What Hugh Howey Won't Talk About (but Should). The Book Channel Part VI of Several Parts. The Resellers and Agency vs Wholesale Pricing and MDF, Oh My!
Agency vs. Wholsale Pricing
The crux of the battle between Amazon and the book publishers is over two pricing models and whether Amazon will be forced to purchase some E-books from the major publishers via the agency model vs. the wholesale pricing model. Note that the battle revolves mainly around digital properties, not paper. The two sides in the battle are in most cases quite happy to sell and buy print books from each other via traditional wholesaling.
What is Wholesale Pricing
Wholesale pricing is the most common reseller method of buying and pricing in the world, and is used in thousands of industries other than books. We are all familiar with it. Below is a highly simplified model of a wholesale priced book. Please remember that the retail price of the book is normally assigned by the publisher if you are formally published and serves as the foundation for your royalty payments.
Wholesale Price of Book
$12.00 Reseller Markup
100% Retail Price
24.00 This pricing model is sometimes expressed in terms of a book being sold to the reseller at a 50% wholesale discount. Use whatever terminology you find makes the most sense to you, but the numbers will come out the same.
In the wholesale model, while the publisher may assign a retail price (in the software industry, the typical term was SRP--suggested list price), the reseller does not have to sell the book at that price. They are free to adjust their resale charge up or down based on their assessment of the market and their promotional strategy.
What is Agency Pricing?
Before we look at the agent model, let's first clear up some misstatements and misconceptions about agency pricing. First, this model is not exclusive to book publishing. It is widely used in other industries as well. In software, the equivalent to agency was called MAP (manufacturer assisted pricing).
Second is the fact that agency (MAP) pricing is not illegal. Claims that it is are ignorant. Apple resells books via the agency model. Apple and the major publishers were found guilty of price collusion in their dispute with Amazon, not for attempting to negotiate the use of agency pricing. The current Hachette vs. Amazon dispute focuses around Hachette's insistence on selling some books to Amazon via agency and Amazon's insistence that Hachette sell its books using wholesale pricing (and pay more MDF). The courts are neutral on this topic. If the other publishers also insist on selling books via the agency model, Amazon will face some tough choices and the courts will not assist them in their struggle (unless Amazon can again prove collusion).
Publishers Stated List Price
$24 Reseller Price of Book
$24 Reseller's % of Sale (assumes 33%)
$7
As you can see, in the agency model the supplier (publisher) controls the retail price of a product sold to a reseller. The reseller, of course, has the ability to reject this, but normally won't want or be able to.The reason is that only a company with a dominant market position and premium product(s) has enough leverage to negotiate for this type of pricing model. To return to software for a moment, in the early 2000's, companies such as Adobe and Microsoft negotiated MAP pricing with their channel. The reason they could do so was in desktop operating systems and advanced professional graphics tools, both companies had achieved effective monopolies in their respective categories. This is why to this day, in retail channels a copy of the latest version of Windows always costs the same unless the supplier has agreed to sponsor a special promotion.
Why do the Publishers Like Agency Pricing?
For several reasons. They include:
The ability to protect what they perceive as "premium brands," in other words, popular or well known writers with proven sales and/or prestige. The reality is that people wll pay more for a Steven King horror novel about the zombie apocalypse than one written by Stefan Konig.The desire to control reseller promotions. Under the wholesale model, the reseller is free to price purchased products at whatever level they wish and can even sell products at a loss (a loss leader) to drive purchases of other products. Suppliers tend to hate this as they believe it damages brand equity (and they're usually right).To maintain their leverage for future pricing negotiations. The more premium brands you build and maintain, the more power you have.To support new brands that are being built. It is easier to introduce new premium products to the market when you already have a stable of them.To control their future financials. Premium products are always more profitable than "standard" or "discount" brands.To protect the pricing structure of the print market. If the gap between E-books and printed books grows too large, the pressure will grow to reduce the prices of print books.
Many publishers have multiple imprints and will not attempt to negoriate for agency purchases for their entire catalog of books, only their top-tier lines. Nor does the agency model have to be in place for the lifespan of a book. The contract between the publisher and reseller may call for the agency model to be in place for only X period of time and then revert back to wholesale. Earlier in the series, I noted the different prices Amazon charges for older Stephen King novel; these are being sold to Amazon via the wholesale model. In an earlier battle, Macmillan told Amazon it could buy new E-books from Amazon seven months after the book's release, but until that time, Amazon would have to purchase the titles via agency pricing. In retaliation, Amazon began to limit the availability of Macmillan titles on its site, but backed off. Macmillan won that fight.
Why Does Amazon (and other Resellers) Like Wholesale Pricing?
