on the shelves for a few weeks after release.

Frank Dellen said...

"Wholesale Digital Model: ... On an ebook with a $25.00 cover price, the publisher sold the book to retailers at a 50% wholesale discount (same as for paper), and collected $12.50. The author then received 25% of the net amount the publisher collected, so 25% of $12.50, which comes to $3.12."

"Agency Model: ... a $25.00 ebook under the agency model. Under the agency model, the publisher sets the actual retail price for the retailer, and collects from the retailer 70% of that set retail price. The author then receives 25% of the net amount the publisher collects. So, with a $25.00 ebook under the agency model, the publisher collects 70% of the $25.00 from Amazon, or $17.50, of which the author gets a 25% cut, or $4.38, leaving the publisher $13.12."

"Under the wholesale model, an ebook that retailed for $9.99 was earning the author $3.12. Under the agency model, an ebook that retails for $9.99 earns the author $1.75."

Following your percentages, a $9.99 book under the wholesale model earns the author $1.25. Which is LESS than under the agency model.

While I find your reasoning for the wholesale model in regards of discpunting plausible, either your math is wrong or I'm an idiot who didn't see something obvious.

(Seems like you switched off anonymous posting and my former comment was deleted - oh, well!)

Ellis Jackson said...

Ok, one last post and I WILL be going for the night...

Then you raise the wholesale price and make more money.

It all comes down to how much the customer is willing to pay. And Amazon is pretty good at figuring that out.


I hadn't considered the option to alter the wholesale price, I must admit, but surely Amazon would be smart enough to tie you in to your wholesale price for a set period at least? Otherwise everybody would see what Amazon is selling it for and set that as their wholesale price. Amazon are big fans of Ts&Cs - I'm certain there would be a clause somewhere that would stop you adjusting your wholesale price. They'd be idiots not to have that, and you'd be impotent to do anything about it!

Joe Konrath said...

a $9.99 book under the wholesale model earns the author $1.25. Which is LESS than under the agency model.

It all depends on what the wholesale prices is set at. Wholesale price isn't dependent on retail price. Your $9.99 example doesn't list what the wholesale is, or what the retail mark-up is.

The previous wholesale price for ebooks was half the hardcover price--$12.50. If Amazon wanted to sell under cost, who cares? The author still got $3.12.

Your $1.25 example assumed the publisher charged Amazon $5.00 wholesale, and Amazon doubled the price to set retail at $9.99.

Stant Litore said...

@Frank Dellen:

Frank, the author makes $3.12 when a book on the wholesale model retails for $9.99 because the cover price is still $25. Whether the retailer sells the book for $3.99, $9.99, $12.99, or $15.99, the publisher makes 50% of the cover price - $12.50 for a hardcover - and the author gets his/her $3.12. Regardless of the price the retailer sets. That's how the wholesale model works. The author makes the same amount no matter what the retail price is.

Hope this helps!

Stant

Frank Dellen said...

Ok, I think I get it now.

"Under the wholesale model, an ebook that retailed for $9.99 was earning the author $3.12."
You assume a $25.00 cover price but a retail price of $9.99 here.

"Under the agency model, an ebook that retails for $9.99 earns the author $1.75."
While here: cover price = retail price.

Sorry for the misunderstanding.

Stant Litore said...

"'Under the agency model, an ebook that retails for $9.99 earns the author $1.75.' While here: cover price = retail price."

@Frank - the cover price may still be $25 but it is no longer relevant to what the author and publisher each make, under the agency model. The publisher will set the retail price themselves (discounted from the cover price), and the publisher and author receive a fixed percentage of the retail price. If I'm understanding the model correctly.

Stant

Frank Dellen said...

Thanks, Stant. And I read the addendum to the previous post.

I live in a country with FBPA, basically an agency model enforced by law, so a wholesale model for books is new territory for me...

http://en.wikipedia.org/wiki/Fixed_Book_Price_Agreement

Stant Litore said...

@Frank - thanks for that link! That's fascinating. The FBPA model is foreign to how books traditionally have been sold in the US; it sounds like the FBPA is specifically intended to inhibit competition on price between booksellers.

The wholesale model ensures a fixed profit per sale for the publisher and author, but allows the retailers freedom to price competitively.

The Big 6 adopted the agency model to prevent competitive pricing between booksellers, because they feared Amazon would, by lowering prices even at a loss, compete other booksellers out of business -- and they rely on brick-and-mortar booksellers to sell their print editions.

Will have to read up more on the FBPA. It's a very different model. Thanks for the info!

Stant

Cherise Kelley said...

I think what the agency price indie authors are missing here is that they would be the publisher, under the wholesale model. The indie author gets to set the wholesale price, just as the publisher did under the wholesale model. In other words, the indie author DOES control how much money she gets per book with the wholesale model.

Tom Maddox said...

@Ellis Jackson

What if their most profitable price point is a high one, that results in good profit for them but few sales for you?

Why would they do that? Amazon is pretty much based their business model on moving quantity, not just with books but with almost all merchandise. Why would they set a price that would stifle sales?

@Stant Litore

The Big 6 adopted the agency model to prevent competitive pricing between booksellers, because they feared Amazon would, by lowering prices even at a loss, compete other booksellers out of business -- and they rely on brick-and-mortar booksellers to sell their print editions.

