This chapter explores some of the fundamental aspects of the underlying pricing models to show why pricing has become an important issue. It examines, in particular, one of the main areas of controversy that the industry is involved in today in the form of agency and wholesale pricing mechanisms. This issue is not likely to be a lasting one, but it is a good illustration of the sort of problems publishers face as digital business models change the environment in which they do business.
The chapter will look at:
- Traditional price models for print and how it has been adapted
- New digital products and consumer perceptions
- Discounts and intermediaries’ effect on pricing
- Internet retailers and the price of digital books
- The pressure to price low
- New ways of buying: the challenge for specialist publishers
- The effect for authors
For those studying publishing, pricing used to be a reasonably straightforward issue. The principles behind book prices had not changed essentially for decades and, apart from market research when assessing new products to check pricing, or analysis to look at relationships between sales and price movements, pricing was not a particularly complex part of the publishing process. However, digital products have been posing huge pricing challenges for publishers. In each of the sector-specific areas in Part II we looked at the issue of pricing. For some areas digital pricing mechanisms are much more established than for others, but in all cases issues around pricing are affecting the digital business model.
Pricing models for books in print, and particularly the price differentials between types of books, whether hardback or paperback, have remained reasonably static for many years. The prices themselves have increased, but the ethos behind these prices has remained similar since the rise of mass-market publications in the nineteenth century.
Essentially the prices of the hardback or library copies supported the first printings of the subsequent paperback, the higher cost of production and investment in the content reflected in the higher hardback price; in this way publishers could test the market and recoup some of the financial risk straightaway. In the nineteenth century, very cheap, often low-quality paperbacks could appear in many different sorts of editions after the first flush of success for a title; each would have its own slight price differentials and launch timings. Companies bought rights to print in paperback, or printed paperbacks once a title was out of copyright. Paperbacks developed in a much more distinct way with the introduction of the Penguin Library by Allen Lane, who launched a distinctive range of paperbacks designed to appeal to a growing affluent market; this market was interested in accessing good-quality material at a low price and the Penguin books were produced in a format designed to be easy to buy and distribute. This led to an increase in paperback houses and the mass-market paperback grew in strength throughout the twentieth century as production costs came down.
Hardback at a higher price continued to support the initial investment and the paperback followed aiming to capitalise on the success of a title; the basic hardback price and paperback prices tended to be linked in some way, and in many ways very stable, predictable price policies suited to the market were maintained. Even with the growing development of trade paperbacks (titles often going straight to paperback for certain mass markets, in a larger-format, slightly higher-priced version) this remained the basis of the pricing model.
The Net Book Agreement, which protected prices and which collapsed in the early 1990s, allowed for the first significant change in pricing for a long time, opening up heavy discounting for key titles within other outlets such as supermarkets and the possibility of special deals (like three for two). Nevertheless, the list price for these titles remained the same, based on the costs incurred by publishers.
The first run of hardbacks continued to support some of the up-front costs, like advances, making a subsequent paperback more sustainable; as we have noted, publishers have continued to treat a digital version as another sort of paperback, or as a special deal, bolted onto the main book, so that digital sales do not have to cover the up-front costs.
New digital format and customer perceptions
The entry of a new digital format has posed much greater problems. One of the basic questions has been: if the old prices were based on print products, how does one put a price on a digital product? One of the striking differences is that the old pricing models were developed over a long period of time, educating consumers as they developed. The basic principle of a high-priced hardback for first launch is accepted by consumers. However, it can be argued that this has embedded in the consumer consciousness an understanding of price based on physical attributes; this causes some of the problems for consumer expectations of price today.
To a consumer, the expensively produced hardback costs more because it is hardback; the paperback is cheaper as its production is cheaper. This does not adequately reflect the real issue around the hardback, which is to support some of the other risks taken on by the publisher (such as the advance or the cost of marketing, as we have mentioned); but it is still how the consumer views the main costs of a book. They can see too that printing a lot of stock and holding it in a warehouse is also a large investment in something physical. So consumers are very much focused on these sorts of costs when they consider the costs of the digital product. To many consumers it is reasonably simple: there is now no longer a need for publishers to spend money on printing, paper, binding, warehousing large inventories, packaging, shipping and postage. All those savings should simply mean the digital book is cheaper in a consumer’s eyes.
