If Publishers Can't Cover Their Costs With $10 Ebooks, Then They Deserve To Go Out Of Business

from the you-don't-price-based-on-your-bloated-infrastructure dept

With the legal dispute over ebook pricing going on, one thing we've heard over and over again from the traditional publishing industry and their supporters is that higher prices for ebooks make sense because of all of the "costs" that the publishers have to cover. This is a fundamental error in how pricing (and economics) works. It reminds me of the MPAA folks who demand to know the business model for making $200 million movies. Years ago, someone who understood these things taught me why cost-based pricing will always get you into trouble. If you start from the overall pricing, including overhead and other fixed costs, then you're not basing the price on what the consumer values -- and, more importantly, you're taking away your own incentives to become more efficient and decrease costs. Instead, you're just "baking them in." But the most important reason not to base pricing on overhead costs is that your competitors won't do that, and they'll under cut your price and then you're in serious trouble.

That moment of reckoning is coming for book publishers, even if they don't realize it yet. David Pakman, who watched all of this happen in the music industry for years, is pointing out that publishers are fooling themselves if they keep trying to rationalize higher ebook pricing:

In all the discussions about why book publishers demand that eBooks should be $15 and not $10, they say it is because they cannot afford to sell books at $10. That is, they cannot cover their legacy cost models on that number. Right. Which is why you must rebuild your cost structure for a digital goods industry with far lower prices. You start by paying your top execs much less than millions of dollars a year. Then you move your offices out of fancy midtown office buildings. Why should eBooks cost $15? Amazon is far more of an expert on optimal book pricing. They have far more data than publishers, since they experiment with pricing hundreds of thousands of times a day across millions of titles. Amazon can tell you the exact price for a title that will produce the most number of copies sold. Amazon is pretty sure that number is closer to $10 than to $15. Yes, they want to sell more Kindles. And they believe that lower eBook prices mean more eBooks sold which means more demand for Kindle. The negative coverage of Amazon is centered on them selling eBooks below cost in order to reach the $10 price point. But that is a function of publishers setting the cost higher than $10. If the profit-maximizing price for an eBook is $10, then publishers must adapt to set a wholesale price lower than that, even if it means your legacy cost structure doesn’t allow it. And that’s the rub.

The public seems much more interested in lower prices, not higher prices. You can understand why the publishers don't like it, but they really ought to learn how pricing elasticity works. They can make a lot more money with more optimal pricing.

Filed Under: ebooks, fixed costs, pricing, publishing