If this is the case then why didn't the publishers implement the Agency System for paper books long ago? They could have implemented it when the chain stores were discount books far more than Mom and Pop stores could. They could have implemented it years ago when Amazon started discounting paper books. Why did they wait for e-books?

Stant Litore said...

@Tom Maddox - Because publishers have adopted the agency model specifically to ensure the dominance of print. They haven't done it before because on a wholesale model, big publishers don't care whether their books are sold at Mom and Pop's, B&N, or Costco. They don't care if Amazon discounts their paper books. Their profit is still the same. The threat to their industry isn't discounted hardcovers. It's e-books.

In short, the Big 6 haven't gone agency before because:

(a) It's a bad idea. Publishers make less money on the agency model, just like authors do.

(b) Up until a couple of years ago, it wasn't apparent to publishers that e-books might become dominant over print.

The Big 6 didn't implement the agency model when chain bookstores became dominant because they would have lost money by doing so.

They are doing it now, even if they make less profit per sale, because their entire business model is based on print distribution. If e-books become dominant (and this would happen faster if retailers were able to set their own, lower prices on bestsellers), then big publishers would either have to rebuild their business model around e-books, or suffer extraordinary financial losses.

Let me emphasize: publishers make more money per sale on the wholesale model. The Big 6 have adopted agency pricing despite this, in order to slow the growth of the e-book market and prolong the dominance of print.

Stant

Stant Litore said...

To put it another way: listen to the fear stories you hear from AAR representatives. What if ALL the brick-and-mortar booksellers closed up shop?

This has never been a seriously considered possibility before. But now the Big 6 are very concerned that this might happen. So they have adopted the agency model in a move to keep online retailers (especially Amazon) from pricing brick-and-mortar booksellers out of business. That's why they've adopted it only very recently.

Stant

T Ludlow said...

Tom Maddox: "If this is the case then why didn't the publishers implement the Agency System for paper books long ago? They could have implemented it when the chain stores were discount books far more than Mom and Pop stores could. They could have implemented it years ago when Amazon started discounting paper books. Why did they wait for e-books?"

The publishers essentially 'own' the paper product. They have the market in physical books down pat. eBooks are a huge threat, traditional publishers essentially lose all their leverage in an electronic market.

Ann Voss Peterson said...

I have to say, Ellis has a good point. When you're dealing with large corporations, sometimes they aren't necessarily concerned with maximizing the earnings on any given title. They might be making enough profit overall that leaving change on the table for a few small earners is not a big enough problem to justify the expense of addressing it.

We've seen that happen in traditional publishing for years. Not enough editors to handle the work load. Bad covers that are cheaper to push through than redo. A few titles hawked to readers and others left to molder.

I think it's a legitimate concern.

Stant Litore said...

@Tom Maddox - Let me offer an analogy. We'll use apples and kumquats. Let's say that 6 big, imaginary companies have sold apples for years. They invest lots of money in marketing apples and getting apples out to the supermarkets. They're very inefficient about it -- half the apples get returned -- but they dominate the industry. They decide what orchards get their apples into the store, and they control the process of getting them there and advertising the fact that the apples are there.

Suddenly, a business opens up that starts selling kumquats. This business is ruthlessly efficient and is very, very good at selling kumquats. In fact, they deliver kumquats right to your house, and the kumquats cost less than apples do. At first, only a few people buy them and have them delivered. People have been used to apples; they like how apples taste, they like their shiny redness. But over a short time, more and more people get attracted to the low cost and high convenience of having kumquats delivered.

The apple-sellers, however, don't know how to sell kumquats, how to advertise them, or what to do with them. When they try selling a few kumquats alongside their apples, they don't sell very many. But the other company is charging less per kumquat and delivering the kumquats directly to the consumer at a fast speed, and so that company is selling a lot of kumquats.

The apple-seller can see the handwriting on the wall. More and more customers are going to choose kumquats over apples each year.

The apple-seller has two options. They can either throw out most of what they know or think they know and adapt, learning how to sell kumquats well. Or, they can do everything they can to slow down the growth of the kumquat market.

Now let's translate this to books, because otherwise we're talking apples and oranges. :) Because apples are fungible, books aren't. Publishers can slow the kumquats because readers want to get a SPECIFIC kumquat, not just any kumquat. Maybe readers want the new James Patterson novel. So publishers can:

* Ensure the new novel gets released on e-book (kumquat edition) long after the print edition is made available
* Prevent the supermarket or the delivery service (online retailer) from discounting e-book (kumquat) prices, by adopting the agency model

Actions like these are intended to make it less convenient and cheap for customers to go get the e-books. It's a last-ditch strategy to ensure that we go buy print editions. Because publishers have a corner on the market of print editions. They know how to sell apples. But they haven't a clue how to sell kumquats.

Stant

Stant Litore said...

Konrath could probably explain this (and probably has) much better than I can, but that's my understanding of the adoption of agency model pricing.

Stant

Wayne said...

Somewhat of an aside to this post but it goes to the costs of publishers. There's been several posts about how much it costs publishers to make eBooks across the internet lately. The point I think was made on PG's blog a few weeks back that there's numerous direct to mass market novels out there for less than $10. Harlequin for example has a $5.25(discounted to $4.20) new mass market book on the front of their website.

Big advances and marketing pushes can raise up costs. But most books get neither.