There are additional considerations consumers have in mind. There is another purchase that has to be considered when buying ebooks – the e-reader itself. This is a costlier purchase. If people are to commit to that, that could well change their perception of the costs of the books they need to put on it. Consumers of information and entertainment today not only have a variety of competing options when getting their information and entertainment, but also have preconceptions about what all these different formats should cost; they are then applying their perceptions of one digital price model to another, in a way that did not happen when they dealt with physical products (a book, a CD and a DVD all had clear price points). So preconceptions about price may be shaped by other digital products (e.g. a music track or games app) or other digital services (e.g. a subscription to a service to watch unlimited films for ‘free’ or broadband, enabling internet access) that have very little to do with books. There is convergence within the consumer’s mind across these entertainment products.
So publishers today face a challenge when pricing digital products. As we have seen, for certain aspects of the sector such as legal or academic there is an understanding of the intrinsic value of the information; while debates continue over certain issues, such as open access, the customer overall is not necessarily expecting low prices simply because of digital access. This, however, is not the same with markets focused on the consumer. The newer digital markets face these problems in perception and publishers need to consider how to re-educate consumers about the costs involved in publishing, particularly the unseen costs of marketing, PR, editorial and design work, and of course author royalties: publishers need to make these more visible. The publisher knows that the value is in the content of the work, nurtured and developed over a period of time by the author and the publisher. There is value in the very fact that the book has been written by a particular famous crime writer (for instance); that value is much more critical to the book’s success than the cost of the paperback production.
Discounts and intermediaries’ effect on pricing
Overlaid on this is the changing sales environment. The way publishers sell the physical product has changed with the growth of online retailers and this has become even more critical with the digital products on offer. The game changer in relation to the digital product is the involvement of the new key intermediaries such as Amazon and Apple in producing the devices needed for the digital products. These companies have control over the route to the reader as the devices are needed to get the ebooks. This has changed the sales environment for publishers and is having a significant effect on price. And, in addition, the way the publisher pays the intermediaries has come under scrutiny and has caused ongoing complications in the marketplace, as we will see on p. 167.
One hidden cost of publishing that consumers do not see is the amount that publishers pay intermediaries. Consumer publishing throughout the twentieth century focused primarily on selling titles through bookshops. These intermediaries were limited in number (independent bookshops, chains and wholesalers) and publishers could focus their attention on working with them to sell their titles to the general public. That meant they developed highly sophisticated relationships with the main distributors of their products and the direct relationship with the customer was less critical – that was fulfilled by the bookshop.
For this service the bookshops retained a percentage of every sale they made. This was also a factor in book pricing (one of which consumers are less aware). The seller of the books needs to make some revenue from the sale of the product as well, so an additional cost to cover that is also encompassed in the price. Booksellers have always had the problem that the lower the price of the book, the less margin there is for them to take away. While a publisher can sell bestsellers in vast quantities across all the sales channels it uses, and so can afford to allow big discounts, a small bookseller can only sell so many of that bestseller to their small customer base and so they need to recuperate as much as they can from that quantity. Publishers need to bear that in mind as they try to support the survival of bookshops, particularly as sales continue to leech into the digital marketplace. But making an allowance for the discount the bookseller gets is not limited to physical bookshops.
Consumers see that internet selling is easy and digital distribution saves the need for bookshops, so saving the publishers money, but, while bookshops suffer, it does not necessarily change the costs for the publisher. Even with internet sellers of the physical product, the intermediaries take a percentage. Sellers like Amazon demand quite a high percentage (higher than most independent bookshops) because they command a large market and can maximise sales quantities for successful books as well as make available titles that it would otherwise be difficult for customers to get. They can also decide on a price that may undercut the physical booksellers. This happens of course with the physical product as Amazon will routinely price lower than the publisher price and in some cases offer much heavier discounting for the customer.
Internet retailers and the price of digital books
However, the biggest challenge for bookshops and publishers alike is the digital product itself. The delivery of this direct to a device has meant the biggest change for the industry. Intermediaries delivering digital products expect to buy the products at a discount from the publishers as usual. However, some of the key intermediaries have a much greater interest in delivering digital products to their consumers because they are also selling the devices themselves. As we will see in Chapter 13, the ability to provide content for their devices is an important part of their strategy. Amazon and Apple are both companies for whom digital content is a critical part of driving the sales of their hardware. For Amazon, its development of the Kindle and its control over the software used for the ebook files on its device is an important way to gain market share. So it is very interested in making ebooks available that can be used on the Kindle, both to drive Kindle sales and to keep customers with Kindles buying products from them. Low-priced ebooks therefore are part of this strategy.
