Wednesday, March 28, 2012

Does Agency Pricing Lead to Higher Book Prices?

According to a March 9 story in the Wall Street Journal, The U.S. Department of Justice is considering suing Apple and five large US publishers for allegedly colluding to raise the price of ebooks.

At the heart of the issue, I suspect, is concern over the agency pricing model. Agency pricing allows the publisher (or the indie author) to set the retail price of their book.

Although Smashwords is not a party to this potential lawsuit, I felt it was important that the DoJ investigators hear the Smashwords side of the story, because any decisions they make could have significant ramifications for our 40,000 authors and publishers, and for our retailers and customers.

Yesterday I had an hour-long conference call with the DoJ. My goal was to express why I think it's critically important that the DoJ not take any actions to weaken or dismantle agency pricing for ebooks.

Even before the DoJ investigation, I understood that detractors of the agency model believed that agency would lead to higher prices for consumers.

Ever since we adopted the agency model, however, I had faith that in a free market ecosystem where the supply of product (ebooks) exceeds the demand, that suppliers (authors and publishers) would use price as a competitive tool, and this would naturally lead to lower prices.

I preparation for the DoJ call, I decided to dig up the data to prove whether my pie-in-the-sky supply-and-demand hunch was correct or incorrect. I asked Henry on our engineering team to sift through our log files to reconstruct as much pricing data as possible regarding our books at the Apple iBookstore.

We shared hard data with the DoJ yesterday that we've never shared with anyone. I'll share this data with you now.

As background, Smashwords is one of several authorized aggregators supplying ebooks to the Apple iBookstore. On day one of the iPad's launch, we had about 2,200 books in the iBookstore, and our catalog there has grown steadily ever since.

Henry was able to assemble a complete data set going back to October 2010. We created once-a-month snapshots of the Smashwords catalog at the Apple iBookstore between October 2010 and March 2012. Our data captures the average price of our titles in the iBookstore, and the number of titles listed.

I'm sharing four data sets. The first data set, above at left, shows the number of Smashwords titles for sale in the Apple iBookstore. As you can see, the numbers have grown steadily. I'm not aware of any other agency pricing study that worked against such a large body of data.

In the next data set, we plotted the percentage of books priced at FREE by our authors and publishers. As you can see from the chart, the number grew from 8.45% in October 2010 to 9.60% this month.

Why would authors and publishers give away complete books when they have the power to price at a price? The reason is because FREE is a powerful marketing tool for platform building, and for introducing new readers to an author's backlist.

This data indicates a slow but steady increase in the adoption of FREE.

For you statistics geeks out there, the data represents a statistically significant trend with a tau of 0.516 and a 2-sided pvalue of .00313. For you non-stat-geeks, a positive tau number indicates an upward sloping trend, and the pvalue represents the statistical odds that the trend is invalid. A 2-sided pvalue of .00313 indicates that the odds of this trend not being statistically significant is only 3 in 1,000.

In the next chart, I aggregate all books, both FREE books and priced books, to calculate the average price of the books in the catalog.

The downward sloping trend is pronounced. The tau is -.948, indicating a downward trend, and the 2-sided pvalue is .000000049141. So, if I'm counting my zeros correctly, that's less than a 1 in 100 million chance that this trend is not statistically significant.

Dizzy yet?

In plain English, we've seen the average price of books in our catalog drop from $4.16 in October 2010 to $2.97 today.

In the next data set, we removed the free titles to identify the true average price for priced books in our catalog at Apple.

This statistically significant data set carries a tau of -0.908 and a 2-sided pvalue of 0.00000017217. This confirms that even if you remove FREE books, the average price of priced books is declining. The tau indicates 1 in one million chance that the indicated trend is incorrect.

In plain English, the average prices have dropped 25% from $4.55 in October 2010 to $3.41 today.

Back in 2009, I blogged at the Huffington Post that the time had come for publishers to price ebooks at $4.00. That day arrived for Smashwords authors and publishers a year ago.

