Options in the Price War Over Books

Last week Amazon.com, Walmart.com, and Target.com embarked in an online price war over the pre-sale of new hardcover, bestselling books. While the retail price for these books is typically $25–35, all three of these retailers are selling them for between $8.98 and $9.00.

Photo courtesy of ©iStockphoto.com/Kolbz, Image #3929364

Photo courtesy of ©iStockphoto.com/Kolbz

Since publishers generally sell these books to retailers at a 40–50% discount, these three retailers are selling these books at a significant loss—$3.50 to 8.50 per sale. Obviously, they are doing this to drive traffic to their stores, hoping that consumers will buy enough other items to offset their loss on these titles.

In my opinion, this strategy will prove damaging to publishers, authors, booksellers, mass retailers, and ultimately consumers.

  • Publishers. For right now, publishers are getting paid an amount equal to the customary discount for hardcover books. But no one in the industry I have spoken with expects this to last for long. Amazon, Walmart, and Target are systematically conditioning consumers to expect these lower prices. Eventually, these retailers will be in the position to force publishers to lower their retail prices.
  • Authors. If retail prices collapse, it will mean that royalties and advances will also fall. You don’t have to be a mathematician to figure out that 10–15% of $9.00 is dramatically less than the same percentage of $25–35. Most authors have a difficult enough time making a living now. This will lower the income of all authors and force many to get out of the business altogether.
  • Booksellers. How can booksellers—who don’t carry blenders, throw-rugs, and groceries—compete with big box or online retailers who are willing to sell books at below-cost prices? Booksellers count on these same bestsellers to bring customers to their stores. Most are willing to discount the books and accept lower margins, but few are in a position to actually lose money on every sale. It is not a sustainable model.
  • Mass retailers. Ultimately, this focus on driving down the price of the best our industry has to offer will hurt everyone, even the mass retailers who started it. When publishers are forced to further reduce titles, or new authors just don’t have the same incentive to succeed, the pipeline of new book titles will dry up. Where will the next crop of new authors come from? Who will be the bestsellers of tomorrow? The mass retailers have had the luxury of being able to skim the cream off the publishing milk pail without investing in the process that creates the milk in the first place. In my opinion, they are about to kill the cow.
  • Consumers. Yes, lower prices are good for consumers—in the short run. But they are not good in the long run if authors and publishers are no longer willing to assume the risk of creating and producing the kind of quality and selection consumers currently enjoy.

The American Booksellers Association has recently objected to these pricing practices as well. On Thursday, October 23, 2009, they sent a letter to the Department of Justice, calling for an investigation. While I agree with their articulation of the problem, I disagree with their solution. I do not believe that asking the government to solve the problem is helpful. I think this will only lead to more red-tape, additional cost, and a raft of unintended consequences.

Instead, I think that the publishers themselves need to find the courage to act in everyone’s long-term interests. As the content providers, they have all the power they need to stop these pricing practices.

Here are at least three strategic alternatives. At Thomas Nelson, we have not decided on any of them, but we are currently discussing all of them:

  1. Establish a minimum advertised price (MAP) for frontlist titles. According to anti-trust legislation, it is illegal for publishers to dictate the ultimate price at which a reseller sells a product. Moreover, publishers cannot act in concert with one another to establish fixed prices or discounts. But any publisher can act unilaterally to establish a minimum advertised price. Using the MAP model, Amazon, et. al., could sell their books for any price they want, but they could not advertise a price that is below the minimum.
  2. Stage the channel rollout of certain frontlist titles. The movie industry does this now. Major movies are first released to theaters, then cable, then DVD. Some people are willing to pay a premium to see it in a theater now rather than wait for the DVD later. In the publishing industry, we already do this with book formats. We typically release the bigger books in hardcover first, then trade paper, then mass paperback. We could do the same thing with specific sales channels.
  3. Delay the publication of eBooks. This is a tough one for me personally, because I believe in the future of eBooks. (I have a Kindle 2 and a large eBook library myself.) However, I do not agree with Amazon’s aggressive pricing model, which kicked off this price war to begin with. I think the worst thing that could possibly happen is for consumers to think that no book should sell for more than $9.99. Therefore, I think Amazon needs to either raise the price of eBooks to more closely mirror the hardcover or trade paper prices, or we as publishers should delay the release of eBooks and think of them more as a digital mass market product. Some publishers are already doing this.