For newer players in the market such as Apple it is vital to attract customers to their products and so effective platforms for selling content are important, even if they do not always want and are not always able to control the price. Taking the case of Apple, it does not have book customers ready to convert to ebook customers as Amazon does; however, it has consumers of its products from whom it wants to drive more usage of digital products, gaining revenue from any content sold and continuing to develop and maintain customer loyalty: digital books are key to this. While it is not necessarily instituting low book prices, Apple’s experience with iTunes or low-priced apps suggests books are another commodity where low pricing is a more attractive option for it than higher price; putting pressure on book markets traditionally with high prices is not beyond them (as with their iTextbooks).
Publishers are therefore facing a marketplace that is much more unpredictable than before. The bookseller broadly operated within the confines of the publishing industry and played by the rules everyone within the industry understood. Now large global businesses are coming in from other sectors: Amazon admittedly started as a bookseller but is growing in stages to become an international retailer, software producer and hardware manufacturer; technology companies such as Google and Apple have moved into the bookselling arena, with a variety of different strategic imperatives and ways of operating.
Pressure therefore has come from consumers and from other competitors in the environment to bring prices low. Yet we know the cost of producing high-quality or very popular content is not negligible. Publishers in general have tended to price ebooks as an adjunct to the print version. Publishers have in the first instance tried to maintain prices similar to the print products, pricing a little below the standard paperback print edition.
However, as digital products gain ground it is unlikely to be possible to maintain this approach. The structure of publishing needs to be rethought, the economics of a book recast without the focus on the hardback print product supporting all the additional editions (print or digital). Publishers are looking at these issues; clearly a digital-only imprint will have had to take into account the lack of a hardback; but these currently tend to be low-risk initiatives based often on short material that may have a reasonably low royalty and marketing cost associated with it.
The pressure on price has been exacerbated by some other issues: free content readily available, territorial availability and piracy. The availability of free content, content that has been out of copyright but put into digital format such as the conversion of novels into EPUB formats from Project Gutenberg, has not helped publishers make a case for maintaining robust ebook prices; content can be and is available free, costing very little to convert and nothing to print or distribute. This influences consumers’ expectation of what they can get in digital format.
More general aspects of undercutting price are also intensified by the digital format; books sold in other territories may be priced more cheaply; digital books can be easier to access from other countries where the prices may be cheaper, undercutting home markets; the drive towards a global price therefore is one consideration for publishers, but in all likelihood this will not push prices up but rather bring prices down. Piracy, too, has an influence on prices – customers are more accustomed to buying music in digital format now rather than file sharing and pirating copies, but that is partly because the prices are low in any case. So these factors also influence a drive to lower prices.
In terms of new launches, a look at the pricing across digital book sites shows that a variety of prices are available and the settled pattern for print pricing is not being copied in any way. But no publishers are pricing their ebooks extremely low. Apart from occasional, sometimes controversial, promotions (Ken Follett’s latest book appeared for a period of time at 20p), the very cheap titles on Amazon are either short stories (from publishers) or self-published titles, with genre titles often priced low too.
Case study: The wholesale vs agency pricing debate
The debate around the issue of agency pricing is likely to become less resonant soon as court cases and settlements sort out the main problems, but it is a useful case study in the way the industry has to face unexpected challenges. In the early days Amazon wanted to produce very cheap ebooks (cheap if based on a hardback price for a new launch) and even bought titles at a loss in order to promote cheap titles. This frightened publishers, who saw ebooks undercut their hardback prices on launch. Not all publishers launch an ebook on publication and there were experiments around phased pricing, like the films moving into the rental market and then onto DVD, as well as pricing and discounting. Amazon here continued to work as it always had as a physical wholesaler, buying titles at an agreed discount from a publisher and then effectively owning that ‘stock’ to sell on at whatever price it wanted; in this way it could undercut anyone else in price as it wanted, as long as it got enough profit for itself (or some other clear benefit where it sold a book as a loss leader). There are problems with that model for publishers: while physical stock was quantifiable, and so discounts were calculable for a finite number or period, ebook distribution was unlimited in number of sales, adding complexity; time-limited deals, of course, could still be managed, but negotiating these deals was more complicated.
Apple, moving into the market to push titles on its iBookstore, meanwhile adopted an approach to books that it already used with its app store. The creator of the content/app remains the seller at all times, while Apple creates the marketplace in which it operates: those sellers can price and market as they want, with Apple taking a cut of every sale made (broadly 30 per cent). Here Apple behaves as a sales agent taking a commission from each sale.
The difference between these models has set up a debate in the arena of consumer book pricing. The wholesale model follows the traditional bookshop approach whereby the intermediary buys the product at an agreed discount and sells it on at its own price – the stock is the intermediary’s (until it needs to return any unsold and claim a credit back). Print book prices remained reasonably robust in this system as the bookshop would not want to reduce its own profit margin by marking prices down too far, though this was less of an issue for companies like Amazon.