The $3.41 is a really interesting number, for a couple reasons: 1) It shows that authors and publishers, left to their own free will, are pricing their books lower in this highly competitive market. Sure, they could all try to fleece customers by pricing their books at $29.99, but customers won't let them. 2) $3.41 is remarkably close to the average price paid for Smashwords books purchased at Barnes & Noble during the last 30 days. The B&N number: $3.16. I looked at every Smashwords book sold at Barnes & Noble between February 28 and March 27, then calculated the average price. This means Smashwords authors are pricing their books close to what customers want to pay. The median price (represents the midpoint, where an equal number of books sold at lower prices and and equal number sold at higher prices) was $2.99. The weighted average price (all priced book sales divided by number of units purchased) was $2.59.


We had a good conversation with the DoJ. They were very interested to learn about our business, and learn about the underlying dynamics of the retail distribution ecosystem from the perspective of indie authors and small publishers.

I explained how when Smashwords first began distributing ebooks to retailers in 2009, our retailer contracts were under the traditional wholesale model. After Apple introduced the agency model in early 2010, we found ourselves managing dual, incompatible pricing systems. Apple priced at agency, and our other retailers continued to discount.

As I explained to the DoJ, Apple was aware that our other retailers were underpricing them, not just because we were juggling wholesale and agency, but because Apple prices in $.99 tiers. As we explained to Apple two years ago and to the DoJ yesterday, if a Smashwords author priced a book at $1.25, we'd bump the price at Apple up to $1.99 rather than price lower than what the author wanted.

The DoJ asked me if Apple ever balked at the knowledge that other retailers were selling our same books for less, and my answer was no. Not once in our two year relationship with Apple have they ever complained about a Smashwords-distributed title priced lower at one of their competitors. They've never price-matched any of our books if they found it lower elsewhere. I really don't think they care.

For our other large retailers - Barnes & Noble, Sony and Kobo - I can think of less than five instances combined where any of them tried to price-match books because they found them priced lower elsewhere.

There's only one retailer that has made it a practice to strictly enforce most-favored-nation pricing upon its authors and publishers, and they're the retailer that forced us to move all of our wholesale retailers to the agency model. As I mentioned in my initial blog post here, our move to agency in 2010 was necessitated by Amazon's automated price matching.

At the time, when Sony or B&N discounted a $2.99 book by a mere 5%, Amazon price-matched the book which dropped the author from a 70% royalty rate at Amazon to 35% (Some time after October 2010, I believe Amazon stopped dropping the royalty rate upon price-matching). At the time, our bestselling authors were understandably upset, because the downgrade was costing some of them thousands of dollars in lost income. It caused some of them to remove their books from all retailers except Amazon out of fear of such punishment. Keep in mind, in mid 2010, Amazon controlled 80-90% of the US ebook market, so such policies put authors in a tough bind.

In mid-2010, with our authors angry over the discounting, and with them removing books from distribution (as a distributor, we care about this on multiple levels!), we started asking our retailers to move us to agency terms so our authors could control their pricing. At first, they all said no. None of them were fans of the agency model at that time. I think all of them felt as if the model had been shoved down their throats by the ultimatums of the Big 5 publishers (who viewed Apple and its agency model as their white knight counterbalance to Amazon).

In November 2010, Kobo moved us to agency, and then the next month Barnes & Noble and Sony gave us agency terms as well. I think they all moved us to agency because they realized that their discounting was causing indie authors to remove their books and sell only on Amazon.

