Showing posts with label ebook pricing. Show all posts
Showing posts with label ebook pricing. Show all posts

Wednesday, December 1, 2010

Smashwords Puts Authors and Publishers in Control of Pricing

Our authors and publishers spoke (and some wrote, screamed, begged and politely asked), and we listened.

Effective today, all Smashwords retailers are pricing Smashwords books at the price set by the author or publisher. No more discounting.

It also means we have significantly increased the royalties we pay our authors and publishers.

To summarize how we got here, and what it means to Smashwords authors, publishers and readers, let's take a stroll down memory lane to review how books have traditionally been priced, distributed and sold.

For most of the last several decades, the book industry worked under a wholesale pricing model. A publisher would ship their books to a distributor or wholesaler, who would then sell the books to brick and mortar bookstores. In advance, the publishers and their supply chain partners would work out a discount schedule in which the retailer would purchase the book for some percentage off of the suggested retail price.

For example, a retail bookstore might purchase books from the wholesaler/distributor for 50% off of list price, which means the retailer would pay $15 for each $30 list price book they sell. The retailer could then set the price. Most retailers, taking advantage of their close proximity to the customer and their understanding of consumer behavior, had the ability to discount the book to such a price that they could achieve their objective.

For example, if a retailer's objective was to maximize the per-copy profit, they might sell the book at list price (when I was Brazil in October, I learned some airport bookstores sell print books for more than the list price). If the retailer wanted to maximize their overall profits, they might sell the book at a discount and make up the difference in increased volume. If a retailer wanted to attract buyers into their store, they might even sell the book at below cost.

To the author and the publisher, the discounting didn't make a difference, because the author and publisher were paid a fixed percentage of the suggested list price. Retailers liked this pricing model because it gave them the flexibility and freedom to use price to help serve their customers and serve their bottom line. Everyone was happy.

Then ebooks came on the scene, and the pricing of ebooks followed the same general wholesale model, only rather than shipping physical copies of a dead-tree book to a warehouse or distributor, the publishers or their distributors would ship a single digital copy of the book to the retailer, and the retailer would make digital copies each time they sold one.

Retailers, responding to customers who expected to pay less for ebooks than print books, started aggressively discounting. Many publishers dreaded such discounting for fear it would devalue books, or would cannibalize print book sales. Then Amazon, in an effort to serve their customers, started selling many best-seller ebooks for under $9.99 - for less than what Amazon had to pay the publisher for the book.

An ebook price war broke out, and other ebook retailers tried to match Amazon's price.

Now remember, in the print world, publishers didn't care too much if a retailer discounted the book, since the publisher is paid based on a predetermined discount off of list. Publishers also understood that if the retailers couldn't sell through their inventory of books, those books would be returned to the publisher for a full refund. So the discounting double-benefited the publishers.

You might think the publishers would have been happy that Amazon and other retailers were pricing books at below cost. The low costs drove up demand, helped accelerate the growth of the ebook market, and helped the publishers sell more books.

But no, the big New York publishers were not pleased. They feared that Amazon and other retailers, by pricing their books under $10.00, were devaluing books and setting an inappropriate customer expectation that ebooks should be priced at $9.99 or less. Publishers feared Amazon was exerting too much control over prices, and further feared that some day Amazon would come back to publishers and demand greater discounts, thereby permanently lowering the publisher's list prices and profits.

When Apple came on the scene in April 2010 with a new pricing model known as "agency," one in which the publisher set the price and Apple, acting as a sales agent, would not discount, five of the big six New York publishers jumped for glee. Finally, they thought, Apple would be their savior - their counterbalance - to Amazon's increasing influence in the ebook business. Publishers also appreciated that Apple would pay them 70% of the list price, as opposed to the traditional 50% or less that they earned under the conventional wholesale pricing model.

So the five big New York Publishers - now known as the Agency Five or A5 - put a gun to the heads of all the major ebook retailers, and basically told them, "you need to either switch us to the agency model April 1 or we're going to stop allowing you to sell our books." As you might imagine, the retailers were not pleased. First, no one appreciates threats, especially from suppliers who are supposed to be your partners. And second, if you take away a retailer's ability to control the price, you make it difficult for retailers to do what they do best, which is to use price as a tool to sell more product and make customers happy.

