Monday 19 September 2011

The Elusive Search for an E-Book Pricing Model

Perhaps it was appropriate that, shortly after buying a Kindle last week, I settled down into a transatlantic flight home, with the 12 September edition of the Wall Street Journal in hand. And there it was, staring me in the face on page 1 of the Marketplace section, an article entitled "e-Book Prices Prop Up Print Siblings." Now that I have a vested interest in the e-reader platform, the question of how e-book pricing differs from print books has become a matter of intense interest. The facts and figures as set out in the article make for interesting reading.

First, let's make a comparison between a hypothetical print book retailing at $26.00 and an e-book offering retailing at $12.99. Taking the print book first, from the $26.00 price one subtracts $13.00 for the retailer, $3.90 in royalty payments to the author and $3.25 for shipping and other handling, leaving a gross amount (don't forget returns) per unit sold of $5.85. By comparison, from the $12.99 retail price, one substracts $3.90 to the retailer, $2.27 in royalty payments to the author, and $0.90 for digital rights management, warehousing and prodution/distribution, leaving an amount per unit sold of $5.92 (returns are not a likely problem here).

These figures show that, to the extent that the e-reader publisher can increase the retail price, the greater will be its ultimate margin. Wait a minute, however! Wasn't the whole idea of the e-reader to offer the ubiquitous price of $9.99 per book. Raising the price from $9.99 seems antithetical to that pricing nirvana. What's the story here?

To appreciate these figures better, consider the major change that has taken place in the e-book industry. The starting point is described as "the wild days" of using the most popular titles as a loss leader (i.e., $9.99 or less), which days "are mostly over." In its place is an elevated e-reader price scheme anchored in what the article described as "agency pricing." As adopted by six major publishers and championed by Apple, "[p]ublishers worried about the deeply discounted $9.99 digital best-sellers promoted by Inc. agreed to set the consumer price of their digital titles. Under this model, retailers act as the agent for each sale and take 30%, returning 70% to the publisher."

The article then goes on to state that "[t]he major significance of agency pricing was that it made it impossible for a retailer to discount the price without the approval of the publisher." For discounting, read Amazon and its widespread $9.99 per book pricing policy, described as a means for building market share, even if "it actually lost money on the sale of many of the book industry's most popular titles."

Personally, I am bit disheartened because I had dreamed of using the Kindle platform to purchase book after book at that magic price of $9.99. Those dreams have been shattered. Standing back however from my disappointment, this apparently steady increase in the price of e-books is a fascinating example of a nascent industry seeking to find a workable pricing model.

On the one hand, we have the comment from an unidentified publishing executive that "'[i]f e-book prices land at 99 cents in the future we're not going to be in good shape." Certainly, the e-book platform carries with it the potential for downward pricing of books.

On the other hand, when is the difference in cost between the e-book and print versions of a book small enough to induce me to factor in the non-quantifiable tactile benefits of embracing a print version, the better to dog-ear, highlight and ultimately to place on the top row of my bookshelf? The problem is that, when I find out the answer to that question, the print version alternative may no longer be available. If so, then what will be the pressures on e-book pricing that will prevent an ever-increasing sticker price?

Don't get me wrong. As a published author, I am the last person to begrudge my publisher's bottom line. That said, as a reading consumer, I want to enjoy the benefits of the e-book platform at a reasonable (whatever that means) cost. Finding that balance remains an elusive goal. Something tells me that this so-called "agency pricing" model will not be the last word on the topic.

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