In the agency model the seller remains in control of the product and the intermediary acts as an agent for the seller – taking a commission from the sale. There are legal aspects to this determining the difference in the relationship between the intermediary and the seller according to whether the arrangement is wholesale or agency. For some, the agency model makes sense as the publisher can retain control over the price, ensuring parity with other book products and making sure its sales are not undercut by excessive discounting by other parties. When the digital price seemed potentially to be in freefall, this sort of control became attractive to prevent ebooks becoming too cheap. This is all an issue while the ebooks market is in development and the main sales of a book remain the print sales; if ebooks at low prices lead to an equivalent increase in sales, then publishers will have less of a problem.
However, problems have arisen in various ways. One is the way the agency model works with Apple; it has certain controls that sellers have to abide by in order to sell from within its stores; some of these controls are around the issue of price and how far prices can be undercut by other companies/intermediaries. These have been highlighted as the agency model comes under scrutiny and competition problems have arisen.
The reason for this is that a group of the largest publishers forced Amazon to treat their ebook sales in terms of an agency model, rather than as wholesale product. This might have been to some extent forced on them with regard to the pricing guarantees required when making their books available on Apple. But it was also clear the publishers could have greater control over their prices and benefit by avoiding any heavy discounting planned by Amazon. The reason they could push Amazon to accept this is that they held the print titles hostage, suggesting that they would not let Amazon carry their key print titles if it did not use the agency model when selling their ebook products.
If you looked at books on Amazon by the publishers that adopted the agency model you would have seen a note stating that the publishers had set the price. This did not necessarily mean that those publishers which were too small to force the agency system on Amazon found their titles were sold at cut prices, nor that the big publishers automatically charged a very high price for theirs. There are clearly market forces at play as publishers price key backlist competitively. Amazon, too, while it will offer a lower price compared to the first launch of a hardback, is keen to capitalise on successful new launches and does not generally go too low with its price.
This has caused controversy. Not only is it interesting to see publishers able to wield some power with an intermediary if they have some critical mass of print and backlist, but, more critically, debates about price fixing and cartels have surfaced. The Office of Fair Trading in the UK started an investigation but it was closed once the whole matter had been set in motion by the EU. Various issues around the legal definitions of the models, together with the specific situation that Apple places its sellers in, are under scrutiny. Is Apple controlling prices by ensuring no one can undercut it? Is the consumer being cheated as prices cannot be set by Amazon so market conditions cannot be allowed to play out their course in a genuinely fair competitive environment? Are publishers ensuring prices cannot be competitive? Is Amazon itself operating a monopoly position, and so uncompetitive?
One of the key points of debate revolves around whether agency pricing has produced any obvious rise in ebook prices, and evidence to support this is difficult to find. Nevertheless it seems unlikely the agency model will persist in relation to Amazon. The US Department of Justice has also been investigating ebooks price fixing by US publishers. Different publishers and Apple are taking different approaches to the investigations within the EU and US as to whether to go to court or settle in some way or other. Some settlement agreements have been proposed, but even these are being assessed as to whether there is a breach of contract involved.
What has been of benefit, though, is that this has provided some breathing space for publishers. They have been pricing titles on Amazon and Apple and, for a while at least, created a perception that prices for newly launched ebooks hover around the £5–7 mark (with some lower), which may help create customer expectations that ebooks are not necessarily as low in price as a 79p track on iTunes. There has also been time to create digital-only lists and price points around short stories, which also may create a higher price point for longer-form narrative. Publishers are getting more used to creating ebook prices that do not have to bear a relation to the print product and o may be able to find their own level within an ebooks market without facing any preconceived expectations from customers.
This might deal with the immediate problem of pricing ebooks, but there are more fundamental questions about the way content is valued as customers are buying content in new ways. These issues include:
- valuing component parts
- pricing aggregated content
- the challenge of new subscription models
- changing consumer purchasing habits
We have looked at rights sales issues, and pricing the components effectively is critical. Once content becomes more fragmented, the challenge is to price the chunks effectively to cater for a variety of purchase patterns whether they are sold in lots of small quantities or in larger groupings. If the product is bought in large aggregated slabs of content, the accumulated price of the chunks must not add up to too much; thus the individual component prices may end up small. But then if the product ends up mainly purchased in small chunks, due to their cheapness, parts of the content may not be used at all. This can lead to questions as to whether it is sustainable to keep producing these sections of content (e.g. in a journal) or whether they have a marketing value to attract customers looking for comprehensiveness, even if they are not used directly. So the relationships between the prices for different components or for different types of access need to be modelled carefully in a way that is new for publishers; other aspects of a product need to be valued as well, whether it be assessing the value of a diagram on a certain page or the importance of speed to market.
