Authors, Books, Business Models, Commerce, Reading, Technology

The Expensive e-Book: The Illogical Reasons Why Paper Books Can Sell for Less

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Nathan Bransford is a literary agent turned author. Dial will be publishing his first children’s book, “Jakob Wonderbar and the Cosmic Space Kapow,” in May. And he’s now writing for CNET. So his insider’s knowledge of the book business and publishing industry is substantial.

In a recent analysis, Bransford explains why e-books can list at higher prices than print books, despite our mental model that e-books should always be substantially cheaper.

The reason? Simple economics. Perhaps too simple.

Publishers typically receive about 50% of the cover price of a book in the wholesale model. The retailer then prices the book within that margin, anywhere from 0% up. So discounting the book to customers eats into their 50% but leaves the publisher’s share unchanged. Even at a 30% retail discount, a retailer can still make 20%, but they’re taking that discount out of their share, not the publisher’s.

E-books brought in an element of uncertainty and opened up another front in an ongoing price war. Amazon was in the midst of a battle with big retailers over print books, with both sides going so far as to sell their print books at a loss in order to entice customers to buy other things with them. Then, Amazon caught itself selling e-books at a loss in order to gain marketshare for the Kindle. For customers, books of all types were very affordable.

But once the agency model was put in place (a model the European Union is currently investigating to see if it violates anti-cartel laws there), publishers could set their own price, and the mathematics of old once again factored into consumer prices. Amazon’s loss-leader on e-books ended, while the loss-leader on print often continued.

So when a reader of Bransford’s blog noticed that “The Girl Who Kicked the Hornet’s Nest” was $0.10 more expensive as an e-book than as a print book, it caused some confusion. Here’s the explanation:

E-book: $11.99
Publisher: $8.39 (70% of e-book price)
Amazon: $3.60 (30% of e-book price)

Hardcover: $11.89
Publisher: $13.95 (50% of $27.95 list price)
Amazon: – $2.06 (customer price minus $13.95 paid to publisher)

Bransford’s economic analysis is over-simplified to illustrate a basic point — the wholesale model provides a better gross cut of the cover price than the e-book. However, it also represents a potentially illogical line of thinking, namely that the gross margin for print wafts down to the bottom line unimpeded by things like returns for physical books, printing and paper costs, and other expenses that take a bite on the way down, dramatically decreasing the net income for print.

It raises for me a question — are publishers concerned about income or are they more comfortable preserving the status quo? Certainly, there’s a tension here that clearer mathematics might settle. As Bransford summarizes the possible thinking of book executives:

Publishers make more money on the hardcover sale. . . . this also has the effect of slowing down the rate e-book adoption or steering people toward the print editions. . . . I’m guessing they’re probably okay with that. They have print operations to consider and bookstores that they’d like to survive as long as possible. As long as it’s still primarily a print world (and it is), publishers have many rational incentives to protect their print sales.

I’d argue with Bransford’s assertion that the publisher’s incentives are predominantly rational — if they’re based on revenues instead of net income, they’re questionable; if they’re based on existing contracts and obligations, they’re not rational but institutionalized, a difference worth noting; if they’re based on current sales proportions (print selling the majority of books), they’re rational but only for the time being; and if they’re habituated, they’re certainly not rational but comfortable. And by pricing their e-books against the revenue model of print instead of the income model of print, publishers are creating a pricing practice that has consumers justifiably confused, as Bransford notes:

But the biggest problem . . . is that it creates a great deal of consumer confusion and angst. It doesn’t make any intuitive sense for e-books to cost more than paper. By keeping e-book prices high, it opens up a huge opportunity for the 99-cent Kindle bestsellers to exploit. Also: As the music industry found out, annoy digital consumers at your peril.

The customer expectation that e = free or e = cheap — created largely during the early days of Kindle market penetration — strikes me as a major conceptual hurdle we’re in the midst of overcoming, through more expensive iPad apps, the realization (as Joe Esposito talked about yesterday) that free can be costly, and other pricing changes based on the fact that print is less able to carry the full costs of a hybrid print/online publishing operation. However, until dedicated e-readers become free (as some are projecting), consumers expect to make up for the expense of an e-reader by getting e-books at a lower price, adding to the pricing hurdle.

Publishers are certainly doing better math (getting to net income, not just comparing revenues), and they should be factoring in their desire for sales into authors and series that can create loyalty over the long haul, along with the fact that e-readers tend to be owned by their most loyal customers.

The agency model can work for e-readers, but with print a loss-leader for more and more mainstream titles selling through large retail outlets, looking only at the revenue line can be misleading for both publishers and consumers alike.

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About Kent Anderson

I am the Publisher at AAAS/Science. Previously, I have worked as CEO/Publisher of the STRIATUS/JBJS, Inc., a publishing executive at the New England Journal of Medicine, and Director of Medical Journals at the American Academy of Pediatrics. Opinions on social media or blogs are my own.

