Tuesday, August 25, 2009

A Few Thoughts on Pricing

As publishers try to figure out and work their way into new business models, there's been lots of discussion about ebook pricing and timing of releases of ebooks vis-a-vis print titles. Questions include, "How should publishers set the price of an ebook?"; "What should be the relative price of the ebook to the print edition?" "Should they be released simultaneously? Print first? Ebook first?"; "How can publishers train readers to value ebooks more highly?"

Some of the most thoughtful conversations are taking place at my friend Mike Shatzkin's blog, The Shatzkin Files. I nearly always agree with Mike (and I'm usually wrong when I don't) but in his most recent post, Mike postulates a "debut pricing" model for the simultaneous release of "e" and "p" editions of new books that I'm having a hard time with. To oversimplify, the idea is to price the ebook 'high' upon its simultaneous release with its print edition and then to lower the ebook price at a later date (in Mike's suggestion, six months) when the initial sales frenzy surrounding the print edition has presumably slowed.

The argument is that this maximizes print sales (and boosts rankings for bestseller lists) while still allowing the hardcore digerati to get their hands on the book in e-form if they want it badly enough. A supporting argument is that publishers are not in the business of satisfying the few (ebook readers who want lower prices and simultaneous release) but rather are in the business of satisfying shareholders who want revenue and (if they're doing it right) profit maximization. These are understandable positions for Big Six-type publishers to take, invested as they are in print infrastructure.

To my mind, this approach and others like it break down because they assume a publisher-centric world that is fast evaporating as well as assuming that the 'e' and 'p' versions of a title compete with themselves in a vacuum.

First, to the extent that publishers have had the ability to set prices in the past, that ability is eroding quickly. The virtual collapse of the supply chain, the sheer volume of new titles, deep discounting by online and bricks and mortar retailers and the skyrocketing growth of the used book market make publishers' suggested prices virtually meaningless. At the same time, while a traditional discount schedule might be in place, retailers' co-op and other merchandising programs are driving publishers' net receipts and profits lower despite ongoing efforts to reduce costs. The result is that a small number of retailers are setting prices (lower) and a very large number of reader/customers are determining value (lower still) by voting with their wallets.

Which brings us to the print/digital relative pricing schemes. The debut pricing model assumes the consumer has no other choices. That may be the case for the hottest of the hot new releases, but those are rare. In the majority of cases, the shopper doesn't have to have a specific book today and he or she will simply move along to another title for his purchase. Or a video game. Or go to dinner. Or watch "Mad Men". Will that consumer come back or is it a lost sale entirely? (In some cases, the consumer may decide he or she wants the book, but not for 80% of the $29.99 hardcover price and default to one of the many torrent sites where books appear virtually simultaneously with--and sometimes before--their trade release.)

Sure, there are games to be played in the short term. As long as Amazon pays publishers for Kindle sales on the print price, publishers can optimize in the short term, but Amazon's subsidy of book prices with Kindle sales won't go on forever and increasing the volume of unit sales is really the only long term solution, and you don't do that with high prices.

Publishers may attempt to set price, but readers will ultimately determine value, and that's where the price will end up, legitimately or otherwise.Why fight your customers? More importantly, why fight your potential customers, many of whom you've never interacted with or made a sale to?

Why not, instead of trying to train customers to act against their interests and instincts in accepting high pricing initially, try to expand the audience of readers? If margins are declining faster than your ability to cut costs, you have to expand volume and Econ 101 taught us all that volume increases at lower prices. (Don't tell customers about your cost structure; they don't care. Just ask GM and Chrysler.)

In any for-profit business, profits must be sustained and shareholder value must be increased for the business to remain viable. As a publisher I'm all for that.What often gets left out of that "Mom and Apple Pie" statement is "over the long term". Publishers can optimize profitability for the short term or they can build models and grow readership for the future. If you do too much of the former, you many not have a chance to do the latter in the future.

It's a reader-centric world now. And readers are smart.