Part 1 of Saving Book Prices, Saving Authors
Ebook prices are falling and that’s bad news for authors who want to make a living writing. Depending on whose data you use, ebook prices, other than the handful of bestsellers, have dropped from an average of about $8 to an average of about $4.50 over the past 5 years. Or to put it another way, prices have fallen by an average of about 10% — 15% per year since self-publishing has become a significant source of books on the market. Worse, surveys of readers suggest that the perceived value of a book by the typical consumer is dropping with average prices. If you’re an author who makes a living writing or aspires to do so, this is bad news. If you’re a reader who is excited about the lower prices, you may not be so happy either, because a lot of great potential authors will decide it’s not worth their time to write the books you love.
OK, enough with the doom and gloom. There are sound reasons for the price decline, driven by factors that are a great sign for self-publishing authors, even if some of the consequences are harmful. Amazon and the other big ebook retailers have already taken steps to ensure a price floor. There’s also a new pricing system called CrowdPricing from my own company, Scribl, that we believe (we obviously have a bias) combines the strengths of all the other approaches in a way that’s better for both authors and readers in both the near term and the long term.
Beware, there are a lot of really bad ebook pricing analyses out there. To explain this properly and overcome some of the conventional wisdom those other articles have established, I need to make sure we’re all on the same page with some basic foundational economics which are as true with ebook pricing as they are with every other industry in human history. So please bear with me through an econ primer so we can get to the good stuff. If you’re an author who is considering self-publishing a book, this series, “Saving Book Prices, Saving Authors” will teach you the core of what you really should know about both the economics and marketing of ebook pricing, and the long-term implications to authors.
Supply, Demand, and the White Gold
In economics, one of our most basic tenets is the law of supply and demand. This is actually the intersection of two separate principles, the law of supply and the law of demand.
The law of supply says that if the price is higher, all else being equal, existing producers will want to make more and new producers will enter the market for the larger profits at those higher prices. The result is a larger quantity supplied at higher prices. Conversely at lower prices, production is less attractive and some of the less efficient or less profitable producers will have to drop out of the market. At a lower price, there will therefore be a lower quantity of supply.
The law of demand is the consumer side of this. For any given good, again all else being equal, if the price goes up, some people who were on the fence about buying before will not buy at the higher price. And if the price drops, more people will decide it’s worth the price and buy it. In other words, the quantity demanded goes up if the price goes down and vice versa. This neglects marketing effects, where a higher price may signal value in some cases and actually increase the quantity demanded (famously the case with certain cosmetic brands), but in general, this holds true.
The “law” of supply and demand says that in a free market, the price will settle at a point where the quantity supplied and quantity demanded are about the same. That’s because if there is insufficient supply, suppliers can sell at a higher price for the needy customers. These higher prices attract more suppliers, and the increased competition pushes prices back down. If there is oversupply, the weaker suppliers will give up due to their unsold inventory, resulting in a reduced supply and higher prices, which in turn reduces the quantity demanded. These forces constantly push against each other to keep the market in equilibrium at the price we call the market clearing price. That’s the price where supply equals demand. If you force the price away from this, generally by legislation, there will either be a shortage or a surplus. For example, rent control keeps prices below the market value, so more people want the cheap apartments than there are landlords willing to provide them. That results in a shortage and waiting lists to get the below-market-price apartments. On the other hand, farm subsidies, paid directly to the suppliers, entice higher production than there would be at prices paid by consumers. This extra production creates a surplus food supply.
I said that higher price attracts more suppliers and fewer customers and lower prices attract fewer suppliers and more customers, ALL ELSE BEING EQUAL. Lots of factors keep things from being equal, so it’s better to look at what’s really driving the supply and demand factors. For suppliers, it’s really all about the profit they can make, because that’s the only income for them. The rest is consumed by expenses. A higher selling price with the same costs to make the products means more profits, which is what really attracts the increased supply. The same selling price with new lower costs would provide exactly the same increase to supply. Computer prices drop over time because new technology lowers costs, allowing a producer to make the same computer for less money, meaning a larger profit at the original price. This attracts more suppliers and competition for customers drives prices back down to the new, lower market clearing price.
