Although the Apple, Macmillan, and Penguin lawsuit is still pending, now that the court has approved the Department of Justice settlement terms with Hachette, HarperCollins, and Simon & Schuster and the termination of their agency pricing contracts, all publishers will no doubt be revisiting their e-book pricing models.
The pricing strategy proposed here is designed to improve publisher bottom lines while also supporting the ability of bricks-and-mortar bookstores to compete with Amazon, as the goal of ensuring a competitive reseller environment has been consistently given as the primary reason for using the agency pricing model.
Furthermore, it is a forward-looking financial strategy for publishers as the sales of e-books increase. That would be a welcome change to the current pattern in which the financial results of publishers are often accompanied by an explanation that revenue is decreasing because the percentage of total units sold as e-books is increasing. A sustainable pricing model must ensure that a product’s growing market share is also financially beneficial—that such sales success be accompanied by an increase in revenue and profit. That, more than the outcome of the DoJ lawsuits, will determine the long-term financial health of the industry.
Here are three strategies for e-books in the postagency world.
1. Establish for e-books a wholesale discount that is different from print books. The typical wholesale discount of 40%–50% is based on the significant costs booksellers have in shipping, displaying, selling, and returning print books. As the postage, labor, rent, utilities, and other “bricks and mortar” expenses do not apply for e-books, the discount from list price for e-books should also be reduced. Different publishers will try different formulas but a discount around 25% seems fair and reasonable. This separate e-book wholesale discount, based on the reduction in reseller costs, is much more appropriate than using a print discount model for e-book products (an earlier mistake that can now be corrected) and will help both publishers and bookstores more effectively and strategically balance print and e-book pricing strategies.
2. Align e-book prices with print book prices. The manufacturing cost (paper, printing, and binding) that is unique to a print edition is usually only 10%–15% of a publisher’s costs. Therefore, any reduction in e-book prices from the print list prices should not exceed this percentage. The costs for all other publishing activities, including author royalties, editorial development, production, marketing, etc., remain the same with an e-book. Most important, the value of the book is not reduced by the e-book format. In fact, for many customers the electronic format increases the value. Therefore, an e-book list price should not be any lower than 10%–15% from the print edition. Thus, publishers and resellers will ensure that customers are choosing the book format purchased based on the format they prefer rather than on price.
3. Ensure that e-book prices reflect a time-to-market premium. As highlighted in my earlier Soapbox (PW, “The Upside of the DoJ Lawsuit,” Apr. 20, 2012), publishers should not forget the lessons learned in the print book world about hardcover and paperback editions. The higher price for the hardcover is due not to the difference in printing costs but to the value a certain segment of customers place on having immediate access to the book. This pricing premium for faster access is similar to the consumer electronics market in which early adopters are willing to pay more when the product is first released. When publishers set highly discounted e-book prices for hardcover print books, they violate this fundamental strategy and harm themselves, their authors, and bookstores. They should instead always establish higher pricing for the initial launch of an e-book, which can stay in effect until the paperback edition publishes, and a lower e-book price thereafter based on the paperback price.
It remains to be seen what the courts ultimately decide about the DoJ’s actions regarding agency pricing. However, these three pricing principles can be implemented now, and in doing so can revitalize the wholesale pricing strategy for e-books in a way that is competitive within the DoJ guidelines, good for publishers, authors and bookstores, and fair to our customers.
Rich Wohl is the founder and president of the educational publisher Wohl Publishing Inc. Previously, he worked for several Pearson Education companies as well as Lippincott Williams and Wilkins.