Cherise Kelley said...

Publishers can slow the kumquats because readers want to get a SPECIFIC kumquat, not just any kumquat. Maybe readers want the new James Patterson novel. So publishers can:

* Ensure the new novel gets released on e-book (kumquat edition) long after the print edition is made available
* Prevent the supermarket or the delivery service (online retailer) from discounting e-book (kumquat) prices, by adopting the agency model

Actions like these are intended to make it less convenient and cheap for customers to go get the e-books. It's a last-ditch strategy to ensure that we go buy print editions. Because publishers have a corner on the market of print editions. They know how to sell apples. But they haven't a clue how to sell kumquats.

Stant


Yes, and discounted kumquats on Amazon helps indie published authors who place their eBooks on Amazon because it brings the customers to Amazon.

Anonymous said...

Joe,

Joe said:

Publishers like to say that an ebook costs as much to produce as a paper book. This is bullshit.


No, an ebook does cost them a tad extra. Not much, though, and the additional profit margin is much higher.

Certain costs are comparable, like editing and proofreading. I don't know if typesetting a paper books costs as much as formatting an ebook (my gut says typesetting costs a lot more.) An ebook requires only front cover art, a paper book also requires spine and back covers, which costs more. But these costs are fixed. The more books that are sold, paper or ebooks, the more these costs are absorbed.

Does a trad publisher (those "Big 6 legacy" publishers) produce just an e-book? Or do they publish a print version and an e-version of the same book?

That editing, proofing, cover art, and basic layout of the book that was done for the print version of a book are also used in the ebook version, correct? I'd think they'd be smart enough to do that even if they might not be smart enough to push ebooks. This is the point where, before ebooks, trad publishers used to stop.

The above is several thousand dollars worth of work.

Now they're also doing e-versions of the print book. They use the same edited and proofed file (I would hope) to make the e-book. They probably used the same cover art and same basic book layout, too. All that was generated for the print book, and hopefully the print book will recover those costs. But the print book was going to get done anyway.

Now they can use the book file and cover art used for print and format it to e-book standards. How much does that cost? $100? $250? Much more than that and they really don't know what they're doing. Say it costs them $100.

That's over and above the print cost. And for the first ebook copy only. All the rest of those ebooks they sell are free to them, cost them nothing. If you want to amortize it, selling 1,000 copies of an e-book means each one of them cost a dime to "make." If they can sell 10,000 of them, each one cost them a penny.

Remember the edit/proof, cover art, etc., was done for print. They were going to do that anyway. Trad publishers don't release just e-book versions without a print version, right? Ebooks are simply profit added over and above the print version. Figure they cost somewhere between a dime and a penny to produce averaging over their whole list.

A hundred bucks extra to produce an ebook over and above the print version they were going to do anyway. Several thousand bucks for the prep to print a book, then a minuscule additional amount to produce the e-version.

James Henry

William Ockham said...

Amazon will never go to wholesale pricing for self-published authors. They have to stay with agency for self-pub. Think it through. Amazon has a lot invested in price matching for books. As long as that is integral to their brand, wholesale pricing self-pubbed books would be idiotic. You would sell your book to Amazon for $2.99 and then turn around and offer it for free on your own website. You would be getting $2.99 every time someone downloaded your free book from Amazon. That would be insane for Amazon.

Anonymous said...

First, thanks for the years of informative posts, and for all the comments, too - many are very informative.

I have no argument with what's posted here, but purely to complete the picture, for a mass market original (as, for instance, most romance titles are) the figures are:

W'sale 7.99: Publisher 4:00; Author 10% cover (at best) 0.88
Agency 7.99; Publisher 5.59; Author 25%net 1.40

So the statement "Authors make less under agency pricing" should be qualified. Authors who sell hardcover/soft make less, but authors with mass market originals make more.

Which is why there has not (yet) been a major exodus of authors from the mass market houses, and why authors with backlist titles stuck at at least some Big6 houses got a unexpected but pleasant surprise this April.

Anonymous said...

Ack! That should be:

W'sale 7.99: Publisher 4:00; Author 10% cover (at best) 0.80

Not that it changes the point.

R L Harlan said...

Hi, I am a newly published author. My book is titled "The Silver" My pen name is R L Harlan. The link for it is www.sbpra.com/RLHarlan. It is also available on Barnes and Noble and Amazon. The link to my blog is www.RLHarlan.com.

I suppose I am newer to this than the authors who left comments. Even with this one post I learned a great deal, I thank you Joe. I will definitely follow this blog.

I reread my contract before posting this comment. I found nothing in the contract that said I can’t sell my book at any price I choose. I am not experienced in the publishing world but I am experienced in sales and marketing. I agree that the publisher shouldn’t print what they think the retail price should be. In reality if I choose to sell it at something less than the printed price the customer feels they are advantaged by that. The problem is if you try to sell the book at a price higher than the printed price. That is marketing suicide. I suppose that is obvious. My book is always on sale is my motto. Thanks again Joe, read ya soon.

Stant Litore said...

@William of Ockham,

William, I might be incorrect (I hope someone will correct me if I am), but I believe Amazon does currently use a wholesale model for self-pubbed (KDP) works under $2.99. If you set the price below $2.99, you receive 35% of that price wholesale, regardless of whether Amazon later drops the price. I don't know enough to speak to the rationale for it, but Amazon doesn't allow self-publishers to use agency pricing on titles under $2.99. (For works over $2.99, indie writers can select an option allowing them to receive 70% of the retail price.)

