Performance Management Solutions

The dispute between Amazon and Macmillan is interesting but oddly founded. The assumption in the trade is that Amazon is artificially subsidising the price of eBooks to offset the very high cost (299-699 USD) of their eBook reader, the Kindle, and that the publishers (Macmillan, in this case) are trying to keep the price of eBooks artificially high so as not to impact their print sales. Thus, both parties are in the ‘wrong’ as far as pricing is concerned (but not as far as their respective, very traditional, business models are concerned).

What was interesting, though, was Amazon’s response to the launch of the Apple iPad (which all happened at about the same time) – after refusing to sell the Kindle outside the USA, they suddenly did a volte-face and announced, the week before the iPad launch, that the Kindle was to be immediately available in Europe. Then, showing their true colours, Amazon priced the Kindle in Europe at 200 USD more expensive than in the USA (499-899 USD – which, for the basic model, is a 60% uplift) – i.e. let’s rip off the Europeans – and then, bizarrely, they also announced that, instead of being between 2.99 USD and 9.99 USD per download, eBooks in Europe would be priced at between 4.99 USD and 13.99 USD for exactly the same version. Amazon cited ‘increased costs of distribution’ (really?) for the price increase. Clearly, Amazon thinks Europeans are stupid. They would have been wiser to claim that Europeans are less price sensitive than Americans (who seem to expect to get everything cheap).

Turning now to the other side of the argument – pricing from the publisher’s perspective. To produce an eBook version of a published book (very few publishers produce eBooks as the only version) the publisher simply takes the pdf files provided to the printer, re-sets the cover to show only the front, and then converts the files to the three eBook formats (mobipocket for the Kindle and some phone-type devices, EPUB for the rest of the eReaders, and webpdf for those who want to read on their computers). The cost of producing these three versions is based on the number of pages and for a 264-page book it is around 125 USD. Thus the extra cost of producing an eBook is very low and so, at 13.99 USD (the Amazon eBook price in Europe) the re-seller gets 8.39 (60%), the author gets 3.91 (assuming the 70% of publisher’s revenue to author suggested by the new aggressive Amazon policy for Amazon published eBooks) and the publisher gets 1.69 – and so they only need to sell 74 eBooks to cover all their costs and anything further is profit. And if Amazon is the publisher and re-seller, then they are raking it in, taking over 10 USD per book or 2.5 times what they pay their authors.

But the point being missed by everyone at the moment is that the cost of creation of a book – no matter whether it is to be printed or made into an eBook – is exactly the same up to the point of the final printer’s pdf. So using some back-of-the-envelop but reasonably accurate figures from a small publisher -

Editing and copy-editing – 3000 USD
Cover design and setting – 3000 USD
Miscellaneous – 500 USD (setting up for POD/printing/eBook)
ROI – say 20% -

Total 7800 USD

Now, with re-sellers like Amazon demanding 60% of the retail price and the author getting up to 40% of the publisher’s revenue (thus 16% of the retail price), the publisher is receiving just 24% of the retail price. So, with a 264-page book, for which the market will pay around 15 USD for a paperback and 9.99 USD for an eBook (Amazon pricing), the publisher receives 3.60 USD for a paperback or 2.40 for an eBook and thus has to sell 3250 eBook copies just to recover costs and make a 20% ROI.

Now factor in the actual printing, marketing and distribution costs, and the revenue from a printed copy is closer to 50 cents and thus the breakeven sales approximates to 15,600 copies – and given that new novels generally only sell around 2500-3500 copies, this is clearly unrealistic and such books will have to be subsidised by other titles. And this, I think, is why publishers are pushing up the price of eBooks: because they make 2.40+ per copy to help them offset the losses they will be incurring on the printed version and/or to bring down the overall breakeven sales point.

Amazon claim that they are acting in the best interests of the customer/reader and that the publishers are not – but this is disingenuous for, as we can see, it is Amazon who is grabbing the lions share of the revenue. The publishers, on the other hand, are saying that it is Amazon who is acting against the best interests of the customer and restricting competition because their pricing policy will restrict the number of books being published since publishers do not have inexhaustible supplies of cash with which to subsidise loss making titles – this is slightly closer to truth. If Amazon and their like accepted either a fixed price for their stock (which is what happens in most other retail sectors) or the trade discount was limited to 40%, then publishers could publish more books and the customer would be better served. This tiff has shown that we need to move away from the remnants of ‘recommended retail pricing’ and towards cost-based pricing.

An alternative is to position the product as an eBook and seek to recover the costs from that before launching a printed version. For this to work with the current cost model, the eBook needs to be positioned at 9.99 USD (3250 copies to breakeven) or 13.99 USD (2320 copies to breakeven) and it is still open to question as to whether this is viable.

Another model is to demand that the writer carries the cost of the editing, it is, after all, a cost associated with the creation of the manuscript, and the publisher would only proof-read/copy-edit. This would probably reduce the costs to 5400 USD. If this is combined with viral marketing and the deliberate non-use of Amazon and the like as the main distribution channels, then an eBook priced at 5 USD would return the publisher 3 USD giving a breakeven sales of 1800. But 5 USD is probably too low as a retail price and does not encourage the reader to value their purchase since it is less than a couple of cups of coffee or a BigMac – this is purchasing psychology – so pitching it at 12.25 USD (Amazon and the big publishers, none of whom are stupid, know that the real price at which eBook readers value their purchases is between 9.99 and 13.99 USD) and the revenue to the publisher would be 7.35 USD and the breakeven sales 735 and that is eminently doable. Variations on this could also work but only after some market testing of the psychologically important ‘perceived value’ pricing point to get it right.

So, if the book was positioned as an eBook first and as a printed version second, then the traditional publishing model will have been reworked and far more books would reach the market both as eBooks and as printed copies. However, I doubt that Amazon or the traditional publishers will want that to happen since it is so counter to their current business models – which, despite the presumption of being modern and of the internet age (especially Amazon), are actually no different to what has existed in the industry for the last 100 years.