I am sure there are other alternatives. However, I wanted to get these three on the table and see what others have to offer. In any event, I think these three strategies beat the two options we have now, which is (a) to do nothing and hope this resolves itself or (b) to bring the government in to solve the problem.

I think it is important that we have this conversation now in our industry before it is too late and we have even fewer options.

Question: What do you think should be done about these current price wars?
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  • ray h

    Mike – your response to one post "Yes, but most publishers are too dependent on these retailers to reach their overall volume objectives. In fact, most are unwilling to speak out against this for fear of reprisal." is perhaps the most telling. Which one of the top 10 publishers will break the ice and put in place something like minimum pricing that would really work for bestsellers and ebooks. If one of these top 10 won't act or is afraid to act in a way to regain control of their products then I hate to say it but then the DOJ action is the only way as the big retailers have already won in intimidating the publishers to non-action.

    I close with this question – if Steve Jobs was faced with the macbook, imac, iphone or ipod being sold at a steep loss by Amazon, Walmart or Target do you think he would let them continue to sell his product?

    Publishers need to take a stand.

    • http://intensedebate.com/people/michaelhyatt Michael Hyatt

      Your points are well-taken. Publishers do need to take a stand! Thanks.

  • Jeff Myers

    I usually agree with you, Michael. But this time (at least at face value) I don't. What I'd like for you to explain as a publisher is why books have to be SOOO expensive. I'm an avid reader and I'm quite sure I spend too much money on books each year. In my uninformed mind, there is almost never any reason for a book to be priced higher than $20 (and soft-cover books should be priced around $10). To me that would be a more accurate value for what I'm getting. Please explain why publishers are pricing books at $25, $30, or more nowadays. Bottomline, if there's not a REALLY good reason for it that makes sense to the average consumer, then I welcome the price wars.

    • http://intensedebate.com/people/michaelhyatt Michael Hyatt

      This varies from book to book, but let's assume a $25.00 retail price. Distributors and booksellers pay, on average, $12.50. The author takes any where from $2.50 to $3.75, depending on their sales history, platform, and overall "bankability." Manufacturing is another $1.25-$1.75, depending on page count, trim size, bells and whistles, etc. Advertising, publicity, and promotion is likely another $1.25. The publishers overhead (editorial, sales, marketing, and warehousing) is another $3.75 or so.

      By the time you add the cost of capital to finance accounts receivable, author advances, and inventory, you're left with pretty slim margins. Added to this is the fact that more than half of new books lose money. The books that work have to earn enough to cover the losses.

      Like most things, there is more to it than make be apparent on the surface.

      Thanks.

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  • digital developer

    It seems to be a "commonplace" among book readers that ebooks are so cheap to produce that publishers should be able to slash prices to the attractive $9.99 (or less) listed by Amazon.com and now others. It's true that publishers save the printing cost and the warehouse storage cost and the shipping cost. But, publishing an ebook requires a bit more than copying a file from one server to another, and our other costs remain about the same as for a print book.

    I'm working on creating ebook versions of my publishing company's old and new print titles. It's like building a new company alongside the old one. We have to check all the contracts–for the content the author sold us; for the charts, photos, long quotes or other content that the author used; and for the cover art and interior design elements our designer used–to make sure we can reproduce them all in digital form. In many cases we have to revise the content or cover or pay additional digital rights fees. Then we have to edit the content to add appropriate links, revise formatting that won't work on an ereader, change the copyright page, and so on. Once we have a final file to work with, we have to convert it into the various formats we want to offer and test for any problems on different ereaders. We might do that with internal staff or we might send the file out for conversion. We have to create marketing information and send it to our vendors. Some of these costs are different (and may end up being less) than for a print book, but they are still significant. And we don't expect to sell as many ebooks as we do print books, so the amount of internal cost that an ebook can bear is less–at least right now.