Stant

Stant Litore said...

@10.16 Anonymous:

I think your math is right. But I'm not certain that this necessarily means that the agency model will yield higher revenues on mass market paperbacks. That may or may not be the case.

One thing left out of the equation is that the wholesale model allows for the retailer to discount the book, while the agency model does not. For this reason, the writer may actually sell more copies on the wholesale model (because the book is priced cheaper for the consumer), thus leading to a higher overall profit.

E.g.,

500 copies sold at $7.99 retail on agency model = $700 for the author

but

1000 copies sold at a discounted $4.99 retail price on wholesale model = $880 for the author

The inability to discount the book holds back total sales. That's a factor that has to be taken into account. Because the retailer can't discount on the agency model, there's no way really to know for certain that sales are lost on that title ... but we can note sharp differences between total unit sales for higher-priced and lower-priced books.

An additional factor is that agency pricing essentially guarantees that your digital edition sales will be low -- unless you're already a bestselling name. James Patterson will end up on the Top Kindle 100 regardless, but if you are a midlist author, your $14.99 agency-priced e-book won't sell much. Whereas your $2.99, $4.99, or even $6.99 e-book on the wholesale model will be far easier to sell, yielding potentially significant revenue. The Big 6 have proven utterly incapable of selling midlist e-books.

Stant Litore

Joe Konrath said...

No, an ebook does cost them a tad extra.

No, it doesn't.

Any book needs editing and proofing. Those aren't the costs I'm discussing.

The costs of printing and shipping a hardcover are comparable to the profit a publisher makes per hardcover--around $4. Corrugation and distribution are also needed for every paper book sold.

The costs of copying and delivering an ebook is a few pennies. Publishers pointing out that "we pay thousands of dollars to get a book into shape" are just talking about the costs of doing business. But they truly cannot say an ebook costs as much to produce as a print book, when per copy costs vary widely.

Rather than split the additional ebook profit with authors, publishers are keeping it. Fail.

"Authors make less under agency pricing" should be qualified.

Agency pricing has never been used for print. There is no such thing as an agency priced mass market paperback.

Joe Konrath said...

You would be getting $2.99 every time someone downloaded your free book from Amazon.

Amazon already has methods to prevent this. There's no reason they couldn't continue under a wholesale model.

Blue Tyson said...

Actually last December Tor UK (Macmillan) raised the prices of some books to $30 in Australia (eg to try and be similar to the triple prices we pay here for dead tree). Garden variety no-name novels etc.

After selling approximately 0 or 1 of these they dropped them to 20+ a few weeks ago. For which they have probably now sold another 0 or 1.

Stant Litore said...

"Agency pricing has never been used for print. There is no such thing as an agency priced mass market paperback."

Hadn't realized that. This just snapped a few details into sharper focus for me.

Increasingly glad I took the road less traveled.

Daniel Huber said...

Hey there
I have been following you blog for about 6 months now and and this is my first time posting. Joe, These are all 100 % correct posts, but my question is why do you want the big 6 to change? Right now as an indie author pricing is your/our advantage in competing. (my first book will be out in a few weeks) If the big 6 change and their prices drop wouldn't that take your advantage away? I get wanting to help the writers at the big 6 get a better deal, but are you not worried how that could hurt you or other indie authors?
Also if the big 6 where forced to change and started giving writers better deals would you switch back?
Thanks and I love your blog. It has been a great resource for my writing partner and I. I went to a writing conference at the beginning of this year and I sat in on a self publishing session lead by Bella Andre and she mention you like 5 times as a place to get more info, and little did I know how much info I would find.
Thanks

RD Meyer said...

The amount of defending the Big Six I've seen from some is baffling to me, unless they're part of that industry and protecting their own interests(like a large number of agents seem to be doing). If publishers can't adapt to the current business environment, then they'll go out of business, and I don't think that's a problem. The market will adapt and find a new equilibrium.

They don't seem very concerned when they are allowed to pick and choose who gets into the club, but when the gates open and more people have control over both pricing and entry into the market...well...they remind me of guys named Chauncey and Priup saying, "Oh God, how could anyone let them into our building."

Anonymous said...

I'm not the snarky anon at 1:38 AM

>>>Joe said:
"Authors make less under agency pricing" should be qualified.

Agency pricing has never been used for print. There is no such thing as an agency priced mass market paperback. <<<

My bad. The correct figs should read:

W'sale 7.99: Publisher 4:00; Author 25%net 1.00
Agency 7.99; Publisher 5.59; Author 25%net 1.40

Which still makes the same point. For authors who sell solely in mass market, agency has paid better, but the best of all worlds would undoubtedly be a 70/30 split at w'sale where retailers could discount as they wished.

Anonymous said...

I would be VERY willing to sell my ebooks to Amazon at a wholesale price.

Isn't that what the 35% kdp royalty option is?

John Hindmarsh said...

Joe,

I really enjoy your posts. I have not commented for a while - too busy in my day job. However, there may be a flaw in some of the logic used above. The approach to working out the cost/revenue for ebooks published by legacy uses marginal costing. That is, take the incremental costs and think - wow - there is a massive profit for that item at that price given that marginal cost. However, when all the costings are calculated on this basis, the profit actually disappears and the company makes a loss. That is, if the paper book sales decrease, and the ebook sales increase, and marginal costing has been applied to the ebook scenario, overall profit has reduced.