Discussion

21 thoughts on “The Expensive e-Book: The Illogical Reasons Why Paper Books Can Sell for Less

  1. On the net revenue side, I’d guess that expenses related to e-book publishing are at least as great as those related to print (about 20% of overall costs), for scholarly publishing anyway, where returns are generally much, much lower than for trade publishing

    Posted by Sandy Thatcher | Mar 15, 2011, 8:00 am
    • Please elaborate. If it’s beyond an attribution switch, what are the expenses an e-book incurs on its own that amount to 20% of the sale price?

      Posted by Kent Anderson | Mar 15, 2011, 9:12 am
      • I think you’re misreading Sandy’s comment. He’s saying that the physical costs of making and shipping the print object are around 20% of the total costs of doing a book. Hence the e-book discount should only rationally be 20% less, which is apparently unacceptable to the e-book buying public.

        Posted by David Crotty | Mar 15, 2011, 10:00 am
      • I meant more than that, actually. This excerpt from the new AAUP Report will give you just some hint of the added costs of e-book publishing (and there are many more than just those noted here):

        For two decades, we’ve been “just around the corner” from a universal format for digital publications. Until we turn that corner, it is likely that market channels will continue to evolve that take advantage of different formats. For example, PDFs are currently not accepted by the iPad (only EPUB files), and that situation is unlikely to change. Google Editions avoids the issue of PDFs by ingesting into its own proprietary reader, but the Kindle wants its MOBI format just so. Older titles must be upgraded to the best flavor of the next format. Search engines may want blurb copy in easy-to-process HTML, while distributors want their data in ONIX. TEI XML may be best for some purposes and future audiences, while NLM XML may be best for others. Perhaps the most complex problem is setting the level of quality assurance and proofreading that is necessary for every format, since a PDF is a different representation than a reflowable EPUB in an iBookstore, or the same book on the Kindle. How do we build quality assurance, in multiple formats, in a way that will be able to evolve along with the reader, browser, and library systems in the future?

        Posted by Sandy Thatcher | Mar 15, 2011, 10:49 am
        • Thanks, that’s very helpful. As Joe mentioned yesterday, QA is still a major factor in creating a worthwhile e-reading experience, I completely agree. David makes a point elsewhere that allocations to print vs. e will probably shift as market dominance shifts, meaning that editorial costs “for print” will migrate — or become an isolated standalone for “content creation” with each channel analyzed for formatting and distribution costs.

          Anybody wearing a green eyeshade out there who would like to chime in? How are your accounting and budgeting practices changing?

          Posted by Kent Anderson | Mar 15, 2011, 10:52 am
  2. I do not know the tax situation in the US, but in the UK, e-books (and audio books) are subject to VAT, whereas print books are not. As VAT is now something like 25 %, this is a significant factor in e-book pricing and why one regularly sees new books on Amazon.co.uk more expensive in e-format than print format. The cheap e-books available on UK Amazon consist of “loss leaders/marketing specials” by mainstream publishers, books that are a few years old so into their long tails, out of copyright books, and a massive number of self-published books (mostly non-fiction and genre).

    Although this is a great time for keen readers, the e-format has not so far heralded an overall cheaper experience, if you like to read the best newish books, that is. (In the UK. I appreciate it may be less the case in the US, but US Amazon blocks people in the UK from seeing what it charges for its e-books.)

    Posted by Maxine | Mar 15, 2011, 9:15 am
  3. I’m wondering about books that have an expected print run of 1,000 or fewer copies. If they went straight to digital, what would appropriate price point for selling the books?

    When printing costs are taken out, how low of a price can sustainably be charged by a publisher?

    Posted by John Hilton III | Mar 15, 2011, 9:36 am
  4. Surely as e-books continue their rise, they’ll make up a larger and larger proportion of a book’s total sales, and as such, they’ll need to carry the load for covering an equivalent proportion of the costs of production.

    The theory often espoused is that since e-books generally cost less, you’ll make up the difference in volume. That may make sense for a best-seller, where by pricing the book at $2.99 or less, you’ll massively increase the number of copies sold. But for scholarly material, where you’re dealing with specialist material that only appeals to a limited community of experts, there’s no volume to be added. If there are only 500 molecular phrenologists on earth, you’re not going to sell more than 500 copies of your advanced molecular phrenology manual no matter how you price it.

    Posted by David Crotty | Mar 15, 2011, 10:05 am
    • @David
      I would disagree. For me, if the price was low enough, I’d take the chance and buy books I normally wouldn’t, including scholarly texts on all sorts of subjects that I don’t know intimately, but am curious about. With our current world population, there’s a potential for many more sales. The book publishing business is looking for guarantees, just like the movie/music industries, and will continue to lose out if they follow the same path.

      Posted by Batarang | Mar 19, 2011, 4:51 pm
      • That’s a perfectly reasonable attitude if one is thinking of material that’s accessible to the non-specialist reader. The problem is that a large amount of scholarly publishing is targeted to the specialist, presenting cutting-edge information with an assumption that the reader has a deep understanding of the field.

        How many books of higher level mathematical equations are you willing to buy? How many books on obscure Latvian poets of the 13th century (with the poems written in the original Latvian, of course)?

