We've Got Hollywood Covered

Those e-Books Are Here to Stay … Get Used to Them

In last week’s New York Times, Motoko Rich and Brad Stone wrote that “no topic is more hotly debated at the moment than the timing, pricing and ultimate impact of e-books on the financial health of publishers and retailers.”

The primary debate centers on how low-priced ($9.99) digital books affect demand for more expensive ($25+) hardcover books. Since digital books are more profitable to publishers, my response is “who cares?”

The norm in the publishing industry is to set a wholesale price equal to 50% of the hardcover list price. A $25 list price yields a $12.50 wholesale price. Interestingly, publishers also sell e-books to retailers at the same 50% (of hardcover retail) price. Thus, when Amazon sells a popular e-book for $9.99, it is usually losing money on each sale.

E-books are more profitable than their hardcover counterparts for publishers. With significantly lower production, warehouse, royalty, and delivery costs, as well as no profit-draining returns from retailers, e-books are relative cash cows.

Some publishers have expressed a concern about price cannibalization of low cost e-books, the situation when consumers who would normally pay full price take advantage of discounts.

The fear is that readers who would have paid $25 for a hardcover will now opt to pay $9.99 for the digital version. Whenever a new discount option is offered, it is important to consider the effects of cannibalization.

However, publishers are in the unique position of the lower priced alternative actually being more profitable. In this case, cannibalization is good.

Since e-book sales were somewhat of an afterthought, in most book contracts today, authors receive a lower royalty for an e-book compared to a hardcover sale.

For this reason, authors are justified to be concerned about digital book cannibalization. That said, authors need to keep in mind that they benefit from e-book discount prices.

From a law of demand perspective, a lower price leads to higher purchases: $9.99 prices draw in new readers who would not have purchased at $25. Given the rise in e-book popularity, digital royalties will be a more important negotiating point in future author contracts.

Finally, e-books help to solve a cannibalization problem that currently plagues publishers and authors, the resale market. Given the ease of using Internet sites such as eBay and half.com, many buyers are reselling their hardcover books after reading them. This cannibalizes new book sales. Since e-books cannot be resold, both publishers and authors benefit.

While the growing popularity of e-books presents new strategic challenges, price cannibalization should be the least of a book publisher’s worries. The biggest issues involve understanding how e-books will affect bricks and mortar retailers (that provide great marketing support for books) and publishers becoming too dependent on one retailer to sell their products (as the music industry did). Of course, I believe that pricing will be an integral strategy to solving these challenges.

Rafi Mohammed, Ph.D. is a pricing strategy consultant and author of pricing strategy books, "The Art of Pricing" (Crown Business, 2005) and the upcoming "The 1% Windfall" (HarperCollins). He wrote his economics Ph.D. dissertation (Cornell University, 1994) on rock-concert ticket pricing and bundling. For more pricing-strategy insights, check out his website.

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