Simple example - I hope. Say 1,000 paper books cost $1.5 to produce and sell for $2. Then introduce ebooks. And think wow - it only costs 10 cents for each ebook. So I can price these at $1 and make $.90 per book. However, the sales of paper books will decrease, as sales of ebooks increase - at least in my example.

When sales of paper books approaches zero, the publisher has revenue of say $1,000 from ebooks and costs - assuming 1,000 paper books were produced and 1,000 ebooks were sold - of $1600. A net loss.

So in fairness to the legacy publisher - there is a very fine line for them to walk.

Marginal costing has destroyed the profit line of many businesses.

So while I have published my first book myself, I do have a small - very small - sympathy for the suits who are trying to manage this unicycle they are all trying to pedal. And no, this is not a defense of their somewhat scurrilous attempts to minimize payments to and general neglect of authors.

John
[Thank goodness I gave up accounting as a career some years ago!!]

D.L.Johnstone said...

Joe - you raise an interesting point. The reason other packaged goods products don't have prices printed on them is a legal one. By law, companies can provide manufacturers suggested retail pricing or MSRP, but "pricing is at the sole discretion of the retailer". I can't think of another product segment where prices are printed right on the items.

Another interesting facet is what we see in Canada. In the past when the US dollar was worth more than the Canadian dollar, you'd have the US price listed and the Candian price, which was always 20-30% higher. Now we're at par and have been for 2 years or so, but the price differential remains even on new releases. That's kind of understandable with products that need bilingual english/french packaging to meet our language laws, given extra packaging investment etc, but not with books. They're printed in english and are identical to the US versions.

TK Kenyon said...

My, but you're chatty lately, Joe. Did you finish a manuscript?

(And yea for us! Thanks for your posts!)

TK Kenyon

Warren said...

John Hindmarsh said... "When sales of paper books approaches zero, the publisher has revenue of say $1,000 from ebooks and costs - assuming 1,000 paper books were produced and 1,000 ebooks were sold - of $1600. A net loss.

So in fairness to the legacy publisher - there is a very fine line for them to walk."


Isn't it only a net loss if you're thinking in the short term? Unlike the paper books which have an individual cost (I print a thousand books at x dollars per unit, and may not sale them all), ebooks only have the cost of developing the original file. Let's say it costs a publisher 100k to purchase and develop a manuscript into an ebook, each additional ebook sold doesn't add to the cost (the costs of ebook distribution, the actual downloading, only amounts to fractions of a cent). Where a paper book might go out of print in a few years if there's no demand, a publisher can keep an ebook on the virtual shelf for the life of their company. Even if it takes you twenty years to recoup the cost of the original outlay, anything beyond that is gravy. For the life of me, I can't figure out why these legacy publishers aren't looking at ebooks as solid long term investments, pumping out as many as possible and calculating their profits on a 50 year timeline.

To give a little example of books that could be earning money over the next 50 years, the bulk of John D. MacDonald's novels are not available as ebooks (at least, if they are they're not listed on Amazon). Whoever owns the copyrights on his work is losing money on a daily basis. His book The End of Night, which Stephen King calls one of the greatest novels of the 20th century, is not only not available in ebook form, it's also not in print at all. What sort of short sighted nonsesnse is that? It's enough to make a reader scream in rage.

Todd Trumpet said...

The Wholesale/Schmolesale Agency/Schmagency Model:

1. Self Pub.
2. Set Your Own Price.

Am I missing something?

Todd
www.ToddTrumpet.com

John Brown said...

Joe, "suggested retail price" has been around for a long time on a lot of items. Cars have it, for example. Sometimes it's used to create a perception of value. Sometimes it's used in to raise barriers to entry into a market.

There is a question about whether it violates fair trade practices. An interesting bit here on wikipedia:
http://en.wikipedia.org/wiki/Suggested_retail_price

Anonymous said...

Hi Joe,
This is a really important post. Thomas Woll makes this point too, in his book Publishing for Profit.

K.W. McCabe said...

Have you seen the latest? The beginning of the end for the publishing industry? Who knows...

http://www.publishersweekly.com/pw/by-topic/industry-news/financial-reporting/article/52040-houghton-mifflin-files-for-bankruptcy.html

Anonymous said...

I can't figure out why these legacy publishers aren't looking at ebooks as solid long term investments, pumping out as many as possible and calculating their profits on a 50 year timeline.

That's because the Big 6 are publicly traded. In general, when a company has stockholders to impress, the only thing that's important is the next fiscal quarter, not 5 or even 2 years down the line.

It's too bad, because if publishers actually thought more about the future, they would have been in a better position to compete, rather than using collusion and other illegal methods. Now Amazon, which is essentially a warehouse store, is poaching their authors.

They're reaping everything that they've sown.

Agency pricing is short sighted and hurts consumers. As I mentioned before, when I see an ebook priced higher than a hardcover release (which I've seen lots of times), I boycott the book. I simply don't buy buy it. If I want it bad enough, I'll get it from the library.