Wholesale pricing provides them with maximum promotional flexibility. The ability to heavily discount a premium brand is valuable and enables a reseller to add a great deal of perceived value to a promotional bundle.Wholesale pricing enables a reseller to establish themselves as a value leader via heavy discounting.Wholesale pricing shifts power from suppliers to the channel by enabling the resellers to ultimately assign brand value via pricing. A brand's value decreases over time if the product or service associated with the brand is constantly being discounted.
Wholesale pricing enables Amazon to pursue its high availability, lowest price model with a minimum of interference from suppliers. Channels always seek to price their inventory independent of their suppliers in the wholesale model. The tug of war between the two parties is constant. And agency pricing just makes Amazon's DNA itch.
Wholesale pricing assists Amazon to gain control over a very valuable market, the E-book market. This is a market with inherently high margins and low production costs. Amazon badly wants to manage this market because its other business lines, most of which involve shipping physical items, is low margin and often unprofitable.Wholesale pricing helps Amazon become Walmart. (And Walmart, not the book publishers, is Amazon's true competitor. In the eyes of both companies.)
The last point deserves some more explication. Walmart is the largest reseller in the world, with revenues close to $500BM in 2013. Amazon's revenues are about $75B.
Amazon was founded upon the premise that because it was an Internet company, it could eventually out-compete WalMart and its brethren by offering the widest possible inventory at the lowest possible price. (I, personally, think that Amazon is right. In my novel, Rule-Set , I describe a world of the future where stores are entertainment centers and serve as a way to run promotional and loss leader programs. The point of these programs is to persuade buyers to integrate your product into their "purchasing manifests," subscribe-to-buy lists that automatically reorder most staples and many optional goods. Day to day delivery of purchases is carried out by 24/7/52 drone delivery fleets and personal and local 3D or "maker" printers.)
Amazon's mission is a difficult one. Its low price strategy shaves margins to the bone. To make money, it must pursue the highest possible operational efficiency. (When the robots eventually take over the world, they'll first have held their first steady jobs at Amazon.) How hard this is to do can be seen by the fact that Amazon has never been consistently profitable. Some years it makes money, some years it loses it. Sometimes a lot. In 2014, losses are projected to be in the area of $1B. But, to date, Jeff Bezos had been able to placate his shareholders with promises of future profits and play the long game.
In addition to one day surpassing Walmart in size, Amazon also wants to wield the type of power the world's largest retailer enjoys in its relationships with its suppliers. Trips by vendors to Bentonville, AK to visit Walmart buyers are accompanied by the same level of hope and fervor as exhibited by lepers going to Lourdes. Suppliers will build, package, and price their products according to Walmart's requirements and diktats. A successful launch in Walmart can make a company. Failing to gain access to its shelves can break it.
Amazon likewise enjoys some of the same power over its suppliers. The publishers, however, with their control over the best selling content in the book market, are an anomaly in the eyes of Amazon. It badly wants to bring them to heel.
How Are Writers Impacted by the Wholesale Pricing Model?
There is almost no impact. In the case of published authors, your royalties are calculated off the retail price of the book. And since Amazon and its counterparts have no interest in buying books at wholesale from indies and deciding how to mark them up and promote them (remember, Amazon is a channel, not a publisher), the issue is likewise of little interest to you ink-stained wretches striking out on your own.
How Are Writers Impacted by the Agency Pricing Model?
This is a more complex issue and is highly dependent on your brand position in the market. If you are a high selling, well known author, agency is probably a benefit to you because it maximizes your book's revenues during its launch. And agency pricing will help support your premium reputation in the market. As I wrote earlier in the series, the public will pay a premium to obtain access to new works sold by established authors. Price your product at too low a level and the increase in the volume of sales generated by this strategy will not make up the loss of revenue.
Of course, the above is dependent on other factors. How good are your reviews? Does the publisher properly estimate what level of premium pricing you can command in the market? What types of promotions are being run to support your book? Does your publisher know when it's time to shift back to the wholesale model and activate your book's long tail?
If you are a new, published author, the issue is not that important to you. Your publisher will probably sell your book into the channel at wholesale pricing and your book will takes its chances with the market. If you sell well, your next book may earn an agency pricing gold star.
For indie authors, the answer is that you already exist in a modified version of the agency model. (It's very ironic reading Amazon advocates such as Hugh Howey and Joe Konrath damn agency pricing and not realize indie publishers are living it!). First, Amazon's margins are already dialed in at 30% a la typical agency models. The larger publishers, BTW, do not pay retail usage fees. Second, you are locked into Amazon's $7 pricing box (handing over 65 points to a channel is not financially viable). This pricing regime is not in the best interests of indies and claims that it is are financially incoherent. We'll discuss (and show) why in an upcoming article. We'll also finally reach the margin slurping topic of MDF in the next article.)
