Wednesday, July 29, 2009

Essay: The Difficulty of Pricing eBooks Part I

Every Wednesday, I have an essay or feature article on any topic that catches my fancy!

One of the debates when it comes to eBooks is pricing: how much should an eBook cost? The big publishers fail at being transparent when it comes to the pricing of their books, and to a certain point, I don't blame them. Not that I'm an industry-insider or anything (and I suspect I'll get some things wrong so feel free to chime in at the comments section)--I'm not a book publisher--but here are some points I want to tackle and I'll divided them into three sections:

I. Book Production

Why is pricing eBooks difficult? When it comes to book production, the biggest reason is that publishers don't have data or an estimate how many books will sell. Why does this matter? Here are the following reasons:

1) Advances. A writer's advances is based on how many books the publisher expects to sell (which also determines how many books they should print). Admittedly, this is the easiest "problem" to solve since writers receive royalties (the advance is deducted from the initial royalties). It's easier on the publisher to price an eBook if they didn't have to pay authors an advance and merely a percentage of the sales (i.e. royalties). Convincing them of this, however, is a different problem altogether.

2) Editors and everyone else. Now here's where the real problem begins. Whether a book's an eBook or print, it needs an editor. Unlike authors, this is usually a fixed rate (i.e. they don't get royalties). This fixed rate is based on the expected sales of the book. If you don't have data on the expected sales of the book, how much will you be paying the editor? (Just because it's an eBook doesn't mean their rates go down.) There must be a minimum number of copies sold in order to justify, say, a $2,000 salary ($2,000 is an arbitrary number). If there's only a hundred copies of the book sold, that won't even cover the costs of the editor's salary. For big releases, this fixed cost is a good thing since the publisher doesn't have to pay the editor more if the books sell better than expected. Unfortunately, eBooks aren't necessarily big releases. Now apply this problem to everyone else such as the artists, the marketing department, and the rest of your staff. They work on a fixed income and you as a publisher determine this amount based on your potential sales for the year. This is the real stickler for the eBook industry.

3) Printing. The beauty of offset printing is that the more you print, the less each individual book costs: printing 10,000 copies is cheaper than printing 500 copies. That's not really the case with eBooks. Additionally, the publisher is committed to selling the number of books they print. If not, there's always the pulping option to save on taxes and inventory space. Unfortunately, you can't pulp unsold eBooks (but on the positive side, you don't have much expenses when it comes to reprinting).

In the book production process, in terms of eBook prices, it all boils down to whether a publisher will be able to sell a minimum amount of books vs the publisher's fixed costs. Whether it's a print book or an eBook, the publisher still needs to pay the staff. Yes, an eBook is cheaper to produce in the sense that you're not spending money on printing costs, but that's only one variable in a long list of people you need to pay. Which brings me to my second point.

II. Distribution

I'm using the word distribution here quite loosely. In some people's minds, they buy a book thinking a bulk of their money just went to the publisher but that's seldom the case. The traditional distribution model (a.k.a. three-tier distribution)--of business and not just books--tends to use this formula (actual percentages will vary but this is a rough estimate):

Producer (in our case, the publisher) - 40%
Distributor (i.e. Ingram) - 30%
Retailer (your local bookstore) - 30%

So when you buy a $30 hardcover, around $12 goes to the publisher. The rest go to the middlemen. In the American book industry, the distributor might also be the retailer, which if I'm not mistaken is the case with Amazon and the big bookstore chains like Barnes & Noble. Unless the publisher is selling their own eBooks, I see no reason why the eBook industry will vary from this model (which could be reduced to two tiers). When you buy an eBook not from the publisher, half of the sales doesn't go to them. That's not to say using eBooks as a delivery method is not without benefits to publishers. With print books, publishers need to ship books to the distributor, and even pay for the shipping of unsold stocks*. But that doesn't change the fact that when you buy a $10 book from Amazon, only $4 goes back to the publisher.

For me, this is an important matter to discuss and one that's often overlooked. Most consumers state that eBooks should be cheaper because there's no printing or shipping costs but while that's true, it's only a negligible percentage overall. Let's say printing and shipping account for 25% of the publisher's expenses in the production of a book. That roughly translates to $3.00 of savings with a $30.00 hardcover book because 1/4 (the 25%) of 40% (how much the publisher receives) is just 10% of the cover price. So are eBook readers content to purchase a "hardcover" eBook for $27.00? Most likely they'll complain it's still too expensive.

The next line of argument is that publishers shouldn't base the price on the hardcover price. Before I move on to the alternatives, what consumers must understand that hardcovers are cashcows for the publishing industry. Since they are relatively expensive, it also means there's a bigger profit margin for everyone involved, be it the publisher or the retailer: 30% of a $30 hardcover book is more than 30% of an $8 mass-market paperback. And as a publisher, whether it's for a hardcover or mass-market paperback, I'm still paying marketing/editors/artists the same rate.

