What Hugh Howey Won't Talk About (but Should). And Don't Take Amazon's Latest Claims About the Awesomeness of $2.99 to $7.99 Pricing Seriously. Part II of Several Parts
In part I of this series we took a close look at Amazons' 30% retailer markup and analyzed why the company is benefiting handsomely from its model. Again, no criticism of Amazon is implied. Amazon is a channel company (yes, I know that they create some of their own content. Macy's has house brand shirts that they contract to be produced. We'll discuss that later). As a channel company, Amazon worships margins. That's what channel companies do.
(A quick aside. In its public tussle, Amazon offered to return to Hachette authors the "proceeds" from the sale of their books on Amazon. Please note that this offer did not include Amazon's 30 point markup. That, they keep. Channel companies give up margin with the same alacrity as the head lion of a pride gives up a dead zebra he's just stolen from the hardworking ladies of the group.)
The Other Amazon Retail Markup Schedule
To date, most of the conversation has focused around Amazon's 30% retail markup for books sold under $9.99 and over $2.99. But Amazon also has another retail markup schedule. That's a 35% you /65% them retail markup schedule. For some reason, Amazon advocates such as Hugh Howey do not discuss this alternate schedule. They should. The reason is that this markup is not connected to any sort of economic reality. You cannot make money on your book when you give away 65% margin points to a channel. Thus, for all practical purposes, Amazon has thrown tens of thousands of authors out their system.
These are many authors and publishers of niche books and limited editions aimed at small audiences. In many of these markets (including one I write for, software and SaaS companies. I also write for the great fantasy/Sci-Fi-book-you-just-can't-put-down-and-should-buy-right-now segment.) the number of customers for books that cover topics of relevance to this market is small, numbered perhaps in the mid thousands of readers worldwide. There will be no hope of generating sales volumes large enough to make the time and effort of writing such a book worthwhile. Titles that discuss such things as SLAs and their place in the business model of an online software firm seem to lack the broad appeal of a JK Rowling offering. Therefore I and many others, at least in regards to these types of books, are locked out of Amazon. This is not a complaint, simply an observation. It is fair to note however, that Amazon has loudly proclaimed it's pricing is in the best interests of authors. If you're selling a novel about alien invasions or the latest zombie apocalypse, this may be true. For other categories of books, their 35/65 pricing isn't.
Another factor to consider is that at the punitive 35/65 split, you are also blocked from using a publisher if you decide you want to go down that road. There is no margin left in the sale of the book to attract a good publisher (in other words, one that will really work to get you book reviews, execute effective SEO, build or provide E-mailing lists, back that up with social media, etc.)
The final result of Amazon's pricing schedule is that if you want to make money, you are stuck in a $7.00 pricing box. In its most recent proclamation on the topic, Amazon claims this is a good thing and they say they have the numbers to prove it:
+++ It's also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. +++
This is an impressive bit of text and at first glance, a strong argument in favor of Amazon's pricing policies, though I do find Amazon's attitude somewhat authoritarian:
+++ Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. +++
I would think the market would be the best arbiter of pricing, not Amazon. But, after all, it is their store and they're entitled to their opinions. But a quick analysis of the Amazon's statement reveals their claims are incomplete and also nonsensical in certain respects.
The first problem is it lumps all books together into one big pot leading to what I call a median stew. Let's take a look at a single example, author Stephen King, whose pricing I will defend even though he did write Insomnia . (Don't ask. Just...don't ask.) Stephen has lots of books available on Amazon at different price points. I see The Stand is on Kindle for 5.17. The Shining for $1.99. And here's his latest book, not yet released, The Revival, $14.99 on Kindle. God, what a fool Stephen and Simon and Schuster are. First, the 35/65 split. Oh, wait. I'll bet real American dollars that Simon and Schuster isn't paying 35/65. That's for the little people. The split is more likely 75/25 or even 80/20. King's got clout in the business.
Also, I don't think Stephen King is losing ".74" copies at that $14.99 price because Stephen King is a brand. There are lots of people who can't wait to get their hands on his books and will happily pay an extra five bucks to get them as early as possible during the novel's roll out period, probably sixty days. After that, it might make sense to drop the price back to $9.99 or whatever careful testing indicates is optimal. Certainly, over time, the price will continue to decrease and to give Amazon all credit, I'm sure King has seen increased residual sales of his earlier works because of the long tail effect.
But the reality is at $9.99 during the launch, King will be leaving money on the table. The revenue generated by the increased number of people who will buy more copies at $9.99 will almost certainly not be offset by the money lost by not satisfying the market desire of a significant number of readers to get their hands on the book ASAP and who will willingly pay a premium for the privilege. That's the power of a brand and you should all strive to become one.
Or consider book publishing's biggest brand, JK Rowling. Imagine she's just announced a new Harry Potter book. Harry Potter and the Adventure of the Golden Franchise. Think those millions of fans out there wouldn't shell out a few extra bucks to get their (virtual) sweaty palms on the latest tome about the boy wizard? And if you want to see what real clout does for you in the book business, go click on her E-book links on Amazon. Welcome to "Pottermore." (Somewhere, Jeff Bezos is weeping.)
BTW, if Amazon wants to dispute the above analysis, it can easily do so. But it won't. The company possesses huge amounts of data and can provide all kinds of detailed analyses on price points for highly branded authors, unknowns, niches and special markets. It does not do so. If it did, its current argument would immediately fall apart as you looked at different scenarios, markets and promotional strategies.