Over the last two years, my appreciation for the agency model has grown as I've come to fully understand its benefits for our authors, publishers, retailers and customers. Here's why I support agency:

  • Agency puts the authors and publishers in control over their retail price and their promotions. This gives authors and publishers the freedom to coordinate promotions across all retailers for reasons decided by the author or publisher.
  • Publishers earn 60-70% of the retail list price as their earnings, vs. 35-50% under the traditional wholesale pricing model. This gives authors and publishers the freedom (should they choose to exercise it) to price their books lower, yet still earn the same or more income from the sale of each unit. This allows our authors to compete more effectively against the books of Big 6 publishers, who price their books on the high end. Lower prices make books more affordable and more accessible to more potential customers, leading to a virtuous cycle of higher unit sales at higher profit levels which leads to more earnings for our authors and publishers.
  • Agency provides our retailer partners a fair, predictable commission of 30%. These retailers are investing millions of dollars - sometimes hundreds of millions of dollars - to attract more readers to more books. They earn every penny. We want them all to build profitable businesses selling indie ebooks.
  • Agency creates a level playing field for all ebook retailers. It prevents deep-pocketed retailers or device-makers from using predatory pricing practices to sell books at below cost in an attempt to bleed their competitors' finances dry, or in attempt to snuff out new competitors before smaller startups gain a foothold in the market.
  • Agency forces retailers to compete on customer experience rather than price. Retailers who win will be those who do the best job of attracting customers to their store, and who offer the best algorithms to match readers with books they'll enjoy reading.
  • Agency forces authors and publishers to be wholly accountable to their customers. If the author or publisher prices their book too high, the market will respond by purchasing lower cost alternatives.
As I explained to the DoJ, I think it's fallacy to believe that agency pricing leads to higher prices. That's like blaming cars for drunk driving accidents. The driver behind the wheel is responsible. If the Big 6 publishers are pricing their books too high (and I think they are), blame the publishers.

It's also fallacy to believe that somehow the wholesale pricing model is the savior and enabler of low prices. Under the wholesale model, the publisher has always set the price at which they'll sell the book to the bookstore, typically a 50% discount to the suggested list price. The $30 front list hardcover you purchase earns the publisher $15, or less. If the publisher decides they need to earn $18.00 on each copy sold, they'll set the suggested list price to $36.00. If you agree that under normal circumstances, most retailers will not consistently sell all their books at below cost, then it's reasonable to conclude that even under wholesale, publishers already control the minimum price all customers, on average, will pay.

It's worth noting that when the Big 5 publishers moved to agency, many of them started earning less per book than they had previously earned under the wholesale model. Pricing control was more important to them.

Analyzing the Short and Long Term Impacts

A return to the wholesale pricing model for ebooks would lead to the following short term affects:

  • Indie author and publisher "royalty rates" (earnings) would drop to 35-50% of the retail price.
  • Retailers would discount ebooks, and customers would begin migrating to retailers with the lowest prices. In the online realm, the cheaper book is only a click away. Online price checking web sites and apps make it easy for customers to always find the lowest price.
  • Authors and publishers, in an attempt to recoup lost earnings, would at first increase prices. For example, if it's important to a Smashwords author that they earn $3.00 per copy sold, under agency they'd price the book at $5.00. Under wholesale, they'd need to price the book at $7.00, 40% higher. Yes, a return to wholesale could increase prices for customers.
A return to the wholesale pricing model could lead to the following long term affects:
  • In the battle for market share, price wars will break out, and some retailers will begin pricing books below cost. Other retailers would be forced to match the prices or risk losing customers. If the price wars persisted, only two or three major ebook retailers would likely have the financial stamina to endure: Apple, Amazon and Google
  • Barnes & Noble, which now controls about 28% of the US market, would probably run out of cash and suffer the safe fate as Borders.
  • Smaller independent ebook retailers such as the Diesel eBook Store, BooksOnBoard and others, would be probably be forced out of business.
  • Formation of new ebook retailers, both here in the US and internationally, would dry up to a trickle, further limiting the number of companies in the business of promoting reading.
  • With less competition, retailers would stop discounting, and prices would rise as retailers capture the full 50% margin enabled by the wholesale model.
  • With retailing power consolidated in the hands of one or two powerful retailers, authors and publishers could lose control over their distribution options and could be forced to make concessions on royalty rates, or forced to pay co-op dollars or listing fees.
I'm not suggesting that any of these retailers harbor nefarious intentions. They're simply trying maximize profit on behalf of their shareholders within the environments they operate. As much as I love our friends at Apple, and as much as I hope to be great friends someday with Amazon, I don't want there to be only two bookstores standing when the post-DoJ dust settles. That would be horrible for everyone, and I don't think it would even be good for Apple and Amazon.