    In addition we still pay a similar royalty to the author for an ebook–in general it's about 4% less than for a print book. And we still spend money on marketing and sales efforts. We have also built and now maintain a webstore where we can sell ebooks and other downloadable products direct to customers. With that comes the need for an extra employee to handle customer service questions and requests. Any savings we have on overhead because our warehouse staff aren't involved with ebook fulfillment is offset by the extra work our business and IT staff have to do to reconcile ebook sales into "orders" after the fact (Amazon.com and others tell us how many books they've sold and we create an order based on their sales report) and to support our webstore and customer records–so we can keep track of what individuals order and give them lifetime access to their purchases, among other things. We have also spent time and money retrofitting our internal operations to accommodate ebooks in a variety of ways. Many of these things simply were never needed when we were just publishing print books.

    Some of these costs are "start up" costs and will diminish or disappear over time, and, sure, ebooks are in an experimental phase, so we publishers have to be willing to take some risk and invest now–planning to have that investment pay us back over the next few years. But we would be foolish to adopt a pricing structure that doesn't take these real and significant costs into account.

    To me it makes sense to drop the ebook price by about 20% from the least expensive print edition. That's about the savings publishers get when they can remove printing and shipping costs and everything else stays equal–or shifts from one internal cost area to another. During the next few years, if we find that we can shave our internal costs after our infrastructure development is done, then we should pass more saving on to our readers or pass more revenue on to our authors–or both.

    This is just 2 cents from one in the trenches.

  • Bruce

    Great analysis and comments. As a Christian retailer, I am very concerned about the future of our industry. It has been rocked by the decrease in traffic due to the collapse of music CD sales. First it was big box competition, then digital downloads. Now the music stores are mostly gone and the big box stores are reducing the number of CD's that they carry, the only place to get music will be on-line. Good or bad for the music industry, long term?

    If the book business follows the music industry, the CBA channel will disappear, along with Bible and backlist sales. However, while music is inherently digital, books are not necessarily digital. Physical books will endure! The loss of the CBA channel would be tragic to authors, publishers, consumers and the mission.

    I do believe that the price of some hardcover books is based on the expectation of heavy discounting. A reasonable price of $20 for a major hardcover with a MP seems to make more sense than $29 discounted 30%, but then again, the consumer always loves deals!

    I would support MP, MAP, channel specific distribution (of course, I would want a CBA exclusive….).

    Thanks for the dialog. Lots to chew on.

  • http://twitter.com/paulmikos @paulmikos

    Is establishing a MAP really a long-term solution or a transitory solution? As content providers perhaps one of the most strategic things publishers should consider is their value proposition to the market–their reason to exist in the ebook/print-on-demand digital economy. The market doesn't care about publisher overhead, royalties, returns, or any other part of the current bad business model. Consumers want value and the market is telling us the value of a good read is somewhere under ten dollars. For more on this: http://bit.ly/2m5k4s

    Instead of attempting to preserve the multi-million dollar advance/$35 hardcover business model, publishers need to create a new model based on $10 paperbacks printed on demand and $10 content-enriched ebooks. The publisher who figures out how to profitably provide content consumers want, in the format they want, at the price they want to pay, wins.

    On your mark, get set, go!

    • http://intensedebate.com/people/michaelhyatt Michael Hyatt

      Paul, I understand your argument, but I don't think the market is telling us this. Demand has remained relatively constant, albeit taken somewhat of a dip in the recession. In my view, these are artificial market forces based on a price strategy that is not sustainable—even for the ones using it.