I saw an recent interview with the ex-CEO of Sony, Howard Stringer, who talked about how Sony, which had the infrastructure to be Apple's biggest competitor, was so worried about piracy in their music division that they waited too long to create an integrated mp3 player to compete with Apple's iPod. By the time they got the green light, it was too late.

Sony had the artists, the computer hardware, the production capacity, and the software developers to become the largest music retailer in the world. They had everything in place already! Instead, they let irrational fear stifle creativity.

And the gain ended up going to Apple, because Apple thought about the future, rather than fearing it.



-Christy

Anonymous said...

Just FYI:

Video game consoles never (or rarely) go on sale because the profit margin for them is next to nothing (think less than a dollar).

But if you want to maximize your sales of the games for those systems (which have a ~25% margin, which is damn good for anything electronic), you have to sell those no-profit systems, too.

Scraps said...

When it was time to design my cover/get the barcode for my self-pubbed book I went through almost the same thought process as above: what if I want/need to change the price and it's stuck on the cover/encoded? What if the shops who stock it want it at a different price? Etc. I was pretty sure I'd made the right choice to leave the price off, but now I feel even better about it. Thanks!

Joshua Simcox said...

An open letter to Ann Voss Peterson:

You're hot. And "Pushed Too Far" is a great read.

--Joshua

Anonymous said...

I have been reading this blog for a while now because my daughter is getting ready to publish her first book and she suggested checking it out. The only real issue I have is the hate of the agency model. For an indie author there is little difference between agency and wholesale. If you want to make $4 per sale, set the wholesale price to $4 or set the agency price to $5.72 (70% model). Yes, a retailer can sometimes play with the prices, put things on sale etc. without hurting your net take but my assumption is that this applies to only a very small percent of books offered for sale and would not effect most people. People using the agency model can play with their prices and see what sells best. Authors under current contracts seem to be having issues with how the e-book profits are being divided, and I can certainly see them blaming agency for this, but I think that long term the big 6 and others would have dropped the wholesale prices of e-books to about what they are getting now under agency models. There was never very good justification to charge full hardcover price for an e-book. Amazon saw this and took much less than the normal 50% mark-up for best sellers because they saw the advantages of e-books. Once initial production costs are covered I think the authors should be getting 90% of the publishers 70%, but I do not write the contracts. Most mainstream books I buy today are selling in the $12 to $15 range which should allow plenty of profits for both the retailer, the publisher and the author. My daughter being an unknown indy will be setting here e-book prices much less than $14, but if she sells will still make much more per book than under any of the old-line publishers.

Anthea Lawson said...

Joe, please remember that *many* NY publishing houses use a 3rd party distributor for their e-books (despite the utter idiocy of doing so). So don't forget to take that distributor's cut out of the $ the publisher receives.

Kris Rusch has said on her blog (a few months ago) that she ran the numbers and in every case, her e-book royalties were *under* 10% of cover. My trad-pub royalties are running around 11% of cover right now.

Authors, please remember that "25% of net" can include all kinds of costs! Just taking out the retailer's cut is merely a best-case scenario.

Veronica - Eloheim said...

I left the price off of my Createspace paperbacks. Pretty sure that it was a suggestion by Aaron Shepard that nudged me in that direction.

I have my wholesale price and the retailers I work with can sell the book for whatever price they want.

Also, if I decide to change my price I don't need to have my graphic designer change the art!!

BTW: Passive Guy pointed out that Createspace is now doing POD in Europe. If you have CS titles, you have to opt in to the new program. Very easy to do!

Anthea Lawson said...

@ anonymous at 1:52

You said:

"W'sale 7.99: Publisher 4:00; Author 25%net 1.00
Agency 7.99; Publisher 5.59; Author 25%net 1.40"

Actually, my e-book royalty in that kind of scenario would be @ .90 cents, based on what I've seen on my royalty statements for the past year. Here's why.

You're assuming that the *only* cost taken out of net is the 30% retailer's cut. But that's rarely the case. As I mentioned above, many (most?) tradpub houses use a 3rd party distributor for their e-books, and those guys take a percentage, too. Other odd costs that are possibly included are 'amortized' DRM and formatting added into the 'cost' of the e-book. Like I said, my 25% of net e-book royalty is running around 11% of cover...

So before you go extrapolating what an author will get paid, take a look at some authors' royalty statements and see what's really up. :)

Also! Don't forget to take 15% out again of the "author's" share to give to their agent. The pie shrinks all the time.

Thomas L. Scott said...

I like to keep my comments simple and short. To that end, well said, Joe. Keep thinking.

Respect,

Thomas L. Scott
Author
Voodoo Daddy
http://thomaslscott.com

Hope Welsh said...

I thought the pricing we can do as an indie was really good--til I looked at what I was making now.

One of my books, for instance, was priced by me at $2.99-but Amazon is selling it at 99 cents--and I'm making 33 cents per book--not what I intended to make.

Same with one of my print books--they are selling it for less than the price I set.

All in all, I'm still making more per book than legacy published authors are.

Indie authors have huge advantages--but there are a few pitfalls, too.

For me, the only huge disadvantage of being an indie is that I will not see my book in a grocery store shelf.

With the small press I have a book through--I make next to nothing--and they have priced the book much higher than I'd have priced it--which means it's not selling. I make less than a dollar on a $5.99 book.

Me, I'll stay indie--but I would like more pricing control.