I think if those of us - including the DoJ, authors, publishers, retailers, distributors, readers - who have the power to promote policies and practices that lead to more bookstores and more reading, we have an obligation to do the right thing. I believe agency will lead to more reading, and wholesale will lead to less.

Ultimately, regardless of pricing model, customers will decide what they will and will not pay.

Here's the big question: Who should decide what customers should pay? Proponents of the wholesale model believe that publishers make poor pricing decisions, and retailers make smarter decisions. If we're talking about big publishers, I agree with the retailers. Big publishers are pricing their books too high.

If we're talking about the indie authors and small presses, I think indies are more savvy about pricing than big publishers. The data above supports this. They're closer to their customers. With nearly 100,000 Smashwords books to choose from at Barnes & Noble, customers are voting for $2.99 as the median price and our books are priced very near that.

Are retailers better at pricing than indie authors? My guess is yes, simply because retailers have real-time access to store-wide data. But this gap in intelligence is rapidly decreasing. Indie authors are getting faster access to information, and there's even greater opportunity ahead for distributors such as Smashwords to start sharing more information with both authors and our retail partners. Such information sharing will help better align the interests of authors and retailers, and the end result will be pricing that is more responsive to the needs of customers.

Who Should Control Pricing?

In the end, I think authors and publishers should have the freedom to decide their pricing.

I have no idea how the DoJ will lean in their rumored lawsuit. I also don't know the negotiation plans of the publishers and Apple. The DoJ declined to share any details of their investigation with me.

I trust now that whatever decision the DoJ makes, they'll make it with the full knowledge of how it will impact indie authors. As I expressed to the DoJ, indies are the future of publishing.

30 comments:

David Crookes said...

You are spot on as usual, Mark. Let's hope agency pricing remains.

Linda Acaster said...

Thanks for sharing this with us, Mark. I'm pleased you are fighting in our corner.

Tracy Falbe said...

Thank you so much for explaining and defending the agency pricing model. Without it I would be basing my business on earning a percentage of an unknown figure per unit of product. I don't know many businesses that can operate that way.

If retailers would agree to pay a fixed percentage based on the suggested retail regardless of whether they discount a price for their customers or not, then the agency model might not be necessary. But as it is, we cannot enter into distribution agreements that promise us nothing and take all control. Without clear agreements on what a publisher gets paid on a unit, the retailers basically have license to steal content, sell it, and pass along whatever they feel like paying to the creator.

Dana Donovan said...

That's a powerful argument you presented to the DoJ, Mark. It's nice to have someone lobbying on behalf of indie authors and publishers to level the playing field for everyone. I doubt there is another individual in the industry today with such relevant insight and perspective into the burgeoning business of ebooks to have done the job better.

Well done.

Alex Greenwood said...

Excellent post. Thanks for the info. I will share it with my tweeps, peeps and pals.

Devin Rose said...

This is fascinating and helpful. Thanks a ton! I'm reading your e-book on secrets to indie success and am enjoying it; keep up the good work.

MikeOnTech said...

Excellent article. Here is my opinion as a consumer of books and ebooks. Maybe I am naive with my view of the publishing industry. As a consumer, it seems to me that the publishers control the price much more than the authors do although your article seems to point to authors having equal say in what the price should be which may or may not be an artifact of indie publishers. When I think of ebooks, I think of things like less overhead and reduced logistics of sourcing printing materials, storing the starting and ending products, and moving them around the control to warehouses and retailers. Hence I expect the price of an ebook to be valued less than a paper-based book.