The crux of the battle between Amazon and the book publishers is over two pricing models and whether Amazon will be forced to purchase some E-books from the major publishers via the agency model vs. the wholesale pricing model. Note that the battle revolves mainly around digital properties, not paper. The two sides in the battle are in most cases quite happy to sell and buy print books from each other via traditional wholesaling.
What is Wholesale Pricing
Wholesale pricing is the most common reseller method of buying and pricing in the world, and is used in thousands of industries other than books. We are all familiar with it. Below is a highly simplified model of a wholesale priced book. Please remember that the retail price of the book is normally assigned by the publisher if you are formally published and serves as the foundation for your royalty payments.
Wholesale Price of Book
$12.00 Reseller Markup
100% Retail Price
24.00 This pricing model is sometimes expressed in terms of a book being sold to the reseller at a 50% wholesale discount. Use whatever terminology you find makes the most sense to you, but the numbers will come out the same.
In the wholesale model, while the publisher may assign a retail price (in the software industry, the typical term was SRP--suggested list price), the reseller does not have to sell the book at that price. They are free to adjust their resale charge up or down based on their assessment of the market and their promotional strategy.
What is Agency Pricing?
Before we look at the agent model, let's first clear up some misstatements and misconceptions about agency pricing. First, this model is not exclusive to book publishing. It is widely used in other industries as well. In software, the equivalent to agency was called MAP (manufacturer assisted pricing).
Second is the fact that agency (MAP) pricing is not illegal. Claims that it is are ignorant. Apple resells books via the agency model. Apple and the major publishers were found guilty of price collusion in their dispute with Amazon, not for attempting to negotiate the use of agency pricing. The current Hachette vs. Amazon dispute focuses around Hachette's insistence on selling some books to Amazon via agency and Amazon's insistence that Hachette sell its books using wholesale pricing (and pay more MDF). The courts are neutral on this topic. If the other publishers also insist on selling books via the agency model, Amazon will face some tough choices and the courts will not assist them in their struggle (unless Amazon can again prove collusion).
Publishers Stated List Price
$24 Reseller Price of Book
$24 Reseller's % of Sale (assumes 33%)
$7
As you can see, in the agency model the supplier (publisher) controls the retail price of a product sold to a reseller. The reseller, of course, has the ability to reject this, but normally won't want or be able to.The reason is that only a company with a dominant market position and premium product(s) has enough leverage to negotiate for this type of pricing model. To return to software for a moment, in the early 2000's, companies such as Adobe and Microsoft negotiated MAP pricing with their channel. The reason they could do so was in desktop operating systems and advanced professional graphics tools, both companies had achieved effective monopolies in their respective categories. This is why to this day, in retail channels a copy of the latest version of Windows always costs the same unless the supplier has agreed to sponsor a special promotion.
Why do the Publishers Like Agency Pricing?
For several reasons. They include:
The ability to protect what they perceive as "premium brands," in other words, popular or well known writers with proven sales and/or prestige. The reality is that people wll pay more for a Steven King horror novel about the zombie apocalypse than one written by Stefan Konig.The desire to control reseller promotions. Under the wholesale model, the reseller is free to price purchased products at whatever level they wish and can even sell products at a loss (a loss leader) to drive purchases of other products. Suppliers tend to hate this as they believe it damages brand equity (and they're usually right).To maintain their leverage for future pricing negotiations. The more premium brands you build and maintain, the more power you have.To support new brands that are being built. It is easier to introduce new premium products to the market when you already have a stable of them.To control their future financials. Premium products are always more profitable than "standard" or "discount" brands.To protect the pricing structure of the print market. If the gap between E-books and printed books grows too large, the pressure will grow to reduce the prices of print books.
Many publishers have multiple imprints and will not attempt to negoriate for agency purchases for their entire catalog of books, only their top-tier lines. Nor does the agency model have to be in place for the lifespan of a book. The contract between the publisher and reseller may call for the agency model to be in place for only X period of time and then revert back to wholesale. Earlier in the series, I noted the different prices Amazon charges for older Stephen King novel; these are being sold to Amazon via the wholesale model. In an earlier battle, Macmillan told Amazon it could buy new E-books from Amazon seven months after the book's release, but until that time, Amazon would have to purchase the titles via agency pricing. In retaliation, Amazon began to limit the availability of Macmillan titles on its site, but backed off. Macmillan won that fight.
Why Does Amazon (and other Resellers) Like Wholesale Pricing?