Anonymous said...

We've started our own indie publishing company as well. It's been a lot of fun getting into the publishing world. Some fun books thus far have been "Waffle Street" and "How they Stash the Cash." We love working in the indie business. http://sourcedmediabooks.com/

dan said...

Hope - Why don't you have more control over pricing? I set the price on everything and have not seen the fluctuations you have experienced. I suggest shutting off any channels that are shorting you, because they shouldn't be unless you have signed one of those funny contracts that transfers your pricing rights.

But if you haven't done that, I don't understand how you are getting undersold.

Warren said...

Hope, is it possible that Amazon is price matching another store? I checked Smashwords and your story The Storm Within is marked at 99 cents just like at Amazon.

If that's not it, perhaps you should give them a call.

--Warren

Scott Brown / Eureka Books said...

A note on the history of prices on books: After the Civil War, sales of books took off. Most publishers were also booksellers. They got in the habit of advertising a list price and then selling the book for less. The also typically offered only 20% off to bookstores and didn't account for postage (which often exceeded the profit on a book shipped from NY to California, for example).

So about 1875, the Booksellers' Association (which included publishers) agreed to stop discounting. The plan quickly fell apart but most publishers and booksellers agreed something should be done.

At the American Publisher's Association meeting on Feb. 13, 1901, the group agreed that its members would only sell at net prices (meaning list price) and would only sell to dealers who agreed to also sell at list prices. The group also recommended "that the retail price of a net book, marked net, be printed on a paper wrapper covering the book."

Macy & Co. (now Macy's) regularly offered books at a discount. They sued and mostly lost. The courts said that publishers could set and protect prices on copyrighted material but not on out-of-copyright books. [I suspect this is why Amazon can force the stores that sell the Kindle to only sell it for the price Amazon sets -- as an aside, Amazon seems to think discounting is good for everyone else's products, but not for its own].

Haarlson Phillipps said...

Hi Joe, excellent post, however, you say:
"Why is publishing the only business so concerned with setting the retail price of its products?"

Well, it isn't.

There was a famous case in the UK in the 90s concerning ASDA supermarkets (now, sort of ironically, owned by Wal-Mart) and Levi's (the makers of denims).

ASDA were selling Levi's denims way below the suggested retail price. Their pricing strategy worked — it got people into the store, ostensibly to buy a pair of Levi's and ultimately spend money on groceries.

Levi's countered by refusing to supply ASDA supermarket, claiming that for their products to be available at such an affordable price cheapened their brand. The issue of who sets the public price went back and forth for a year or more.

You'll also find Dolce i Gabbana, Rolex, Vuitton, Ducati, and various other (so-called) premium brands guard their wholesale supply lines, and inflated mark-ups, ferociously.

ASDA filed a suit - claiming that Levi's were offering preferential supplier discounts to preferred resellers. They won. But Levi's laggardly pretended that they could not supply the requested lines in the quantity demanded — i.e. they deliberately limited supply in order to starve demand and keep prices high.

Any mom and pop store wanting to resell any of the above mentioned brands, and possibly resell them at discount, will find a mountain of excuses as to why the particular product 'cannot be made available at this time'.

Also, ask yourself why is it more difficult to buy Spanish olive oil than (so-called) labeled Italian olive oil (most of it produced in Spain and Greece )in the United States? Or, Spanish ham? Ask yourself why you can travel the world and marvel at beautiful pyrotechnic displays created by Spanish, French, Maltese, Italian, British, Australian, Chinese, Japanese, Irish, Canadian et al pyrotechnic companies in most countries in the world, and not U.S. based companies — then look at the home U.S. market. The U.S. pyrotechnic market is dominated by the Mafia. True. Been there, done it with scars to prove it.

And, while looking at these things, look at the cinema distribution racket.

Free market my arse.

The import of foodstuffs and entertainment from Europe into the U.S.A. is bound hand, foot and head by over-zealous protectionist legislation and shady gangsterism.

The problem now is is that domestic U.S. suppliers think they get away with the same trick with domestic, i.e. U.S. consumers.

The CEO of Wal-Mart once said that he wasn't in the retail business so he could go play golf with his rivals; I suspect Jeff Bezos, and Amazon, think along similar lines when it comes to keeping customers happy.
Regards.

Radio said...

Re: Typesetting costs. I'm currently employed with an academic publisher, and if other typesetters are at all like the ones we use, the typesetting time cost will be exactly the same. Obviously, this doesn't apply to publishers still using letterpress printers -- but I can't think of many who are. Typesetting is pretty much all digital now, so the cost is going to be about the same.

Anonymous said...

@Hope Welsh

Amazon will still pay you the original cut of 70% Retailer discounting is not the same as price-matching.

Here is a helpful quote from Passive Guys blog (via Anthea Lawson):
"I’ve seen a bit of misunderstanding about Amazon dropping prices. Here’s the thing — if Amazon is choosing to discount your book, you will STILL GET the royalty amount on the price you set. They take the loss. Yes, they do this with indies.

*However* if they are ‘price-matching’ your title to a lower price that they find on another site, then you only get paid royalties on the lower price.

Barbara, if you don’t have your title listed more cheaply elsewhere (and check all the retail sites, some can be notoriously slow to post changes if you’ve changed, esp. Kobo and Diesel) THEN Amazon is actually doing you a favor, by putting your book on sale (ie. more attractive to readers) yet still giving you the amount you’ve chosen based on the retail price you’ve set.