Due to the reduction of materials, storage, and transportation/shipping, I would expect the publisher to reduce the price of the ebook yet the author could still earn the same amount per unit sold since ideally this is a reduction in cost that the publisher was footing. When I see things like ebook prices being raised above paperback book prices due to the movie or sitcom of the month/season being released I lose faith in the agency model. The supply and demand curve does not work with a virtual product (i.e. ebooks) when the product can be replicated and produced instantly, on demand.

Robz Ajatus said...

Great information Mark and thanks for taking a proactive position on this very important issue.

Kristine Kathryn Rusch said...

Fantastic analysis, Mark. Thank you for sharing all of this information and for your thoughts. Wonderful.

Kristine Kathryn Rusch

Jobo said...

Very curious to know why my first ebook is getting a 50% markdown from B&N, which Amazon is matching. If publishers are setting the price, why mark down my book from the price I set? Are other books being marked down as well? is this going against what you are describing as "agency pricing"?

Mark Coker said...

@Tracy Back when we were doing wholesale contracts with retailers, we actually negotiated the contracts so the 50% was paid on the author's suggested list. So most if not all retailers are willing to pay that fixed percentage of list under wholesale deals, though it's only 50% and not 70% (or, 42.5 and 60% after our commission).

@Jobo. Our retailers don't discount, so if the price is listed incorrectly that's a problem our support team wants to know about asap. Here's how to report incorrect listings at retailers: https://www.smashwords.com/about/supportfaq#error

Tracy Falbe said...

@Mark Coker - Thanks for the response. I recall the lower percentages when the retailers could discount our prices. Just so people understand, those original wholesale agreements were tolerable when all the retailers allowed similar terms. But then Amazon offered the appealing 70 percent royalty above a certain price point and of course everyone wants to produce for that. But then Amazon would price match the discounts of other retailers and then blow the suppliers out of the 70 percent Amazon royalty. This horror is what prompted the need for an agency model. I fully support the agency model. And as your data shows, it allows market forces to nudge prices lower when producers know that the price point they set is the one that has to compete as is. With agency pricing I also like knowing that readers can shop at whichever retailer they like best and know that they are not paying a higher price than elsewhere.

Tom Lichtenberg said...

I'm curious to know if the DOJ has any interest whatever in the price of books or the economics of bookselling. I'd assumed their interest in this matter would be strictly about the law, and in this case, whether or not the industry is engaged in collusion and price-fixing. Whether the activity is beneficial to certain parties or not is beside the point. If they are engaged in an illegal practice, the DOJ has a legitimate interest.

Annemarie Nikolaus said...

In Germany and other European countries we live with fixed book prices due to law. No other product does.
One of the reasons is, as you say too, Mark, to protect the small retailers - book stores for that matter.
Another argument: the cultural value of books: Fixed - read high - book prices would help publish more books and allow the publishers to take risks with new authors. As if they care about culture instead business. Well ...
Retailers who distribute to European countries need to respond to this law (Actually they don't and can't, because Smashwords doesn't set the Euro price for them).

Where was I? Actually, though, some authors and many readers in Germany fight against said law, because with this argument publishers set very high ebook prices - they just lie about the implications, pretending that the ebook price depends on the print price; what is not true. But readers don't know better - in the ebook forums we indies have to explain again and again. And authors often are too lazy to learn business.

Alison Pensy said...

Thanks for this post and for fighting in our corner.

I had no idea the impact of these models had on our royalties and possible earnings.

A lot of indies will suffer if we go back to wholesale pricing.

sgoldin said...

A wonderfully lucid, cogent explanation, Mark. Thank you. And I hope the DoJ paid attention.

And Tracy is absolutely right. If Amazon had to pay a fixed amount to the writer/publisher regardless of how much they discount (as they do with paper books), that'd be one thing. But they can discount ebooks by 90 percent and then pay the author a pittance. It doesn't cost them a cent, and it costs the author a lot. They'd think more deeply about the deep discounting if it actually came out of their own pocket.

JH Gordon said...

