Understanding the “Agency Model”

Understanding the “Agency Model”

I wrote this in a thread in the Amazon Kindle community, and people there suggested that it should be made more widely available or easily found.  I thought it might be worth taking a special post for it.

The Old Model (the “wholesale model”)

The way it works prior to the agency model between publishers, retailers, and readers is very similar to the way it works in a lot of stores.

The publisher creates the book.
The retailer buys those books from the publisher.

In that exchange, the publisher suggests a price that the retailer should use for customers, but it’s up to the retailer. That suggested price is called the “list price”.

The retailer then sells the book to the customer. The retailer owns the copies of the book, they can set any price they want.

Retailers may even choose to lose money (Amazon clearly does on most $9.99 bestsellers). Why would they do that? One reason is to compete with other retailers. You can develop loyalty and inspire other sales.

The traditional amount the retailer pays the publisher for the books? Fifty percent.

So, in the old model:

The publisher might put a $20 list price on a book.

Amazon, Barnes & Noble, Sony, and other retailers would likely pay the publisher $10 for copies of the book.

Amazon might choose to sell it for $9.99 (losing a penny in direct money for each one). Barnes & Noble might sell it for $15, and Sony for $18. Or you could switch these prices around: B&N had been matching Amazon on popular e-books.

The New Model (the “agency model”)

The publisher does not sell the books to the retailer. The publisher sells the books directly to the public, but the former retailer acts as a “sales agent”. The former retailer just processes the sale.

That means the publisher sets the price. The price will be the same for all outlets: since the agents (former retailers) don’t own the books, they can’t set their own prices.

The former retailer gets a commission, instead of making the money they can get by reselling it. In the agency model that we hear about currently, that is 30 percent.

Under the agency model, the publishers are getting 70 percent instead of 50 percent.

So, that same $20 book? If the book stayed $20, the publisher would get $14 instead of $10.

However, shoppers (especially at Amazon), aren’t likely to actually pay $20 for it, and least not in the same volume.

What happens if the publisher sets a $9.99 price point for the book? The publisher would get about $7: considerably lower than the $10 they got under the wholesale model.

They can charge more money than the $9.99. Suppose they charge $14.99? They would get about $10.49…more than the $10.

Now, it gets a bit more complicated. The former retailer may have guidelines for the books, although they can’t set specific prices.

That’s the basic idea, though. In the old model, the retailers bought the books from the publishers and then resold them for whatever prices they want. In the new model, the publishers sell the books to the public, and the former retailers just process the sales.

Old model: retailers set the prices you pay
New model: publishers set the prices you pay

One of the key points: no competition between stores on prices…you’ll see the same price on an agency book regardless of where you shop.

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

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7 Responses to “Understanding the “Agency Model””

  1. loto Says:

    If this is such a great deal for the publishers, why are they limiting it to e-books? Why don’t they sell all books (paper and electronic) in this fashion?

    • bufocalvin Says:

      loto, thanks for writing!

      I think they would probably like to do that, but I think it’s a very different situation legally for paperbooks.

      With paperbooks, the retailer buys the book from the publisher (considerably before it is sold), and owns the book.

      In the e-books, the sales agent isn’t buying the book. Neither is the customer…you buy licenses.

      I think that’s what the difference is, that licensing thing.

      That’s my understanding, anyway.

  2. Jayne Says:

    Sooo does the agency model also apply to tree books? Will Walmart be charging the same price as my local independent book store? If this is not the case it seems hardly fair to the independent book store who cannot compete with Walmart on best sellers.

    • bufocalvin Says:

      Jayne, thanks for writing!

      You and loto asked a similar question. I believe the difference is that the retailer buys a copy of the book from the publisher, and then sells it. With an e-book, the retailer doesn’t own a copy of the book…and neither does the customer. Instead, what is being purchased is a license.

      That seems to be the difference.

      Otherwise, you are right, if the agency model was in place on paperbooks (and I don’t think it can be), Walmart and Costco might stop selling books…since they would have to charge the same as the independent (and they probably wouldn’t want to do that). The other way it would go is that the publishers would price the books so low (to please the big stores) that the independents just couldn’t stay in business.

      I don’t think it can be applied to physical books, though.

  3. Jayne Says:

    Hey thanks for explaining that.

  4. Al Says:

    Since price fixing is illegal, it seems to me that someone is going to challenge this agency model as being in restraint of trade. Meanwhile, what is to prevent the retailer from giving up some of his cut to be competitive. Does anyone recall “Fair Trade” in California that was finally tossed out as illegal? I do.

    • bufocalvin Says:

      Well, price fixing would require that the publishers got together and decided on a price. My understanding is that Apple could suggest a price to everybody, and as long as they don’t get together and discuss it, it’s legal. Restraint of trade can be tricky, but it won’t surprise me if the DoJ (Department of Justice) looks at this.

      The former retailer is just a sales agent. They are processing the sale. They could, hypothetically, give a buyer back some money, I think, but they can’t lower the price. However, I’ve seen reports that they aren’t even allowed to apply specific coupons. If the publisher says it is $12.99, Amazon must charge that. They could probably give loyalty rewards based on how much you buy, but not reduce the price of the specific transaction.

      That’s my guess.

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