Retailer discounting. Different than price-matching. Make sense?"

And PG said:

"What Anthea said.

Many of the misunderstandings about Amazon’s price-matching price changes end up being traced to some little webstore someplace that updates its database and prices every six months."

----

hope its okay to quote them here just wanted to reassure you. you can read more at
http://www.thepassivevoice.com/


Jacques

Orlyn said...

Konrath, I noticed a thread on Amazon yesterday about how to avoid indie books. And the reasons are sound for the new gatekeepers: bad writing compounded by bad editing. The problem is that their solution was to try and find only traditional publishers.

I'm wondering if there is something we can do to enhance the image of indie books that deserve to be read. A Konrath-esque stamp?

Anonymous said...

"I'm wondering if there is something we can do to enhance the image of indie books that deserve to be read."

1. Do more indie book reviews on your blogs.

2. Review books that people might want to read, reviewing boring stuff probably doesn't help.

3. Give an honest review, good reviews about bad books ruin your rep as a reviewer.

Alan Spade said...

There are not many bloggers who accept reviewing ebooks in France. They prefer paperback. I hope it's not the same in the US.

BTW, I've made translated my short space opera story, Marinopolis. If someone want to give it a try : http://www.amazon.com/dp/B005US9UDA

Anonymous said...

How can Amazon make a business out of selling ebooks at less than cost?

The answer is they can't.

But they can put other distributors of books out of business.

And when the other distribution channels are no more, Amazon can raise their prices and start to make a profit on ebooks.

Authors will make money now via Amazon and that is a good thing. But to put all your trust in one big supplier whose tactics are to force other suppliers out of business, well, maybe that's not such a good thing.

TeriB said...

"I'm wondering if there is something we can do to enhance the image of indie books that deserve to be read."

I look for indie-published books that have few or no reviews and review them. If the book sucks, I always give specific examples about what failed - to help the author if they are interested in improving their craft. I've learned a lot reading well-constructed critical reviews myself.

I also call bullshit on other reviewers who gave false reviews, in my review.

I'm sure the author of that quote was pointing towards some kind of "Indie-Approved" stamp but I cringe to think of the volunteer hours involved in creating, managing, and administrating such a project.

There will be indie-slander by anyone invested in the status quo for a while, and they will point to the barely literate stuff to support their position.

If it's a good book, readers don't care who pushed the "publish" button. And I think that after a while, it isn't going to matter very much anymore whether a book was published Indie or Trad.

TeriB said...

Reading all these posts about pricing I am reminded of a boy I knew in high school. He was a genius writer from elementary school. He wrote beautiful, lyrical, perceptive stuff. And he was utterly in love with writing.

But he was shit at math. He didn't have aptitude for it, but more importantly he didn't want to work on learning it.

He said all the time "I don't need math. I'M GOING TO BE A WRITER."

T Ludlow said...

In 2008, the UK Sunday newspaper the Observer (the sister publication to The Guardian) published an insert on books and publishing. Their breakdown of the cost of a £20 hardback was as follows:

Retailer £11.00
Publisher £3.50
Author £2.00
Production £2.00
Distribution £1.00
Promotion £0.50

They also noted that the average income of a UK author was £16,000 (a third of the national average). However, once you removed high flying authors and celebrities from the equation the average earnings for the remaining 50,000 authors was £4,000. As a result only 20% of UK authors in 2008 were making a living as writers.

bdillahu said...

Joe,

I'm not sure I understand your emphasis on having the price printed on the book. I understand about the various models of pricing (at least I think I do), but I don't see where having the price printed on the item or not really affects things. I know that I've ignored the printed price for years, just like I ignore the "sticker price" on a car. The vendor I'm dealing with in either instance will have a (possibly different) price of their own, and what comes out of my wallet is what I care about.

I mean, if I order a physical book online from Amazon, I never see the cover price. I see what they advertise and charge me. Why do I care what they print?

Now I know I care if they have contracts with publishers, etc. that limit/enforce what they can do, but that (to me) seems separate of the printed price.

Guess I'm just saying that it seems like your emphasis doesn't match the concern.

Bruce

MP said...

Hi Joe:

I agree with you on leaving the price off the cover. The problem is, from what I've heard (Dean Smith just blogged about it), many indie booksellers will refuse to carry a book with no price on the cover. So for an indie author who probably already faces a challenge to get her books into a physical store, wouldn't this just add another hurdle?

You've mentioned that you've met dozens of booksellers over the years. Any thoughts on whether they truly care that much about the price on the cover?

Thanks.

MP

Frank R. McBride said...

I know I am late to this specific post, but I have thought about this whole "agency model sucks" debate of the past few weeks and wanted to chime in. I think there are some major flaws in these arguments and it is not as easy as "agency model" sucks.

Under the wholesale model, an ebook that retailed for $9.99 was earning the author $3.12. Under the agency model, an ebook that retails for $9.99 earns the author $1.75.

Lets turn this argument around. Under the agency model, an ebook that retails for $9.99 earns Amazon $3.00. Under the wholesale model, an ebook that retailed for $9.99 netted Amazon a loss of $2.50. So - how much longer do you think would sAmazon be willing to adopt the wholesale model?