As a brand new author, I'm squirming over this stuff. I'm really glad Mark is here to set things in perspective. I just jammed a 7 book detective series on board and I wrestled with the pricing a bunch.

I figure it this way, e-book sellers make no greater or lesser effort no matter what the price. It's all ones and zeros and nobody is involved who can fog a mirror. It's just a program. Therefore, it's a matter of controlling bytes of info. There's the money.

Ok, why then, since the cost of one book is the same as the next for the retailer to offer, why should they offer only 35% at .99 and 70% if you price at $2.99 or higher? What is their actual cost? I say there is no difference and the royalty split is arbitrary.

Agency or wholesale is a argument I can't grasp because there is no difference in effort on the part of the "retailer". They must promote their site and encourage people to buy through them. If a person downloads a free book, it costs them nothing beyond the original cost of the program. So what difference does it make if I choose to charge under a buck? There is no difference in cost to them.

I plugged in Joe Detective because I realized I could use the .99 cent price as a an attractive model and I hope the message to the reader is this; buy the first one cheap and if you like it, pay a fair price of 2.99 for the rest in the series. Frankly, I can't afford the "free" model for a lot of reasons.

I'm very glad Smashwords was created as an opportunity for authors. I truly appreciate the advocacy as well. And I think the DOJ is sniffing. As long as an author can control the price of his or her work, the only thing we need is protection from huge retailers who might sell us down river because they can. Digits are digits. I wrote each book only once. The retailer benefits from the author. And the book is only uploaded once. Retailers should not be allowed a discount on royalty clause. They should have to negotiate with the author. If I wish to accept a lower royalty for a reason like better promotion, it should be my decision and that decision should be based on better returns reached by higher volume. Otherwise, they enslave us at no cost to them. They earn at no cost to them. They can lower the value of my months or years of work.

I'm glad you're there Mark. Thanks.

Joleene Naylor said...

Wonderful post! Thanks so much for explaining this so clearly :)

Russ Crossley said...

Thanks, Mark. As i understand DOJ is concerned that Apple and some publishers colluded to fix prices in an attempt to influence the overall market.

I agree with you that we indie authors should be able to set our prices freely as we see fit and what the market will bear. Having some outside body set some limits (either too low or too high) seems draconian to me and highly inappropriate in a free market economy.

I am somewhat concerned about Apple and those publishers trying to price fix but the consumer will decide what price to pay. Check out the RWA's survey on e-book pricing on their website. It's very revealing.

Tony McFadden said...

ostansh ininlYour average price is interesting, but only as an author pricing point. I'd be interested in a weighted average price,

(#books sold at each price)*(price) divided by (total number of books sold) excluding, of course, the free books.

That would give a better idea of what the *readers* are willing to pay.

Mark Coker said...

Tony, great question. Just calculated the number for the B&N timeframe and updated the post: $2.59.

Over the the next few days I'll be doing more extensive number crunching in preparation for a talk I'm giving at the RT Booklovers convention in Chicago. I'm sure that data will find it's way back here as another post.

PolyWogg said...

Hi Mark,

I think your use of the term free market must differ from mine -- you argue that "agency pricing" is simply the ability of the producer (author or publisher) to set the price. However, I hope it was clear to the DoJ that there are really two agency models at work here.

First, there is the "simplified agency model", which is basically what Smashwords and Amazon Digital Services use for indies/self-pubbed and picks up all the benefits that you bestow. Unfortunately, your analysis doesn't show that this simplified agency models come out to lower prices that people are willing to pay (predictive), it merely shows what people are actually paying (descriptive). To use the vernacular, if the "pareto" equilibrium is really $1.25 (predictive), for example, your analysis would still show actual prices (descriptive) are higher than what it "should" be. If the equilibrium was $4.50 (predictive), it would be showing authors getting ripped off. In plain speak, your analysis shows a trend that simple prices are not rising, but that doesn't say anything about what the market says the price SHOULD be -- and a discussion about agency models should be about whether such models raise prices above what they SHOULD be when all actors are free.

