What Hugh Howey Won't Talk About (but Should). The Book Channel, Part VII of Several Parts. MDF and the Big Slurp
We finally reach the topic of MDF, an issue of continuous interest to most companies that have to deal with distribution and reseller channels. MDF stands for marketing development funds. Ostensibly, all MDF programs are supposed to increase sales of products for both parties.
The reality is that many, though not all, MDF programs are designed to extract margin from suppliers regardless of a particular program's performance. Suppliers in a wide variety of industries are well aware of this and regard many MDF progams with the same affection given an expired roach atop a wedding cake. Fights over how much MDF money will be handed over by suppliers to their channels is ongoing and endless. While it has been ignored for the most part by the press, the fight between Hachette and Amazon is not simply about agency vs wholesale pricing, but also about Amazon's great desire to increase its MDF charges to Hachette and the publisher's great desire to not pay them.
The types and quantities of MDF programs that will exist in any particular channel is dependent on the industry and what it sells. I will not attempt in this series to identify and list all the various book publishing MDF programs. That is another series. Channels are constantly creating new programs and modifying existing ones. They are also masters of MDF creation and sometimes not that picky about pushing programs that are less than stellar performers.
Managing MDF can be very complex. Companies exist whose sole purpose is to help book and other types of firms manage Amazon MDF programs alone. The only way to master a particular industry's structure is to study and understand it's unique idiosyncrasies. MDF programs can function in very different ways in different businesses even if they're called the same thing.
How Are MDF Programs Funded?
By the supplier, whoever the supplier is, and the payment is almost always in the form of increased channel margin. (One of the most interesting exceptions to this is currently Amazon's MDF Kindle Select Program, which demands exclusivity in return for participation, though authors do receive far lower margins on books "purchased" via the Kindle Unlimited and Kindle Library program components.) How much margin? Between 5% and 15% in book channels. It is not uncommon for a larger publisher to sell a book to a reseller at a 40% discount off list, then hand over an additional 10% to 15% extra margin in return for the right to execute MDF programs.
Types of MDF Programs
In print and online publishing, the most common type of MDF program is called "co-op." (This was also true in software retail publishing.) Co-ops are funded by joint deposits to a special account. In the ideal model, both parties provide matching funds, but this is not a hard and fast rule. Also, the larger the supplier, the more power it possesses to negotiate favorable co-op terms.
Co-op programs usually bundle several services into their framework and suppliers are, in theory, free to allocate funds among the various options offered. However, suppliers frequently find that the programs are mired in so many restrictions and red tape that they give up on using them. Sometimes this is a deliberate strategy on the part of a channel partner and in other cases, it's because the program is poorly administered. If you are a supplier to a channel, always ask to be shown how the program is administered and run. Dig into its payment components. Ask other suppliers how the program performs for them.
Traditional Publishing MDF Program Components
Advertising in appropriate periodicals and venues (this component is normally included in most co-op programs).Trade show signings and panel appearances.
Schedule interviews on radio, blogs and web/podcasts and perhaps TV.Direct marketing programs both via E-mail and an ever decreasing number of snail mail campaigns. In-store or book signings.In-store End caps, banners, and special displays.Catalogs, both online and mailed.
Bundles and discounts.
There are many others, but this is a good initial overview.
If a particular MDF component is not included in a co-op program, it may be bundled into another program or funded via increased reseller margin individually. The cost is usually 1% to 3% additional margin, but this can vary widely.
Digital Publishing MDF Programs
From the standpoint of the channel, particularly Amazon, (but I'm sure the other resellers are rubbing their palms together in happiness) a glorious epoch of digital MDF is dawning. This is because resellers are now in the position to understand and analyze book purchases and customers in ways never before possible. This situation is akin to the Software as a Service (SaaS) revolution that took place in high tech in the mid 2000s. Prior to the rise of SaaS, software companies sold their titles and had no real idea of how the software was used and who used it.
But SaaS, which requires a subscriber to login (usually) into a Internet portal, enables the software company to precisely monitor and track every interaction a customer initiates with the system. The value of this to software firms has completely changed the industry.
Resellers are now in the same happy spot as SaaS companies (and Amazon most of all, because its readers and file format are the defacto standards for E-books). Resellers can now track when, from where, what time, how much, how many and what type of books you bought. They can analyze societal and holiday trends. Cross index against genre, age, sex, and any other information you provide them. And on and on.
