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.