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.