Amid this awkward shift to agency for the A5, the A5 also gave second shrift to the smaller independent ebook retailers, even though a thriving ecosystem of indie ebook retailers would assist the A5's master plan of creating a counterbalance to Amazon. Due to logistical problems, contractual holdups, tax collection requirements and prioritization, the small indie ebook retailers were not allowed to switch immediately to agency, which meant that the indie retailers lost access to most of the best-selling books in April. I'm told more than one indie retailer went out of business after the virtual rug was pulled out from underneath them when they could no longer sell these books.

The move to agency also created conflict within the supply chain, and it created challenges for Smashwords authors too. Prior to the advent of agency, three our original retailers - Barnes & Noble, Sony and Kobo - were under the traditional wholesale retailer model. Previously, most Smashwords authors and publishers didn't care that their books were discounted, because the discounting only helped sell more ebooks, which benefited authors, publishers and readers.

But then around July, Amazon increased their royalty rates for direct publishers to match the Apple 70%. For the authors who chose to work directly with Amazon, they had to agree that their books would not be sold elsewhere for less, and if Amazon discovered the book priced elsewhere for less, they had the right to discount the author's book to price-match the competition.

This is when the proverbial fertilizer hit the fan for some Smashwords authors who publish direct with Amazon via DTP and then use Smashwords for all the non-Amazon retailers. I recall receiving one especially frantic email from a Smashwords author on disability retirement who was faced with the prospect of seeing his Amazon sales slashed due to discounting at our retailers. This author, like some other panicked authors who had been selling at Amazon for a long time, decided to remove their books from Smashwords retailers. This, to me, was an especially disconcerting trend, because these authors were hurting themselves by removing their books from important retailers like B&N, Sony and Kobo. Some of these authors even removed their books from our Apple channel, or unpublished their books at Smashwords altogether, even though Smashwords and Apple have never discounted. When someone yells "FIRE," it's tough to think straight. Matters weren't helped when some authors, clearly talented on the imagination front but lacking hard details, jumped to erroneous conclusions in online message boards, which further fueled more panicked responses.

When an author pulls a book from retail, it destroys their sales rank, they lose all their reviews, and they deny themselves the opportunity to reach new readers. In other words, no author in their right mind should ever remove a book from retail.

On the other hand, it's difficult to maintain your right mind when your friends are panicking too, and you're suffering real measurable harm when an auto-pricing robot cuts the price of your book at the largest retailer - a retailer said to control 70% or more of the ebook market. Remember, Amazon had every right to do these price corrections - and the authors agreed to this when they signed the Amazon contract - though it did create a situation where some authors felt forced to take actions to preserve their sales at Amazon. Some of these authors eventually waded back in, or tried to compensate for the expected discounting by raising prices at Smashwords, or raising prices across the board.

The obvious solution to me, given the impossibility of managing two incompatible pricing models, was to give our authors and publishers complete control over the price of their books. We've always done this for sales at Smashwords.com, our small retail operation, but I knew it would be a bigger challenge to move our retailers to the agency model, or something agency-like. Needless to say, none of our retailers were too keen to do this when I first started requesting this in June. I can't blame them for their hesitation, because the agency model creates all kinds of complexity and expense for the retailer to administer. I imagine many were still smarting from the insult of being forced to do it in the first place by the A5.

Today, however, I'm pleased to report that Kobo, Barnes & Noble and Sony have transitioned all Smashwords books to the new model. I'm also pleased to report that unlike the tactics used by the Agency 5, we did not put a gun to the head of our retailers. No shots fired, no threats made. In the end, I think each retail partner decided on their own that what is best for Smashwords authors and publishers is also what's best for them and their customers in the long term.

Possibly I have a different view of our retailers than the view from the large publishers. I see our retailers as true partners. Our mission at Smashwords is to help our authors and publishers connect with readers. One of ways we accomplish this is by supporting our retail partners because they more than anyone know how to connect readers with books.