Probably simpler to think of wartime scenarios for rationed goods -- even if you only charged 10 cents more, and then 8, and then 6, your analysis would show prices going down, but it would still be profiteering. Interestingly, though, with the way Amazon set their commissions, the retailer with the most sales info arguably wanted a $2.99 rate as the minimum -- which is higher than what the market is actually paying as a result of the free and 99 cent options.

Secondly, there is the Big 6/5 "unilateral agency model", which you agree results in prices that are too high. But too high compared to what? Essentially, what the market would bear if left to its own devices i.e. if retailers set the price or if demand set the price. The market would lower those below $9.99 and certainly way below $14.99. Yet this is far from a "free market" agency model -- separate from collusion was the threat that the vendor would not have access to other items (collateral damage).

Yet, if the market is supposedly free, why doesn't the vendor have the same freedom that the publisher does? And by your extension that the author always gets the same commission and can do their own price adjustments, why can't the retailer make those decisions too, since they also are simply getting commissions that way?

Do you have a concern that not separating out the agency models into the two tiers -- and running the numbers separately -- that you may have done authors a disservice? Not intentionally, obviously, but did you get the feeling that the DoJ really understands the difference?

Finally, I think it's a bit of a strawman to wax and wane about concerns that once Apple, Amazon, and/or Google are left standing, they will turn evil and pillage the land. Not a single monopolistic industry has ever done that in the history of economics -- although there are a few cartels who have. And with lower startup costs and barriers to entry, the "long-term" possibilities are just as likely to be disrupted by new innovators as old ones. At some point, even the Big 6 are going to create seamless / frictionless websites that can do direct sales for less.

Random House's new sales portal that gives more accurate sales data is, in my limited view, a much greater harbinger of what will come than assuming 3 sole vendors.

PolyWogg

CHightshoe said...

My problem as a publisher is more closely tied to what Amazon has forced. I prefer that ebooks be treated the same as other retail products. I set a MSRP and am paid a set percentage off of that MSRP and I don't care what the retailer sells the product for after that. They can make it a loss leader or sell for the MSRP or some price in between.

Amazon with their set-up forces the publisher to absorb any discounts they decide to give on the product - in essence creating the price setting that is going on because everyone price matches everyone else.

This is the set-up that the DOJ needs to investigate and the practice that needs to stop. Ebooks should be treated the same as any other retail product - I set the MSRP, I get paid a set percentage of that MSRP and the retail sells the product for whatever they feel they can get for it.

Daniel said...

I'm with CHightshoe. Publishers and authors have no business telling retailers how to run their business. Agency pricing works *against* a free-market economy.

Wholesale pricing makes as much sense for books as it does for any other product. However, as a supplier, I should be able to set my wholesale price and get paid that price on every book that the retailer sells. If the retailer wants to give the book way for free or charge 10X what they pay me for it, that's up to the retailer.

Pricing is a powerful marketing tool that retailers should have at their disposal and discretion. THAT is what empowers a free market economy.

What Amazon does with indie authors is not wholesale or agency. They take full discretion over pricing and pay the author a percentage of the discounted sales price, not a fixed wholesale price (assuming the lower price is due to a "competitive discount.") Indie authors are idiots for accepting that deal, but we do it anyway so we can have access to the Amazon customer base, and most of the time, it works to our advantage.

Agency pricing is a dumb idea that only came about because a large group of powerful corporations decided to use it as a tool to fight Amazon. That's the only reason it exists. All this talk about the effect of agency on prices is completely beside the point. Agency pricing has already been used in collusion to stifle the competition. GO DOJ!

DonOmite said...

Let's look at this data from another perspective tho. Is it really market pressure driving prices down or the lack of confidence the authors have in their material? Giving your work away for free tells the reading public that your work is not that great because you are desperate enough to give it away in the hopes that some people will like it enough to pay for subsequent titles.

Free books hurts other authors because now people are thinking ALL ebooks should be free.