Moving on to the second line of argument, an eBook consumer might say that publishers should base their prices on mass-market paperbacks. Now for the reasons stated above, it's in the best interest of the publisher that they sell hardcovers (when there is a choice between hardcovers or paperbacks). There are typically (there are more but I'm oversimplifying) three types of book consumers:

1) Those who buy hardcovers (hence the occasional mass-market paperback reprinted as a hardcover [i.e. Laurell K. Hamilton's Anita Blake series, Margaret Wis & Tracy Hickman's Dragonlance trilogies]).

2) Those who buy whatever comes first (hence the standard model of releasing hardcovers and then a paperback after a year or so).

3) Those who buy whichever's cheaper (hence one of the reasons for the existence of paperbacks in the first place).

If publishers do price eBooks based on paperbacks instead of hardcovers, it's a lower profit margin for everyone. It's also possible that it'll cannibalize sales of the hardcover release (those who fall under #2 or #3). There's actually a new variable thrown into the mix:

4) Those who can stand reading from a computer screen (hence the current generation's bias for print books).

Because of #4, eBook sales should theoretically be less than the maximum quantity of either #2 or #3 (because not everyone in #2 or #3 will meet the criteria of #4) so on one hand, this is a potential reason as to why eBooks won't cannibalize hardcover sales but on the other hand, also decreases the number of potential buyers for eBooks (at least at this point in time).

All things considered, an $8.00 mass market paperback should cost around $7.20 as an eBook. Is that a price eBook buyers are willing to pay?

III. How Publishers Earn Money

The problem with looking at I. and II. in isolation is that we're looking at individual books. The business model of publishers factors their entire print-run for the fiscal year rather than individual titles. For example, the marketing department's salary is not based on the marketing of any one book, but all of the publisher's books. This makes the breakdown of how much should go to the marketing department per eBook sold (and this reasoning easily applies to the other employees) difficult to estimate.

Another factor is that individual books don't necessarily need to earn out in order for a publisher to make a profit. This is an exaggeration but a publisher could release ten books a year and nine of them are flops yet the company is still viable. (Why publishers do this is best left to your interpretation, from the altruistic love of publishing--there are honestly other businesses which have a higher profit margins or less risk--to self-serving reasons such as not really knowing which of your lineup will be this year's cash cow.) The marketing department could still "earn its pay" if that one book sells really, really well.

And the reality is that most eBook pricing is based on the existence of print books. Depending on the format of the eBook for example, you don't really need a book designer if the eBook is just going to be released as a .txt file (you will need one though if it's a .pdf). A print-eBook hybrid publisher will have a different business model from that of a solely eBook publisher and from a pricing standpoint, the former will usually lose out to the latter (unless the former is giving away their eBooks for free or at a loss).

Price Breakdown

At the end of the day, it is difficult to nail down a universal breakdown of the price of a book--at least if you're a major publisher. Printing costs can be calculated, as well as author royalties (up to a certain point, especially if their royalties are progressive [i.e. the more it sells, the higher their royalties become]). How much percentage goes to the employees is more difficult to estimate, especially the more titles you have. Distribution is another problem as rates will vary from distributor to distributor (some publishers, for example, actually lose money by having their titles available on Amazon Prime).

Does that mean selling eBooks aren't viable? Of course not. Some publishers are making a profit selling eBooks, or at least know how to leverage them to their own advantage. In part II, I'm hoping to discuss how to use these facts to your advantage.

*To save on expenses, instead of shipping the entire book to be pulped, it used to be the case that a retailer/distributor could just mail back the book covers and destroy the product themselves. This is why there's a disclaimer in some books that if you find it without a cover, it's an illegal book. The same practice applies to magazines.


Kristan said...

Just wanted to say that I found this enlightening, although my eyes/brain started to glaze over towards the end... There's so much in this industry that's so hard to process!! That's something they don't tell you when you're a 9-year-old dreaming of being a published author.

Anonymous said...

Your ratios are slightly off, unless things have changed dramatically since I studied this stuff in college. Traditionally, bookstores got 40% and distributors got 15% of the cover price of each book sold. The publisher only gots to keep 35%, since the author gots 10% (sometimes 15%) of the cover price.

My understanding is that in the era of Wal-mart and Barnes & Nobel, the retailers are demanding bigger discounts, so the publishers' share has shrunk a bit, to around 25-30%.

With ebooks, there is no distributor, just the publisher and the ebookseller. IIRC, the usual arrangement is that the ebookseller and the publisher split the sale price 50-50, with the publisher paying the author's 10% cut out of their share. That still gets the publisher out ahead of the game, if only they could sell as many ebooks as they can paper books.