Every once in a while I'll see people suggest authors should only sell their ebooks direct on their own websites, as if all intermediaries between the author and the reader are to be excised. Those folks are smoking opium. Smart authors put their books at retailers who can put their books in front of customers.

So effective immediately, all our retailers are on the same page. Like with our other agency retailers Apple and Diesel, we now pay our authors and publishers 60% of the author/publisher-determined list price for books sold at Kobo, Barnes & Noble and Sony. Simple.

Well, mostly simple. Here are some additional fine print details of interest to Smashwords authors and publishers:
This change means that for sales at B&N and Sony, we have significantly increased our royalty rates. Previously, we paid 42.5% of your suggested list price. The new 60% represents a 42% increase (42.5*1.42=60). At Kobo, we've increased our rate from 46.75% list to 60% list for most sales, a 28% increase. At Kobo, the new royalty rate applies for books priced between $.99 and $12.99, and only for dollar-denominated sales. We can no longer ship books to B&N that carry the price "Reader Sets the Price," so if you're one of the very few authors with this price setting, and you want distribution to B&N, then please change your price asap to $.99 or higher. All three have the freedom to price match if the same book is sold elsewhere for less. Make sure your prices at Smashwords are the same as elsewhere. Click to your Smashwords Dashboard's Channel Manager for summarized details.
With this change comes new responsibility for authors and publishers to price their books at a level customers want to pay. Here, I think indie authors and small publishers do a much better job than the big publishers. Already, the average book at Smashwords is priced under $5.00. At $5.00, a Smashwords author earns $3.00 profit for every book sold at retail. Large publishers can't compete against that (a traditional mass market paperback sold for $8.00 earns the author about 40 cents), which is one of the reasons I firmly believe the future of publishing lies in the hands of indie authors and small publishers, and in the years ahead we'll see more and more big-name authors go indie. They can earn more money per sale while serving their readers with a lower cost product. It's a win-win for the author and reader.

If you'd like to learn more about the agency model, Mike Shatzkin did a good post on it a few days ago at his Idealogical blog in which he concluded agency pricing represents the most significant event in 2010 for the publishing industry. Click here to access it.

If you'd like to learn about the transition to agency from the perspective of an indie ebook retailer, Kelley Allen over at Diesel has been posting a fascinating blow by blow as the events unfolded from April through today. She thinks the agency model will eventually be good for indie retailers and customers in the long term, though the path to here was fraught with much pain. Some links from the Diesel blog:

April: Most of the posts on this page deal with agency. Start at the bottom first for a chronological blow by blow: http://blog.diesel-ebooks.com/?m=201004

May:
Jilted (this caused quite a stir): http://blog.diesel-ebooks.com/?p=124

Day 43, Landing Harper Collins: http://blog.diesel-ebooks.com/?p=137

Day 45 days, they got Penguin: http://blog.diesel-ebooks.com/?p=130

June:
Mobi announces that they are no long selling Agency
http://blog.diesel-ebooks.com/?p=161
http://blog.diesel-ebooks.com/?p=179

July:
Diesel inteviewed by Kat Meyer of O'Reilly about Agency
http://blog.diesel-ebooks.com/?p=201

September:
Day 153: Hachette back up http://blog.diesel-ebooks.com/?p=368

October:
S&S back up http://blog.diesel-ebooks.com/?p=520

Nov:
Kelley Allen's recap of her latest thoughts on agency
http://blog.diesel-ebooks.com/?p=704

My sincere thanks to Smashwords authors, publishers and especially our retail partners for their support in helping us navigate these exciting times.

If you're not yet using Smashwords as your ebook publishing and distribution platform, please join the over 10,000 indie authors and publishers who now collectively publish and distribute over 25,000 books at Smashwords. To learn more, visit How to Publish and Distribute Ebooks with Smashwords. Or, view the Introduction to Smashwords post on the Smashwords Blog.