        There are some types of publishing where volume is not the answer, simply because there is a limited number of people on earth who can understand the material. Cutting prices just means less revenue from the same number of sales. Relying on reaching a wider audience via lower prices means an end to specialist material and a dumbing down of the literature to reach the broadest audience possible. That’s not a bad business model for some types of publication, but it does a disservice to the research community.

        Posted by David Crotty | Mar 19, 2011, 6:20 pm
        • I have mostly agreed with David on this point in the past, but I have seen data that suggests audiences for research material that goes beyond the core constituency in the academy. Take a look at the figures for the number of people who go to CrossRef but cannot get access to articles. The numbers are large. Yes, they vary by discipline. I think there is some elasticity of demand, more in some fields than others. Finding ways to monetize users who are outside the academy is an interesting business problem.

          Posted by Joseph Esposito | Mar 19, 2011, 11:54 pm
          • I have a Ph.D. in Genetics and 25 years of experience reading and editing science papers in a wide swath of the life sciences. If you put a biology or medical paper in front of me, with time and concentration I can work out the details. Give me a chemistry paper and depending on the field, I can likely get the gist of it. Give me a mathematics paper or a physics paper and I’m not going to get much beyond the abstract. Even with my training and experience, most high level research literature is beyond my understanding.

            Journal research articles are written at an expert level, for the specialist with an assumption of a deep background in the field. This material is simply not accessible to the general public that lacks that background. I think it’s a mistake to try to extrapolate from people clicking on links to an actual demand for high level scholarly material by the general public. I know I click on plenty of links in Google searches that I quickly abandon.

            The argument you’re making is essentially that being made by companies like DeepDyve–that there’s a tremendous level of demand for scholarly materials outside of the current set of users. Unfortunately, the sales numbers I’ve seen from DeepDyve’s content partners have not shown that this market exists. The same argument is often employed by open access advocates as well—that the general public has great interest in reading the research papers paid for by their tax dollars. The reality of the situation though, is that very few members of that public has the training necessary to make head or tails out of a typical research paper.

            That said, you’re right, it certainly benefits an academic publisher to create products that reach readers outside of the research community. But those products are separate from those created for the specialist and can’t serve to replace the high level articles the research community requires. And those communities, because of their level of specialization of advanced knowledge, are by their nature limited in size.

            Posted by David Crotty | Mar 20, 2011, 9:50 am
          • And we’ve been trying to figure this out for years. The primary experiment was to issue almost all monographs in paperback, not just for college course use but to tap into that extra, nonacademic market. But for the future a more promising scenario will be to explore selling at a more granular level, i.e., parts of books since the nonacademic audience may not be interested in entire monographs but in some sections of them. Mike Shatzkin recently suggested this as a strategy in a talk I attended.

            Posted by Sandy Thatcher | Mar 20, 2011, 11:45 am
  5. The 20% figure for what you can save by switching from print to digital is wrong. First, as Sandy notes above, there is more overhead with digital products, in part because of the variety and dynamism of file formats. But more importantly, a print book in a bricks-and-mortar bookstore is a marketing tool as well as a delivery system. Most book purchases–literally most–are made at the point of sale, which explains why publishers invest so heavily in their packaging. For books, including most scholarly books, that are not sold in bookstores, the marketing factor is much smaller and may be as low as zero. But then you come up against the ongoing reluctance for media to cover books that don’t appear in print (and hardcover to boot) and the marketing angle reasserts itself. It is a strategic blunder to put a print business and a digital side by side and compare them. Each has its own physics.

    Posted by Joseph Esposito | Mar 15, 2011, 2:25 pm
  6. I am replying to David’s remark here. DeepDyve is a client of mine, so it would not be appropriate to engage David’s remark directly in this forum. The general point I would make is that there are about 24,000 peer-reviewed journals. Not all of them are accessible only to researchers in the field. Second, in some fields people with advanced degrees go off to do other things. I know a former graduate student in physics who is now a CTO and economists who work in venture capital. As I said in my earlier comment, I mostly agree with David on this, but the line between the professional and occasional reader is sometimes porous. Why be inflexible? Why not experiment?

    Posted by Joseph Esposito | Mar 20, 2011, 5:58 pm
    • You may then be privy to data that I haven’t seen. But so far, the evidence presented does not show this to be a significant market (one anecdotal CTO does not a market make). Of course should it prove a lucrative business model, then I don’t see why any publisher would bother splitting revenue with a third party when the same results could be accomplished merely by dropping standard pay-per-view rates, and cutting out the middleman.

      But you are correct in that one can not paint all of the scholarly literature with such a broad brush. As one example, there is often great demand for medical research results from patients who suffer from a particular condition being studied. Even so, the training needed to fully comprehend those studies remains problematic, which is why, to use the most prominent example, we have an uninformed but vocal contingent still trying to tie vaccines to autism despite all the evidence to the contrary.

      Posted by David Crotty | Mar 20, 2011, 8:24 pm

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