Also, once you give it away free you will rarely be able to start charging for it because the free copies will still be out there. I tried this with the Amazon KDP. 5 days of free. Then checked all the "free ebooks sites". Yup. There the book was. Even AFTER the promotional period was over.

To keep this short, indie authors need to keep their prices up there with the big names. Don't damage the whole industry by giving your work away free. Unless of course you are not in this for the money at all.

DonOmite said...

In response to Daniel and CHighshoe, ebooks are different from "real" books and other products in a very crucial area, they are just electronic information. They don't actually exist physically.
So if I am selling a product like widgets, I sell them to retailers at wholesale price. Then I don't care what they do with the price. I have my money. With physical books there is usually the deal that unsold books can be returned for a refund. (Or just the cover).

How do we do that with ebooks tho? Do I say to Smashwords "buy x number of copies from me and do what you will with the price"? That would be nice but not practical unless we want to go with a licensing model like software.

The problem with going for a percentage is that the author has no clue how much to expect. Of course this is a typicl practice in the arts. However there is usually a base amount coupled with a percentage of profits.

My favorite pricing model is fixed amount. I had a contract where I got 25 cents per sold book. Didn't matter what the price of the book sold was, even free, I got 25 cents. (yeh this was years and years ago).

This usually means a lower percentage but it allows the retailer to do what is needed to move the book. Plus the retailer usually has a better feel for how much a book will sell for. Afterall, that is THEIR job. The authors' job is to write.

So we, as indie authors, need to stop worrying about percentages and get solid numbers. Smashwords etc could have us say "I want x amount per book sold" and let them set the price. Even free. But for every book that goes out, the author gets their money.

DrDln said...

Thanks for sharing such a useful info.
“Nobody can go back and start a new beginning, but anyone can start today and make a new ending.”

Nirmala said...

I would add that agency pricing was not just a tool the publishers used to fight Amazon, but it is also a tool they are using to slow down the adoption of ebooks. This is not good for any author including Smashwords authors as Joe Konrath points out here: http://jakonrath.blogspot.com/2012/04/agency-model-sucks.html

If publishers really preferred agency pricing, they would also use it for their paper books, but their real agenda is to slow down the adoption of ebooks. hence they use agency pricing to artificially prop up the price of ebooks, and therby slow down the adoption of ebooks by customers.

The real issue is whether I as a small publisher/author can set a price that I receive for my book. What the retailer charges for it is not my concern. Given that Amazon does not give us a set price and reserves the right to pay me less if they discount my book, I can understand why Smashwords resorted to agency pricing. But that is a band-aid approach, and maybe isn't as important now that Amazon does not drop the 70% cut when discounting a book below $2.99.

Hopefully, the market will sort itself out, and maybe the DOJ suit will help.

Nirmala said...

I would add that it crossed my mind that the effort by the publishers to slow the adoption of ebooks is also hurting self-published authors by reducing enthusiasm across the board for ebooks and ereader devices. A reader who is a late adopter of new technology may look at the high prices of bestsellers as ebooks, and decide not to buy a Kindle or Nook. They may decide it doesn't make economic sense when ebooks cost almost as much as or sometimes even more than a paper book. They are used to reading paper books and so might just stick with that delivery system for now.

And based on my experience with self-publishing both ebook and paperback versions of my books, it is a lot easier right now to reach a new reader through sales of my ebooks, in part because I can charge only $2.99 for an ebook versus $11.95 and up for my paperback books. I also have enough ebooks out there to offer some of my ebooks for free (which I can't afford to do with the paper versions), and those free ebooks reach a lot of new readers. But if someone does not buy a dedicated ereader in the first place, I am much less likely to reach that new reader because they do not own a Kindle or Nook.

Thanks to the DOJ, maybe ebook reader device sales will increase and bring more ebook sales to all of us.

No Filter: The Book said...

I really wonder what is next for pricing with eBooks.

Agency pricing seems like a win-win.

Hopefully can find a good new normal.