So the question is why the current Amazon pricing model? That's all about power and the future. We'll dig even deeper in the upcoming parts of this series.
(A quick aside. In its public tussle, Amazon offered to return to Hachette authors the "proceeds" from the sale of their books on Amazon. Please note that this offer did not include Amazon's 30 point markup. That, they keep. Channel companies give up margin with the same alacrity as the head lion of a pride gives up a dead zebra he's just stolen from the hardworking ladies of the group.)
The Other Amazon Retail Markup Schedule
To date, most of the conversation has focused around Amazon's 30% retail markup for books sold under $9.99 and over $2.99. But Amazon also has another retail markup schedule. That's a 35% you /65% them retail markup schedule. For some reason, Amazon advocates such as Hugh Howey do not discuss this alternate schedule. They should. The reason is that this markup is not connected to any sort of economic reality. You cannot make money on your book when you give away 65% margin points to a channel. Thus, for all practical purposes, Amazon has thrown tens of thousands of authors out their system.
These are many authors and publishers of niche books and limited editions aimed at small audiences. In many of these markets (including one I write for, software and SaaS companies. I also write for the great fantasy/Sci-Fi-book-you-just-can't-put-down-and-should-buy-right-now segment.) the number of customers for books that cover topics of relevance to this market is small, numbered perhaps in the mid thousands of readers worldwide. There will be no hope of generating sales volumes large enough to make the time and effort of writing such a book worthwhile. Titles that discuss such things as SLAs and their place in the business model of an online software firm seem to lack the broad appeal of a JK Rowling offering. Therefore I and many others, at least in regards to these types of books, are locked out of Amazon. This is not a complaint, simply an observation. It is fair to note however, that Amazon has loudly proclaimed it's pricing is in the best interests of authors. If you're selling a novel about alien invasions or the latest zombie apocalypse, this may be true. For other categories of books, their 35/65 pricing isn't.
Another factor to consider is that at the punitive 35/65 split, you are also blocked from using a publisher if you decide you want to go down that road. There is no margin left in the sale of the book to attract a good publisher (in other words, one that will really work to get you book reviews, execute effective SEO, build or provide E-mailing lists, back that up with social media, etc.)
The final result of Amazon's pricing schedule is that if you want to make money, you are stuck in a $7.00 pricing box. In its most recent proclamation on the topic, Amazon claims this is a good thing and they say they have the numbers to prove it:
+++ It's also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. +++
This is an impressive bit of text and at first glance, a strong argument in favor of Amazon's pricing policies, though I do find Amazon's attitude somewhat authoritarian:
+++ Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. +++
I would think the market would be the best arbiter of pricing, not Amazon. But, after all, it is their store and they're entitled to their opinions. But a quick analysis of the Amazon's statement reveals their claims are incomplete and also nonsensical in certain respects.
The first problem is it lumps all books together into one big pot leading to what I call a median stew. Let's take a look at a single example, author Stephen King, whose pricing I will defend even though he did write Insomnia . (Don't ask. Just...don't ask.) Stephen has lots of books available on Amazon at different price points. I see The Stand is on Kindle for 5.17. The Shining for $1.99. And here's his latest book, not yet released, The Revival, $14.99 on Kindle. God, what a fool Stephen and Simon and Schuster are. First, the 35/65 split. Oh, wait. I'll bet real American dollars that Simon and Schuster isn't paying 35/65. That's for the little people. The split is more likely 75/25 or even 80/20. King's got clout in the business.
Also, I don't think Stephen King is losing ".74" copies at that $14.99 price because Stephen King is a brand. There are lots of people who can't wait to get their hands on his books and will happily pay an extra five bucks to get them as early as possible during the novel's roll out period, probably sixty days. After that, it might make sense to drop the price back to $9.99 or whatever careful testing indicates is optimal. Certainly, over time, the price will continue to decrease and to give Amazon all credit, I'm sure King has seen increased residual sales of his earlier works because of the long tail effect.
But the reality is at $9.99 during the launch, King will be leaving money on the table. The revenue generated by the increased number of people who will buy more copies at $9.99 will almost certainly not be offset by the money lost by not satisfying the market desire of a significant number of readers to get their hands on the book ASAP and who will willingly pay a premium for the privilege. That's the power of a brand and you should all strive to become one.
Or consider book publishing's biggest brand, JK Rowling. Imagine she's just announced a new Harry Potter book. Harry Potter and the Adventure of the Golden Franchise. Think those millions of fans out there wouldn't shell out a few extra bucks to get their (virtual) sweaty palms on the latest tome about the boy wizard? And if you want to see what real clout does for you in the book business, go click on her E-book links on Amazon. Welcome to "Pottermore." (Somewhere, Jeff Bezos is weeping.)
BTW, if Amazon wants to dispute the above analysis, it can easily do so. But it won't. The company possesses huge amounts of data and can provide all kinds of detailed analyses on price points for highly branded authors, unknowns, niches and special markets. It does not do so. If it did, its current argument would immediately fall apart as you looked at different scenarios, markets and promotional strategies.
So the question is why the current Amazon pricing model? That's all about power and the future. We'll dig even deeper in the upcoming parts of this series.
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