Making this even more wonderful from the channel's viewpoint (and certainly Amazon's) is that devices and readers can, if so enabled, allow the reseller to track what in a book you read, how far you read (Amazon already does and ties your payment-- not royalty--into its Kindle Select MDF program), what you reread, etc. The potential ability to peer over your shoulder is almost frightening.
Combine the two datasets and resellers in the future will be able to micro target audiences and niches in ways never before possible. Some of these programs are already being implemented by Amazon and other resellers and many more are on the way.
A Quick Overview of Amazon's Digital MDF Programs
Amazon's core MDF programs include:
Digital couponing and promotions.Enhanced product listings (links to video, animations, enhanced text, etc).
"Gold" and "Silver" promotional periods that enable a company to offer products at special prices for X period of time.Enhanced product listings on the Amazon system.A special data "concierge" service. Amazon will assign a dedicated person to work with your company to optimize your sales through its system. The cost of this starts in the low six figures and is only available to high volume customers.
From the standpoint of indie publishers, its most important MDF programs is Kindle Select. The program incorporates the following components:
Increased royalties on some international sales.
Participation in both Kindle Unlimited and the Kindle Owners' Lending Library.
Promotional programs that include a free giveaway period and discount period.
Over time, you can expect that many new components will be added to the Kindle Select program. Most, if not all of them, will be funded by paying increased retail usage fees (increased margin), to Amazon. Again, despite the "royalty" language the company insists on using, the revenue you receive from sales of your book will decrease the higher your MDF expenditures are.
How Are Traditional Authors Impacted by MDF Programs?
If you are traditionally published, MDF certainly impacts your royalties, though you are so cut off from the process that you don't feel it. As I stated earlier in the series, publisher don't want authors to dig into how the book selling channel operates.
If you are a well known and/or strong selling author, you will often be asked to participate in high profile events such as signings and interviews. These are paid for by increased margin to the reseller, and yes, your book may be on the discount list. But if you are a mid-list author, it's unlikely you'll be signing autographs in B&N soon. Traditional publishers almost always execute MDF programs only on behalf of their top-tier authors. (Yes, I know, life is unfair, but that's the way it is. But things are changing. Some of the changes you may like!)
How Are Indie Authors Impacted by MDF Programs?
Currently, the impact is low, but this will changing dramatically over the next several years. Channels love selling MDF and love the increased margins it brings. It also loves attaching MDF costs to things that currently aren't part of an MDF program. (Often times, this charge will be "buried" if you agree to participate in a MDF bundle.) Below are some new MDF programs and charges you can anticipate will be part of your indie future:
Charges for book storage.
Charges for enhanced book reporting.
Charges for enhanced product placement and display.Web based virtual tours.New micro targeted direct marketing programs.New micro targeted catalog mailings.
Web hosting, creation, and SEO services.Possibly direct access to your book's readers via opt-in options (though I wouldn't hold my breath. Channels like to disintermediate suppliers from their customers and remember, as an indie, you're a supplier.)New micro targeted catalog mailings. Community enablement of your book.Integration of interactive components into your book.Promotional bundling.Enhanced couponing and discounting.
This is by no means a comprehensive list. The channel's fertile imagination will create many more programs.
One important point to not lose track of is that suppliers will be in position to demand high quality performance analytics from the channel. For example, if you wish to charge me for sending a micro-targeted mailing to a list of people who love book where a zombie apocalypse takes place in Newark, New Jersey (something about this sentence feels redundant), how many people exactly am I reaching and what type of conversion to sales figures can I expect to see?
If the channel is unwilling or unable to provide good data for its MDF program, you will know it's one you should steer clear of.
The next and last part of this series will discuss the future of the book publishers vis a vis the channel and the very real possibility that the resellers will use data and customer contacts to take complete control of book publishing. And where will you, the author, fit into the new world coming into existence around you?
The reality is that many, though not all, MDF programs are designed to extract margin from suppliers regardless of a particular program's performance. Suppliers in a wide variety of industries are well aware of this and regard many MDF progams with the same affection given an expired roach atop a wedding cake. Fights over how much MDF money will be handed over by suppliers to their channels is ongoing and endless. While it has been ignored for the most part by the press, the fight between Hachette and Amazon is not simply about agency vs wholesale pricing, but also about Amazon's great desire to increase its MDF charges to Hachette and the publisher's great desire to not pay them.
