When losing money is good business: the pricing of e-books, part 2

In an earlier post, I talked about who sets what on e-book prices.

In this one, I want to talk about one very important aspect: Amazon (and other e-tailers) pricing some new releases and bestsellers at $9.99.

There’s been a lot discussion about this: Sony’s Steve Haber discussed it at the Media Bistro eBook Summit, and one of the most-posted to threads in the Amazon Kindle community has to do with it.

I wanted to take a post to explain why Amazon is losing money at $9.99, and why that would make sense for them to do.

Why does Amazon lose money at $9.99?

Amazon is a retailer.  They buy things from a manufacturer (publisher, in the case of books) and sell them to the consumers (readers). 

It makes sense.  The skill set involved in producing a book is pretty different from the skill set involved in selling a book to a reader.

I was a bookstore manager, and we did well.  That doesn’t mean I could make a deal with an author and work the book through a year long process of getting it ready for sale.

So, retailers buy the item at one price from the wholesaler and sell it for more than that (usually) to the consumer.

It would be possible to work out a separate deal for each book, but that would be very hard.  It’s generally a standard percentage of the retail list price, which the publisher sets.

The publisher says, “The suggested retail price for this book is $25.” 

That statement is made the same way for all retailers.

The retailer pays some percentage  of that price.  That percentage is probably 50% on e-books.  That’s what we typically paid in a brick-and-mortar store.  I’ve seen that figure reported in several news stories on Amazon.

That $25 book?  Amazon would be paying $12.50 for each download.

That means Amazon would be losing $2.51 if they sell it for $9.99, right?

Not exactly.  Amazon also has some “costs of sale”.  It’s probably considerably lower than it would be in a brick and mortar store.  One of our biggest costs in a physical store?  Rent.  Let’s make it easy and say that you pay a dollar a square foot a month in the store.  Let’s also say you have three square feet for one of your shelving units and you have, oh, fifty books on it.  So, three dollars per fifty books per month (that’s going to vary by size of book and such.  We were making six cents a book less for each month it was on the shelf.

Amazon doesn’t have that cost for the e-books…but they do have servers to maintain and a website to do.

We also had a cost of the salary for the person selling the book.  Let’s say $10 an hour, and that it takes…oh, five minutes to sell a book.  That’s averaging out…and I’m counting the time to help the person find a book.  That would be eighty-three cents a book.  There’s also the time spent to unpack the boxes, deal with returns, all of that.

Amazon’s biggest salary cost for a sold e-book (not counting marketing and all that) is probably Customer Service calls.  There are likely to be a lot more calls and questions about e-books than about p-books (paperbooks).  We did have to do deal with returns, but they weren’t that common.

We had theft as a concern…Amazon presumably doesn’t have much of that.  :)

So, we have to figure that there are some costs of sale, but it’s hard to say how much.  If we say it costs…oh, ten cents a book, that’s fine.  I’m really guessing on that one, though.

Let’s just go with 50%, and figure we are close enough.  :)

How much is Amazon losing?

Here are the stats on five of the bestsellers that Amazon has marked at $9.99 (based on a 50% wholesale price):

DLP Wholesale K-store Diff
 $   27.95  $    13.98  $    9.99  $    3.99
 $   27.99  $    14.00  $    9.99  $    4.01
 $   21.99  $    11.00  $    9.99  $    1.01
 $   28.00  $    14.00  $    9.99  $    4.01
 $   26.00  $    13.00  $    9.99  $    3.01

That would make the average loss on that set $3.20.

Every time they sell 2000 of each of these (10,000 all together), they would lose about $32,000…plus the costs of sale.

Gee, they better hope the books are unpopular, right?  ;)

Why would Amazon do that?

They are buying marketshare.  When I compare the nook (sic), the Sony, and the Kindle, one of the biggest things is that the books in the Kindle store tend to be cheap.  Amazon was lower at $9.99, but for bestsellers, Sony and Barnes and Noble do tend to match that now.  They didn’t used to do it.

So, they might have done it initially to get people to buy Kindles.  They could be trying to just build store loyalty.

Both of those would seem like short term strategies, though, and Jeff Bezos has said that $9.99 is a sustainable price.

They can sustain that price if they make enough of a profit on other things. 

Let’s take a look at some paperbacks priced by Amazon at $7.99.

DLP Wholesale K-store Diff
 $   14.95  $     7.48  $    7.99  $        0.52
 $   15.00  $     7.50  $    7.99  $        0.49
 $   13.99  $     7.00  $    7.99  $        .99
 $   13.99  $     7.00  $    7.99  $        .99
 $   14.99  $     7.50  $    7.99  $        0.50

The average profit on these titles is $0.70.

If they sold 45,889 of those $7.99 books, they’d make up the loss on the $9.99 books.

That seems like a tall order, though. 

There are a couple of other things that can help.

One is the Digital Text Platform books.  Instead of paying fifty percent for thoe, they pay 35%.  That’s a good deal for those independent publishers, by the way.  It does mean Amazon is making more money on those, although they also have some costs on them (like setting up the accounts and sending out reports, although they have to do that with traditional publishers as well, of course).

The other thing is that $9.99 books don’t stay $9.99 forever…it’s when they are on the bestseller lists or “recent releases”. 

Only 6% of the books, according to my Jungle-Search.com search right now are discounted over 50%. 

I know that’s very different than the numbers I report in the Snapshots.  When I do the Snapshots, I limit the search to books that are one penny to fifty dollars. 

Books that are public domain freebies have a zero discount.

Of the books that are $100 or more, only 125 out of 17158 showed a discount of 50% or more.  That’s less than one percent (.73%).

Amazon wouldn’t sell very many of those, but textbook sales is one way they could make up for the bestsellers.

 So, selling books for $9.99 is sustainable if that means you’ll buy other books with a less than 50% discount…and enough of them to make up the difference.  Of course, with Amazon, they can also make up the difference on other categories of things (like batteries and such), if the $9.99 e-book bestseller makes you more likely to shop at Amazon generally.

If boycotting books over $9.99 has any impact, I’m assuming it is reducing the discount on books under that price.  If we we’re going to get, say, 20% on most books that are out as paperbacks, we might only get 15% now.  I don’t think that boycott is having tha much of an effect, but I simply don’t know.

The rumor is, by the way, that Apple is offering publishers 70% on books for their iTablet (rumored name) that should come out in the first half of 2010.  Does that mean that publishers will lower the Digital List Price?  If they do, they’ll lower it for everybody (you can’t really collude on prices between a retailer and a wholesaler), and I’m not convinced that’s the case.  It may, however, result in more exclusives for them.  Amazon has some big name exclusives…they may be giving the publishers a better deal on those, unless they had some kind of “signing bonus”.  :)   Apple may also figure it has some other way to make that money on the new device.

Well, I hope that helps clarify it a bit.  If you want to hurt Amazon, you’ll buy $9.99 bestsellers and new releases…and nothing else.

This post by Bufo Calvin originally appeared in the I Love My Kindle blog.

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