Wednesday, March 10, 2010

Ebook Coupon Statistics from Read an Ebook Week

Have data, must make pie charts.

It's been a long couple days and my brain is teetering between blank and foggy. It's times like these when I enjoy some good mindless data analysis.

It's fun to look at numbers and speculate about the story they might tell.

Today is day four of Read an Ebook Week, which, I'm convinced, is like Christmas for book lovers.

Our traffic the last few days almost doubled over the same period a week earlier. Thousands of ebook readers around the globe wore their mice ragged during a gluttonous ebook binge to download our 3,000+ participating titles offered at deep discounts.

The traffic Tuesday reached such fervor it caused the site to crash and stay crashed nearly all day. It was a horrible, gut-wrenching experience to preside over our comatose baby. Thankfully, after we performed some radical database surgery, the site jumped back to life, faster than ever.

Back to data. As of this moment, 2,341 Smashwords books with a price are participating in Read an Ebook Week. Probably another 1,600 (don't quote me on that) are also participating because they're already priced at FREE or "Reader Sets the Price."

We gave authors and publishers the opportunity to manually opt-in their books to one of three promotional discount levels of 25%-off, 50%-off, and 100%-off (FREE). The only requirement was that the book needed to carry a pre-coupon price, and the price after application of the coupon needed to be either free, or $.99 or higher.

So I bet you're wondering, which coupon levels did they choose? The fascinating answer is in the pie chart above and the list below.

Coupon Level ... # of books ... Average book price, pre-coupon
100%-off ... 370 ... $3.25
25%-off ... 983 ... $4.61
50%-off ... 988 ... $5.20

Interesting conclusions from the data (plus additional data):
  1. More authors/publishers selected the 50%-off coupon than the 25%
  2. Books given the 50% coupon had an average pre-coupon price 13% above the 25% coupon books, yet after applying the discounts, the 50% books cost $2.60 while the 25%-off books cost $3.45. In other words, the more expensive books were selling for 25% less than the less expensive ones. Got that?
  3. The 50%-off coupon books sold at a rate nearly four times higher than the 25% books. Perhaps the combination of perceived value (of higher price, greater discount) with lower price made all the difference?
  4. The 100%-off books experienced 74 times more downloads (sales) on average than the 50%-off books, and 291 times more than the 25%-off books

Monday, February 15, 2010

How to Publish and Price an Ebook - San Francisco Writers Conference Presentation

Dan Poynter and I presented our Ebook Revolution presentation this weekend at the San Francisco Writers Conference.

Attendees were given a crash course in how to produce, publish, price, distribute and promote their books as ebooks.

The Powerpoint is embedded below. (Click here to download a separate audio recording of the presentation - will open a new browser window, then click on the "Download File" link)



As promised, I presented *preliminary* data based on a quick study we did at Smashwords to determine if certain ebook price points yield authors and publishers more revenue. For example, we all know if something is cheap, we tend to consume more of it. If the price goes up, we consume less.

So how does this rule apply to ebooks, and at what price can ebook authors and publishers expect to yield the highest total revenue, defined by price multiplied by units sold?

We examined 13,500 recent sales at Smashwords. We aggregated the sales data into 50 cent price ranges from $.99 and up, and then divided by the number of titles represented by those sales. This gave us the average sales per title per price point. The vertical axis is deliberately left unlabeled because I'm more interested in the visual representation of how titles in different price ranges perform in relation to one another. Scale, however, is apparent in the horizontal lines. The third line is triple the first line, and the second is double the first.

I expected to find a single price as the magic sweet spot, but instead, our data suggests there may in fact be a few sweet spots. $5.00 and $9.00, for example, look like promising price points that deserve further study.

The highest yielding books, on average, are those with higher prices. Before you all run off and raise your prices over $20.00, I'd caution this data is subject to error and misinterpretation.

The data doesn't take into consideration genre, the length of a title, the quality of a title, the age of the title, or the success or failure of the authors' marketing. Although we looked at a large sample, most of these sales were under $10.00 because most Smashwords books are priced under $10.00. Although the data is normalized to account for this, results for titles priced over $11.00 are less statistically relevant because they reflect fewer titles.