  • http://www.paulmikos.com Paul Mikos

    I guess time will tell, Mike, whether the market forces are real or artficial. I thought the same thing last year, before the mass market players and B&N (with ebooks) got on Amazon’s $9.99 bandwagon. One thing is for sure, the “loss leader” game is not a sustainable price strategy for the current publishing business model. My instincts tell me $.99 and $9.99 are the two most important price points of the future, and I’m looking forward to seeing what innovations emerge from the growing adoption of technology and pressure of the current market conditions–real or artificial, temporary or permanent.

  • http://intensedebate.com/people/patriciazell patriciazell

    Perhaps publishers should work with Wal-Mart, Amazon, etc. to do more promotion. Let me explain my reasoning: if you sell 100 books @ $2 profit each, you make $200, but if you sell 1000 @ $1 profit, you make $1000. I think the answer is not in the percentage of profit, but in the number of books you sell.

    I live in a small town and do most of my shopping at Wal-Mart. I buy books there, too. Rarely, do I go to the big cities with their bookstores (we have one true book/gift store–its prices are way too high). With time and economic issues, I don't see more frequent bookstore visits in my future. I appreciate the book section in Wal-Mart because it fits into my life.

    Why don't you publishers use the changing circumstances to promote and sell more copies of your books? Work out deals with the "big box" entities in order to increase your numbers. Remember, you have the products these guys need to have access to in order to stay in business.

  • http://www.povbootcamp.com Andrea

    I’d suggest an appropriate price for an ebook is the paperback price minus the cost of producing a paperback book. There’s no reason to charge the consumer for paper not printed.

  • http://true-small-caps.blogspot.com Derek

    What do you think should be done about these current price wars?

    Retailers selling products at less than cost is clearly an anomaly that needs to be corrected.

    I don't know about you, but I'm overwhelmed by the amount of content out there. Not just half a million new books every year, but blogs and websites, too.

    Classical economics tells us that when supply exceeds demand, prices will eventually fall to create a new equilibrium.

    I think we're just seeing the beginning of that.

  • http://twitter.com/doycet @doycet

    The best sellers of future will self-publish to e-formats (and pod for folks who need a dead tree copy for whatever reason), and we won't have to deal with pricing purposely inflated to support a publishing industry we no longer need, just to share our stories with our readers.

  • Babu

    Dont you think Amazon's pricing of Ebook vs physical books is very similar to the physical CD vs MP3 music war.. May be authors / publishers would be willing to sell individual chapters / books via online stores or be willing to rent books to people just like renting a movie via iTunes ?

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  • http://www.facebook.com/badesemowo Bade Adesemowo

    I'm only a consumer myself…. even though the advent of low prices is very tempting … i think the end result as you've pointed out would be disastrous… isnt there some sort of mid point.

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  • Guest

    As a consumer, it seems to me that prices have been outpacing inflation significantly for years and a correction is only natural. There was no shortage of successful books, authors, publishers, or sellers when I was a kid. But back then, books cost about half what they do now after adjusting for inflation (1/4 what they do now if you ignore inflation). Magazines seem to be even worse. I don’t know why that is, but I don’t see a problem with trying to return prices to what was once considered a reasonable level to see if they can get more sales. If not, perhaps they’ll go the way of other now-esoteric things and pump the prices way up to make every book a collector’s item so that they can make some profit even though so few will be sold.

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  • guest

    You of course would know more about this then me but I think rather than take away from consumers the ease and low price of things such as ebooks (which is what makes the format so appealing) the industry needs to adjust.

    Consumers may be hurt because of less options but you yourself state how many books are published, we will never be at a loss of content and anything that is not produced that otherwise would have been, we will not know about.

    The world is changing and the consumer is king. With the option to simply pirate or ignore content (there is plenty to choose from) that is not convenient most of these methods are not good ideas. People with ebook readers read more, publishers will need to adjust to a lower profit higher volume world.  

    Don’t make the same mistake as the movie industry. Make things more readily available not less.