Have you bought anything through the Kindle store recently? Chances are you’ve noticed, for most titles, the eBook is not quite the deal it used to be. In fact, the Wall Street Journal recently ran a feature entitled “E-Book Readers Face Sticker Shock“. So what’s going on here? Well, publishers have wrestled back control of digital pricing from Amazon and are attempting to find individual price points that (1) protect the value of content, (2) adequately price in the added convenience and features of a digital copy, and (3) encourage digital sales that will grow overall industry revenue rather than strictly cannibalize current sales.  Where once eBooks cost a nice simple $9.99, now they can actually cost more than the physical copy.  Is this insanity?  How can publishers justify charging the same price for a digital book (with no manufacturing, distribution, stocking or retail costs) as they do for a real book? Let’s take a look.

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You see, back in aught-7 in the early days of eBooks, to build a market for Kindles and the Kindle store, Amazon decided that consumers needed a nice easy price point. Something simple and standard, say $9.99. They argued it was a new medium and consumers didn’t know what it was worth, so a standard price would set that value for them. Where did they get this idea? Well, back in aught-3, in the early days of digital music, to build a market for iPods and the iTunes store, Apple decided that consumers needed…sound familiar? Apple decided people needed simple standard pricing in order to be persuaded to buy digital music instead of steal it. All albums $9.99, all songs $0.99, doesn’t matter if it’s a major label or indie, big artist or small, everyone was the same and people knew what to expect.

The strategy worked stupendously for Apple, which has sold over 10 Billion songs, and horrifically for the music industry, which has lost 1/3 of its value since 2003. There are many reasons for this (piracy, the ability to buy one song instead of an entire album, general obtrusiveness) but a key reason labels have argued, is that $0.99 vastly undervalues their content. In 2009, after years of fighting,  Apple finally introduced tiered pricing (so a hit song in greater demand cost more than a random catalog track that people are less willing to pay for). But, the damage was done. $0.99 is the universally excepted value of a song and the music industry has been losing money ever since.

So beginning this year, as eBook sales started to really take off and physical sales started to decline, major publishers decided to regain control and set their own pricing policies. Ironically, Apple had the largest hand in convincing publishers to abandon Amazon’s $9.99 standard and set each book individually (you can read about it in the Wall Street Journal piece). Anyway, what publishers are trying to do is maintain the value of their content and minimize the cannibalization of their print inventory by cheaper substitutions. Economists call this price elasticity and pricing optimization – different people are willing to pay different amounts for different things. The name of the game is to increase the total pie. Price so that you gain as many customers as you can without leaving any money on the table, all to get the highest net profit possible. Sometimes this means sell cheap, with lots of customers but little margin, sometimes it means sell high, with few customers but fat margins. It all depends on what a consumer is willing to pay. For the music industry, the pie has been shrinking. So what does it mean for the publishing industry?

Well, since 2008 total book sales (including physical and digital) and total revenue have been increasing – only 6% over that period, but for an industry in the midst of a disruptive technological revolution, that’s not too bad. BUT, if you consider that in that time period eBooks sales increased over 1,200% its obvious eBooks were not adding much to the bottom line. These figures are through 2010, so we’ll have to wait for 2011 stats to see if the total pie is in fact increasing or if book publishers are overpricing and steering consumers towards piracy and lower cost alternatives.

So what is the right price for an eBook? The consumer in me says you can’t charge similar amounts for a physical and digital copy –a digital copy that I can’t hold in my hands or give as a gift and that I know doesn’t include manufacturing costs, distribution costs, retail  and co-op promotions, allocations for returns and other physical costs built into the physical price. However, the economist in me says that the convenience of an eBook is worth something. The ability to buy and download instantly, to take hundreds of books with me, store and organize notes, highlight and email key sections, – these are all features that add value and that value should be priced accordingly. As of now, publishers are pricing in that added value, whether or not consumers are willing to pay for it remains to be seen.  At the very least, publishers are in control of their destiny. If their pricing scheme fails, they have no one to blame but themselves.

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