Pricing the aggregated content might seem a more straightforward proposition but the problem is that people can end up buying something they do not want alongside the things they do. If the prices become too high, they cannot be afforded. The payoff between individual titles, which used to be the way libraries could manage a budget, is not something that can be easily replicated in large digital databases.
The consumer is also growing used to new forms of subscription services. For other forms of entertainment, the content is the commodity and what consumers buy is access to the full library rather than any specific product. Once you have paid once (for access to an online juke box, for instance), paying again for the content can feel negative to many users.
Customers are becoming more used to buying in increments. If we take the app as an example, it may well be that customers can access the basic app for free and top it up with a purchase. Micropayments are becoming a standard way for consumers to purchase things. Topping up like this can also be seen, for instance, in Kindle, where the free editions quite often do not have a table of contents (one that you can click through to the right section). For certain things this can be quite useful (e.g. complete plays of Shakespeare are difficult to use if you have to scroll through the full text to find a play you want, or use the limited search facilities), so customers recognise that element of a product is useful and worth paying for; an index on top of that, if more searchability is useful, can be worth a little more and so the product range can build up to ones with click through to annotations and notes. In this sort of case it is not content that buyers are getting, but easier access to it. In this way a product becomes less free – but it still starts with content that is free to tempt you in, then if you are interested enough you’ll pay a little more for an additional aspect of the book/service. This presents book publishers with more challenges. How can they work with this model for their content? Can they break their content up into chunks that make micropayments workable and profitable for a product that is less mass market?
There are also considerations in relation to the author. Some of the main issues are around the changing value of their content:
- lower prices means they get less royalty unless they sell a lot more
- authors expect to earn more money since their content is more valuable now that the print is not part of the risk the publishers bear
- authors may expect more money from digital – as the costs in their eyes are lower, their share of the profit should be larger
- authors wanting to make a living out of publishing will find that where publishers are squeezed on price they cannot spend as much on authors – the fate of mid-list authors becomes a consideration here
These are issues that are already being raised by the industry: agents, for example, are pushing for higher digital rights deals. This will have to be addressed to some extent by publishers, and the economics of the publishing process may have to change in order to do this.
It might well be time to review pricing mechanisms. The costs of producing an ebook, as we know, are lower but not necessarily very much lower. In addition, the industry is still pricing based on supporting an infrastructure that it no longer needs (from print production systems to large warehouses). Pricing on this basis to support a legacy infrastructure will pose more problems when newer market entrants emerge that do not have that legacy and can effectively price and manage their risk purely within a digital environment.
There are possible opportunities in pricing, however, that the new digital environment enables. Digital-only imprints are developing rapidly and pricing low; these currently tend to be focused on particular genres (romance and crime, for instance) and the economic model for these is one that may be difficult to apply to other aspects of publishing. Prices can also be more fluid compared to print products. Consumers do not want to be confused, but prices can be adjusted up or down easily, whether in response to a day-long special deal available on Amazon or when a title moves into a new phase of its life cycle; this can enable publishers and/or intermediaries to capitalise on price points effectively. Understanding the movement of prices and sales in this way will become an important skill.
The changing behaviour of purchasers could also be an opportunity. It may well be that consumers buy more books for their e-reader than they did in print. There may be many reasons for this, such as ease of purchase and more impulse purchases with a quick click of a button on an e-reader. However, lower prices may make spontaneous purchases easier for customers, who feel they risk less with a lower price on an individual product and so end up buying more. When studying owners of iPhones compared to owners of Android phones, it can be seen that Apple users spend more money on average on products for their phones, even though there are more Android phone owners. Potentially these new ways of buying may increase the amount spent on titles in the longer term.
Books
Anderson, Chris. The Long Tail. Random House, 2006.
Thomspon, John. Merchants of Culture. Polity Press, 2010.
Websites
www.wsj.com – online wallstreetjournal has followed quite closely the debates over agency book pricing
- How can publishers develop a stronger customer awareness of the value and cost of their content?
- What can be learnt from the agency and wholesale pricing issue?
- What considerations does a publisher need to bear in mind when developing a pricing strategy for a book launched in both print and digital formats?
- What pricing effects might digital-only imprints have on other titles?