The publishing industry is right to be concerned over $9.99 price tags for bestselling e-books. One price has the potential to disrupt the current publishing model, as well as change how books are marketed and priced in the future. The good news is that pricing techniques can be used to effectively manage this transition.
Let’s establish a few fundamental facts:
If wholesale prices for hardcover and e-book editions are identical, an e-book sale is relatively more profitable because of lower costs. Printing, warehousing, delivery, and return costs are almost eliminated. Additionally, e-books curb a growing problem for publishers: the resale market, since e-editions can’t be resold on sites like eBay and Half.com.
$9.99 e-books stimulate demand, and lower prices induce customers to purchase more books. Plus, the electronic platform attracts new readers. Higher profits and increased demand are rare rays of good news these days.
$9.99 prices don’t really devalue hardcovers. We believe once someone adopts an e-reader, the majority of their book purchases will be electronic versions. As a result, $9.99 e-books and $27.99 hardcovers can peacefully coexist. Readers benefit by choosing the version that works best for them and their budgets. There are worse fates than being in a situation where customers switching to lower-priced products leads to higher margin sales and profitable growth. Finally, $9.99 e-book prices aren’t sustainable. How much longer will retailers opt to lose money on top-selling e-books?
A movie-like, phased release strategy (hardcover to e-book to paperback) isn’t the most profitable for publishers. First, who deemed the movie industry windowing strategy optimal? We’ve always believed that movies should be released simultaneously (say, a $29.99 pay-per-view or one-use DVD on opening weekend). More importantly, DVDs and e-books aren’t comparable products in the value chain. A simultaneous theatrical and DVD film release would result in massive cannibalization. Instead of paying full price at the cinema, a family of four could rent the DVD for a dollar. In contrast, e-books are highly profitable and don’t have the potential for such cannibalization. So e-books can be profitably made available before—or simultaneous to—the hardcover release. Publishers can even sell enhanced e-book versions at higher retail prices than hardcovers.
The verdict on $9.99 e-books depends on how the adoption of the format affects brick and mortar retailers. These longtime allies provide significant marketing benefits to publishers—there’s tremendous value to customers in being able to physically thumb through a book, receive in-person recommendations, and make impulse purchases. Losing 10% to 15% of in-store hardcover sales to e-books can sink brick and mortar retailers. Therefore, the question that publishers must answer is: do they want to give physical retailers additional time to plan and react to the inevitable cannibalization of hardcover sales as more customers favor e-books? If publishers want to slow down the e-book revolution, they can delay the release window or set minimum resale prices (which the U.S. Supreme Court ruled legal in 2007), but neither strategy is a solid long-term business decision.
Whether publishers opt to slow down or embrace e-books, a key opportunity will be to capitalize on long-tail sales. It’s now viable to bring millions of currently out-of-print books back to the market and start earning new profits.
E-books are perfect to price dynamically—it’s impossible to set the right price for so many products. As the marketplace has learned with iTunes, all music isn’t worth the same price, and all e-books aren’t worth $9.99—particularly throughout their life cycle. Publishers can change the wholesale prices of e-books based on demand. Just to be clear, strong demand doesn’t necessarily translate to “charge higher prices.” The right price depends in part on the shape of demand. It may be more profitable to raise prices of slow-selling classics (those who value well-known books will pay a premium), for instance. The goal of dynamic pricing is to find (and constantly adjust) the price that generates the most profit from each e-book.