Penetrating the Mysteries of E-Book Pricing. Kind of.

The e-book industry was officially launched at a government-sponsored conference in 1998. Starry-eyed dreamers, technical pioneers, entrepreneurs, geeks and curious publishers convened with the evangelical fervor of a tent meeting. Bliss it was in that dawn to be in the e-book business, and the wave of zeal generated predictions of the end of printed books.

Alas, some hard realities set in soon afterward. Copyright issues, technical problems, muddled business models and a lack of standards hindered momentum for almost ten years. Though the industry grew at a steady double-digit rate in spite of these problems and has at last broken out, it took a decade to mature, and that's a decade longer than most of us anticipated.

One of the problems that compromised progress was e-book pricing. No one really knew how much to charge to download a book. And the fact is, we're still not sure. If you survey prices on various publisher and etail sites you will readily see that list prices are all over the place. A quick foray onto the website of Fictionwise, the world's foremost book etailer, shows Janet Evanovich's The Grand Finale e-book listing at $14.99 (discounted by Fictionwise to $12.74 for its Club members). Temptation and Surrender by Stephanie Laurens sells for $25.99 ($22.09 Club price). The Demon's Librarian, a paranormal romance by Lilith Saintcrow, sells for $5.95 and $5.06 respectively.

As in every other business enterprise there are two schools of pricing merchandise. One is to set a target profit and peg the price to meet that target. The other is to gain an advantage over competitors by undercutting them, reducing profit to the thinnest possible margin. That easily explains the range of list prices from roughly $3.00 to $10.00. It doesn't however account for e-books listing for $20.00 or more. We'll examine that in a moment.

In an attempt to bring discipline to e-book pricing and do for books what Apple did for music (at least, for whole albums) via the iPod, Amazon has strongly prescribed a $9.99 cap for books carried on the Kindle. But an analysis of list prices of Kindle titles, described in a blog headlined "Paid Is a Lot More Complicated than You Think--So Is the Truth"*, reveals the following:

"Using two different methods for checking Kindle price data in Amazon's system, we find that roughly 30 percent of the 240,000 or so Kindle titles sell for more than $9.99 (and well over 20 percent sell for more than $20).

Yes, approximately 33,000 titles sell for around the magic $9.99--but about 13,000 titles sell for between $10 and $20. Here's is one slice of approximate numbers for the four most popular price bands:

1. $20.01 and up: 55,750
2. $10.00 and $9.01: 33,000
3. $4.00 and $3.01: 25,500
4. $8.00 and $7.01: 20,750"

The writer goes on to point out that “There are more than 7,000 free books, and another 28,000 or so titles that sell for $2 or less.” He or she goes on to say,

"Now take a look just at their hourly bestseller list, as we have done both yesterday and today. As of one slice this morning, two of the top three Kindle books (and 18 of the top 100) are free.

But the No. 4 title sells for more than the magic $9.99--Breaking Dawn, by Stephenie Meyer, at $11.38. (The print version, at No. 2 on Amazon's overall list, sells at discount for $12.64.) The Sony eBookstore sells it for $11.99 and the iPhone app version sells for $19.99.

In all, 16 titles on the top 100 are selling for more than $9.99. Some of those are pre-orders of books by the likes of Jodi Picoult, selling now at $15.37 even though presumably those books would sell for less once they are available and hit the NYT list."

A $15.00 or $20.00+ price for an e-book seems counterintuitive, but don't worry, your intuition is quite sound. We know (and appreciate) that there are diehard fans so desperate to read a new book by their favorite author that they're ready to shell out as much for a download as they would pay for the hardcover in a bookstore or on amazon.com, maybe even more. But it's safe to say that most readers and fans feel that, confronted with a choice of paying $25.00 for either an e-book or a hard copy of the same book, they will elect the version that they can put on their bookshelf when they're finished with it.

What's behind that high list price for so many e-books has to do with a stubborn fact of book publishing life. The business model of traditional publishers like Random House, Simon & Schuster and Penguin, is built around printed books. The profit to be made on a successful “book-book’ is at this time far greater than that made on an e-book. Furthermore, publishers employ sales representatives who earn commissions on sales of printed books; they do not earn anything on e-book sales.

It stands to reason, then, that from the viewpoint of a publisher and its sales reps, a low e-book price will cannibalize the profit made on sale of the higher priced print edition, and deprive the sales reps of their commissions. To bring the e-book profit up to parity with that of the print book, publishers must bring the e-book list price up to parity with that of the print book as well. That explains why Temptation and Surrender, the Stephanie Laurens novel selling in e-book for 25.99, is being sold for the very same price in hardcover on amazon.com. When a hardcover edition goes out of print and a cheaper paperback is issued, the publisher will in all likelihood lower the e-book price to maintain that same parity. (And there are mystifying anomalies. The Grand Finale, the Evanovich novel mentioned above that sells for $14.99 in e-book format, can be purchased in mass market paperback for $7.99!)

If your intuition tells you that this brick and mortar mentality is a significant reason why it’s taken so long for the e-book business to prosper – well, again, you’re absolutely correct. Whether the problem can be remedied is hard to say. Traditional publishers are traditional for a good reason. Newer entries into the e-book publishing field are not hampered by the same considerations as the Simon & Schusters of the world, and price their wares without concern about cannibalizing themselves or keeping commissioned sales representatives happy. On the other hand, traditional publishers enjoy distribution advantages that are the envy of every e-book startup.

So – you pays yer money and you takes yer choice.

Our anonymous blogger also raises a cogent point about Kindle pricing: though the price of an e-book purchased on the device may be discounted, you have to build in the price of the Kindle itself in order to ascertain the true cost of the downloaded book:

Logically speaking, the overall save-money-by-buying-a-Kindle argument is also specious for most consumers; as others have pointed out, if you save an average of $7.50 a book--supposed Kindle price of a new hardcover versus discounted Amazon print price--you need to buy at least 50 books or so before recovering the purchase price of the device. Yet it's clearly one factor in the purchase decision by many Kindle owners.

Which brings us back to the “Gillette Razor” solution we’ve championed in these pages. The inventor of the modern razor shrewdly observed that the most effective strategy to boost his product was to give away the razor and sell the blades. Giving away the e-reader and selling the books might be just the rocket boost the e-book industry needs to send it into the stratosphere.

Richard Curtis

*(Apologies to the unnamed author of this survey, which was emailed to me by a friend without a link to the source. In a rare failure of Google search capabilities I was unable to ascertain the blog's author. If the author happens to read this, sir or madame, please identify yourself so that I can accord you well deserved recognition!)