Wholesale pricing provides them with maximum promotional flexibility. The ability to heavily discount a premium brand is valuable and enables a reseller to add a great deal of perceived value to a promotional bundle.Wholesale pricing enables a reseller to establish themselves as a value leader via heavy discounting.Wholesale pricing shifts power from suppliers to the channel by enabling the resellers to ultimately assign brand value via pricing. A brand's value decreases over time if the product or service associated with the brand is constantly being discounted.
Wholesale pricing enables Amazon to pursue its high availability, lowest price model with a minimum of interference from suppliers. Channels always seek to price their inventory independent of their suppliers in the wholesale model. The tug of war between the two parties is constant. And agency pricing just makes Amazon's DNA itch.
Wholesale pricing assists Amazon to gain control over a very valuable market, the E-book market. This is a market with inherently high margins and low production costs. Amazon badly wants to manage this market because its other business lines, most of which involve shipping physical items, is low margin and often unprofitable.Wholesale pricing helps Amazon become Walmart. (And Walmart, not the book publishers, is Amazon's true competitor. In the eyes of both companies.)
The last point deserves some more explication. Walmart is the largest reseller in the world, with revenues close to $500BM in 2013. Amazon's revenues are about $75B.
Amazon was founded upon the premise that because it was an Internet company, it could eventually out-compete WalMart and its brethren by offering the widest possible inventory at the lowest possible price. (I, personally, think that Amazon is right. In my novel, Rule-Set , I describe a world of the future where stores are entertainment centers and serve as a way to run promotional and loss leader programs. The point of these programs is to persuade buyers to integrate your product into their "purchasing manifests," subscribe-to-buy lists that automatically reorder most staples and many optional goods. Day to day delivery of purchases is carried out by 24/7/52 drone delivery fleets and personal and local 3D or "maker" printers.)
Amazon's mission is a difficult one. Its low price strategy shaves margins to the bone. To make money, it must pursue the highest possible operational efficiency. (When the robots eventually take over the world, they'll first have held their first steady jobs at Amazon.) How hard this is to do can be seen by the fact that Amazon has never been consistently profitable. Some years it makes money, some years it loses it. Sometimes a lot. In 2014, losses are projected to be in the area of $1B. But, to date, Jeff Bezos had been able to placate his shareholders with promises of future profits and play the long game.
In addition to one day surpassing Walmart in size, Amazon also wants to wield the type of power the world's largest retailer enjoys in its relationships with its suppliers. Trips by vendors to Bentonville, AK to visit Walmart buyers are accompanied by the same level of hope and fervor as exhibited by lepers going to Lourdes. Suppliers will build, package, and price their products according to Walmart's requirements and diktats. A successful launch in Walmart can make a company. Failing to gain access to its shelves can break it.
Amazon likewise enjoys some of the same power over its suppliers. The publishers, however, with their control over the best selling content in the book market, are an anomaly in the eyes of Amazon. It badly wants to bring them to heel.
How Are Writers Impacted by the Wholesale Pricing Model?
There is almost no impact. In the case of published authors, your royalties are calculated off the retail price of the book. And since Amazon and its counterparts have no interest in buying books at wholesale from indies and deciding how to mark them up and promote them (remember, Amazon is a channel, not a publisher), the issue is likewise of little interest to you ink-stained wretches striking out on your own.
How Are Writers Impacted by the Agency Pricing Model?
This is a more complex issue and is highly dependent on your brand position in the market. If you are a high selling, well known author, agency is probably a benefit to you because it maximizes your book's revenues during its launch. And agency pricing will help support your premium reputation in the market. As I wrote earlier in the series, the public will pay a premium to obtain access to new works sold by established authors. Price your product at too low a level and the increase in the volume of sales generated by this strategy will not make up the loss of revenue.
Of course, the above is dependent on other factors. How good are your reviews? Does the publisher properly estimate what level of premium pricing you can command in the market? What types of promotions are being run to support your book? Does your publisher know when it's time to shift back to the wholesale model and activate your book's long tail?
If you are a new, published author, the issue is not that important to you. Your publisher will probably sell your book into the channel at wholesale pricing and your book will takes its chances with the market. If you sell well, your next book may earn an agency pricing gold star.
For indie authors, the answer is that you already exist in a modified version of the agency model. (It's very ironic reading Amazon advocates such as Hugh Howey and Joe Konrath damn agency pricing and not realize indie publishers are living it!). First, Amazon's margins are already dialed in at 30% a la typical agency models. The larger publishers, BTW, do not pay retail usage fees. Second, you are locked into Amazon's $7 pricing box (handing over 65 points to a channel is not financially viable). This pricing regime is not in the best interests of indies and claims that it is are financially incoherent. We'll discuss (and show) why in an upcoming article. We'll also finally reach the margin slurping topic of MDF in the next article.)
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