Similarly, for the customer, it’s really all about the value received (whatever that means to the customer). I recently bought a snow blower to clear snow from my driveway. At the price I paid, I decided it was a good value compared with the alternatives. If I lived in Phoenix, Arizona or had a neighbor who offered to clear my driveway for $5 per snow storm, a snow blower would not have been a good value for me.
I think that’s enough background that we can finally get back to books. We don’t tend to think about authors as the “manufacturers” of book content, but from an economic perspective, that’s exactly what authors are. However, unlike a business making manufacturing and pricing decisions based purely on a financial calculation of a return on their investment, many authors are motivated also by a strong desire to express themselves, tell a story, or reach readers. Back in the traditional publisher days, an author’s assessment of his or her cost in time and effort needed to achieve the goal of reaching readers included both the time spent writing and also the challenge of striking a deal with a publisher. One of my absolute favorite authors, Stephen R. Donaldson, author of the best-selling Chronicles of Thomas Covenant, Unbeliever and White Gold Wielder, said he submitted to and was rejected by all of the then 47 fiction US publishers before finally finding someone to take a chance on the first book in that series. While he went on to tremendous success, many other authors in a similar situation did not. Many gave up altogether and their works were never available to the marketplace.
In today’s ebook world, the advent of easy self-publishing provides a much lower cost (from an author’s economic perspective) to reach readers. A broadly accessible reduction in cost, exactly like an increase in price, will always attract more suppliers to a market. An important distinction between authors and publishers as suppliers is that an increased supply of books by authors means more titles. For a publisher, an increased supply means more print runs, which does not necessarily mean more titles. So more suppliers (authors it this case) will of course translate to an increased supply in the total number of book titles available. And as we know from the law of supply and demand, more supply means a lower price.
Self-Published Ebook Prices Were Too High…
The same factors that enable more authors to enter the market also cut the actual costs of distributing books. A digital book costs almost nothing to distribute, compared with a print book. If a print book costs $1 to print, the publisher takes a $1 in gross profit, and there’s another $1 — $2 in shipping, inventory, and profit by the retailer, that’s about $3 — $4 that can come off the price before the revenue to the author would be affected at all.
Further, at a lower price, more customers will enter the market. Remember the law of demand? So if the only change in price is a reduction by the amount of the eliminated costs, this would be a win for authors and readers — readers pay a few dollars less per book and get to read more, authors make the same per book, but sell more books.
The amount that the quantity demand changes with price is called the elasticity of demand and is a complex area of study. You may want to read my article on the MDSD (Mass Double Sided Digital) market for more on how different prices can affect different reader market segments.
A lot of analysts on ebook pricing stop here. They point out the cost savings of producing ebooks compared with print books and the increased demand at lower prices, then conclude, naively, that lower ebook prices = good. Falling ebook prices are indeed good if the prices have been too high. But they are bad, especially for authors, if the prices are already too low. The real analysis should be on what price is too low and how do we manage the natural competition between suppliers (authors) from driving prices down below this line? And even more important, how do we make sure that you, dear author, can make the most possible revenue on your book, reaching the largest possible number of readers to help build a fan base for your future work, all without driving down the perceived value of books so that other authors (maybe including the future you) can’t earn a living writing.
For that, please join us for Part 2 of Saving Book Prices, Saving Authors, “Author’s Suicide Pact with Cheap Ebooks Destroys The Market”
Colin Higbie is the Chairman and co-founder of Scribliotech, a digital publishing company with key patent-pending e-publishing technology, including the CrowdPricing system to fairly price content by emerging authors, building customer trust and sales, and the Story Elements system for new book and author discovery. More info at Scribl.com