On the surface, it wouldn't be such a huge surprise that authors and publishers can make more money at $20.00 than $2.00. In order for the $2.00 book to beat the $20.00 book, the $2.00 author would have to sell ten copies for every $20.00 copy sold. The supply curve isn't so elastic that readers will read an unlimited amount of content at lower prices. A reader's time is limited, and the reader values their time, so it would make sense the reader is willing to invest good money if they know it's for a quality read. The possible lesson here, and it's a bright note for authors with the ability to develop high quality content, is that readers will pay for your content if it's worth paying for.

I think the data raises more questions than it answers, so I plan to dig deeper. In the months ahead, we'll look at larger samples and better-tuned sample sets. I'll share the more enlightening results with you here.

The conference was excellent, by the way. If you're a writer and you want to improve your craft and knowledge of the business, I'd definitely recommend the conference in 2011. Agents Michael and Elizabeth Pomada, the conference organizers, did an excellent job of pulling together a writing conference that was both entertaining and educational. Thanks also to the dozens of conference volunteers who helped make every session run like clockwork.

Thursday, February 11, 2010

What Happens When Ebook Customers Choose Their Own Price?

One of the pricing options authors and publishers can select at Smashwords is "Reader Sets the Price." The reader pays on the honor system. They can take the book for free, or they can select a price of $.99 or higher.

It's a chance for authors to eliminate price as a barrier in their never-ending campaign to reach readers.

We've offered this pricing option since we launched Smashwords two years ago (Hey, today's our two year birthday!). Internally, we always thought of it as Radiohead pricing, since our inspiration for this model was the band Radiohead who bravely offered their album "In Rainbows" under this pricing model in late 2007.

At the time, Radiohead had recently unshackled their careers from the control of their record company, and the pricing scheme probably amounted to an equal mix of experimentation, pre-album publicity stunt to drive paid concert attendance and physical CD and vinyl sales, a gift to their fans, and also a big F* You to the record companies.

Radiohead never revealed hard data on the percentage of people who paid or the average price paid, though the album did go on to top the charts in the U.K., U.S. and elsewhere.

As I mentioned yesterday in my post about the most popular ebook formats, earlier this week we did some number crunching to expose some of the data Radiohead never shared.

We looked at a small sample of 353 recent "purchases" under this pricing option at Smashwords. Of the 353 purchases, 299 customers selected to take the book for free and 54 paid money.

Next, we looked at the breakdown of the voluntary payments. The payments ranged from the lowest minimum of $.99 to a high of $12.42. The average price paid was $3.20, and the median price (for you statistic geeks out there) was $3.20. As you can see from the chart, the distribution of payment amounts was fairly even.

Interestingly, when we compute the average yield per book "purchased," including the zero dollar purchases, it averages out to $.49 per customer.

Not captured in this data is any other ancillary benefit received by the author/publisher. Possible author benefits might include:

  • customer goodwill
  • purchases of print versions
  • free author and book publicity from satisfied readers on blogs and social networks
  • increased fan base to which to market other titles by the same author/publisher
I neither encourage or discourage our authors to use the Radiohead model. As I'll discuss this weekend in my Ebook Revolution session with Dan Poynter at The San Francisco Writer's Conference, there's no one-size-fits-all pricing strategy for ebooks. Your choice of pricing really depends on your objective as an author, and also your subject matter. Are you looking to maximize readership or revenues, or do you want to do both?

High prices tend to discourage readership by reducing affordability. Lower prices expand the available market. Free eliminates price as a barrier. And the Radiohead model offers a middle ground by trusting the customer to decide.

The other bit of research I'll share at the conference is a small study where we sought to discover the magic price at which an author might expect to maximize earnings. Is the price $1.00 or $25.00, or somewhere in between? Or might there be multiple magic price points? This will be the topic of my next post.

And as a final note on our two-year birthday, I want to extend my sincere thanks to Smashwords authors, publishers, readers and everyone else in this wonderful business of publishing who honor us every day with their trust and support.