Apr 11 2010

Indoctrinated Into Discounts: Will the Agency 5′s Gamble Payoff

By Jane • Ebooks, Letters of Opinion • • Tags: , ,

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Are you sick of the talk about pricing? It’s my current obsession, as you can see by the propensity of my midday posts to include something the topic but as it affects us within the reading community so tangibly, it’s hard NOT to be frustrated with the current state of affairs.

Here is what I believe is the publisher’s position:

1. Hardcover, specifically the sale of front list titles, form the core of the Big 6 (who in turn sell about 75-85% of the fiction market). Publishers have the highest margin per unit of sale from print hardcovers which are sold to the trade (wholesalers, booksellers, etc) at discounts of 30-60% off the list price depending on the account. Independent bookstores with low buying power get smaller discounts and wholesalers with the ability to move hundreds of thousands of copies garnering the largest discounts.

2. Digital books, perceived to be of lower value to consumers, cannot provide publishers with the same amount of overall revenue because a) the margin per unit of sale is lower (even with “agency” pricing) and b) volume cannot make up for the loss of per unit margin of sale.

e.g. While the growth of digital music purchases grow exponentially each year, the increase in volume has not made up the difference in the loss the CD market has presented to the music industry.

3. Thus, publishers believe that it should do two things:

a) slow down the rate of ebook adoption

b) increase the margin of an ebook sale

By slowing down the rate of adoption and increasing prices, the belief is that new entrants to the digital market will be less inclined to demand a $9.99 price point made popular by Amazon.   I read an article at Psychology Today that refers to this as anchoring:

At issue is the phenomenon of "anchoring," discovered by Amos Tversky and Daniel Kahneman. When people don't know what a fundamentally new product should cost, they are strongly influenced by the first price they encounter.

Further, any individuals pushed from the digital market back to the print market is considered a plus for publishers because the print margin is larger.

The margin under digital books was the same under the previous business model which was the same as under the print model. However, the danger publishers perceived was that

a) customers would become inculcated to the $9.99 price point and less
b) Amazon would become such a dominant force in the market that it would be able to push the retail price of a digital book lower so that Amazon would no longer be taking a loss on its discounted digital hardcovers.

I believe the first is true but the second not true. Regardless of what the price was going to be, Amazon was not going to own 75-90% of the book market much like Apple owns the digital music market. Apple and Google would be too powerful for Amazon to wholly own the digital market as it does now. In fact, this is what Random House is banking on. (As an aside, the iBooks App in the App Store is the number one free app and Kindle App is the 22nd free app for the iPad).

In any event, the publishers have decided that to forestall losses that do not resemble the music industry’s CD revenue loss is to take control of pricing and raise the prices. Remember that the digital market as of the end of 2009 was approximately 4%. It’s likely grown since that time given all the Kindles and iTouches given at Christmas time, but the publishers are banking of behavioral shifts in to their benefit. This strategy works if the following is true:

1. The change of readers’ buying habits from “buy” to “wait, rent, buy used, or pirate” represents a negligible amount (and by negligible I mean the percentage of revenue lost is of no import).

2. Some portion of the digital reading market is pushed to buy paper books.

3. The incoming market of readers are willing to buy at the higher price. I still remember the point of BISG survey was that when the digital book market increases by 1/3 at least every 6 months, publishers have an opportunity to reindoctrinate people at a different price.

Subpart 3 is what I am wondering about. Anchoring presupposes that this digital book is a new product and thus the value assigned is unknown to new entrants. However, if most readers buy at a discount and are predisposed to believe that a digital product is of less value than the physical counterpart, isn’t there already an anchor?

Most readers buy books at discount whether it is at Wal-mart, Target, Costco, grocery stores. I have heard that retail sales at national chains like BN, Borders represent sometimes as low as 5% of a front list book’s sales. Most people, the great majority of people, buy at a discount. If you are used to buying a discount in paper and then move to digital, you expect not only to get a discount but a greater one.

The perception of all digital products is that it is less costly than a tangible one. You see this in the pricing of all digital products. I think you would be hard pressed to find one digital product that is priced higher than the physical one prior to this the wholesale adoption of the Apple Model.

Subpart 3 is affected by two things. First, the public’s indoctrinated desire not to buy books at full cost. Second, the perception that any digital good must certainly cost less than the comparable physical good. No matter how many times that publishers and others tell people that there are only minor cost differentials between the creation of the physical good and the digital good, very few people believe this. The concept doesn’t match the consumer’s own reality.

I think that the publisher’s success at keeping digital prices higher than they were prior to April first depends a great deal on Subpart 3. Publishers are making a gamble here. What I perceive will be a blow to publishers is if books are replaceable. Because if individual titles are replaceable by a lower cost good offered by a publisher that allows discounting (Random House, Harlequin, Indie pubs, digital first houses), then the Agency 5 are sunk. However, if the frontlist titles are not replaceable (i.e., you have to have that Briggs/Roberts/Butcher/Brown/Sparks hardcover), then the publisher gamble might be successful.

What do you think? Is my theory all wet? Does your consumer behavior match that of the publishers? Are certain titles irreplaceable to you? Will higher ebook prices mean a difference in buying behavior?

*Sidenote, I have heard the backlist also makes up a great portion of sales, but I don’t know how much. I also think some publishers are going to be better able to whether the pricing storm. For instance, Penguin is clearly in a financial position and a publishing position to demand greater concessions from Amazon. Others in the Agency 5 may switch back to wholesale if Random House shows a nice profit and ebook sales figures continue to rise precipitously.

**Sidenote 2, my library has an express option where you can pay $1.00 per title to not wait for a copy of a new bestselling hardcover. This might be one way for libraries to raise funds and readers to have quick access to those must read titles.

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By • Ebooks, Letters of Opinion • 94 • Tags: , ,