The types and quantities of MDF programs that will exist in any particular channel is dependent on the industry and what it sells. I will not attempt in this series to identify and list all the various book publishing MDF programs. That is another series. Channels are constantly creating new programs and modifying existing ones. They are also masters of MDF creation and sometimes not that picky about pushing programs that are less than stellar performers.
Managing MDF can be very complex. Companies exist whose sole purpose is to help book and other types of firms manage Amazon MDF programs alone. The only way to master a particular industry's structure is to study and understand it's unique idiosyncrasies. MDF programs can function in very different ways in different businesses even if they're called the same thing.
How Are MDF Programs Funded?
By the supplier, whoever the supplier is, and the payment is almost always in the form of increased channel margin. (One of the most interesting exceptions to this is currently Amazon's MDF Kindle Select Program, which demands exclusivity in return for participation, though authors do receive far lower margins on books "purchased" via the Kindle Unlimited and Kindle Library program components.) How much margin? Between 5% and 15% in book channels. It is not uncommon for a larger publisher to sell a book to a reseller at a 40% discount off list, then hand over an additional 10% to 15% extra margin in return for the right to execute MDF programs.
Types of MDF Programs
In print and online publishing, the most common type of MDF program is called "co-op." (This was also true in software retail publishing.) Co-ops are funded by joint deposits to a special account. In the ideal model, both parties provide matching funds, but this is not a hard and fast rule. Also, the larger the supplier, the more power it possesses to negotiate favorable co-op terms.
Co-op programs usually bundle several services into their framework and suppliers are, in theory, free to allocate funds among the various options offered. However, suppliers frequently find that the programs are mired in so many restrictions and red tape that they give up on using them. Sometimes this is a deliberate strategy on the part of a channel partner and in other cases, it's because the program is poorly administered. If you are a supplier to a channel, always ask to be shown how the program is administered and run. Dig into its payment components. Ask other suppliers how the program performs for them.
Traditional Publishing MDF Program Components
Advertising in appropriate periodicals and venues (this component is normally included in most co-op programs).Trade show signings and panel appearances.
Schedule interviews on radio, blogs and web/podcasts and perhaps TV.Direct marketing programs both via E-mail and an ever decreasing number of snail mail campaigns. In-store or book signings.In-store End caps, banners, and special displays.Catalogs, both online and mailed.
Bundles and discounts.
There are many others, but this is a good initial overview.
If a particular MDF component is not included in a co-op program, it may be bundled into another program or funded via increased reseller margin individually. The cost is usually 1% to 3% additional margin, but this can vary widely.
Digital Publishing MDF Programs
From the standpoint of the channel, particularly Amazon, (but I'm sure the other resellers are rubbing their palms together in happiness) a glorious epoch of digital MDF is dawning. This is because resellers are now in the position to understand and analyze book purchases and customers in ways never before possible. This situation is akin to the Software as a Service (SaaS) revolution that took place in high tech in the mid 2000s. Prior to the rise of SaaS, software companies sold their titles and had no real idea of how the software was used and who used it.
But SaaS, which requires a subscriber to login (usually) into a Internet portal, enables the software company to precisely monitor and track every interaction a customer initiates with the system. The value of this to software firms has completely changed the industry.
Resellers are now in the same happy spot as SaaS companies (and Amazon most of all, because its readers and file format are the defacto standards for E-books). Resellers can now track when, from where, what time, how much, how many and what type of books you bought. They can analyze societal and holiday trends. Cross index against genre, age, sex, and any other information you provide them. And on and on.
Making this even more wonderful from the channel's viewpoint (and certainly Amazon's) is that devices and readers can, if so enabled, allow the reseller to track what in a book you read, how far you read (Amazon already does and ties your payment-- not royalty--into its Kindle Select MDF program), what you reread, etc. The potential ability to peer over your shoulder is almost frightening.
Combine the two datasets and resellers in the future will be able to micro target audiences and niches in ways never before possible. Some of these programs are already being implemented by Amazon and other resellers and many more are on the way.
A Quick Overview of Amazon's Digital MDF Programs
Amazon's core MDF programs include:
Digital couponing and promotions.Enhanced product listings (links to video, animations, enhanced text, etc).
"Gold" and "Silver" promotional periods that enable a company to offer products at special prices for X period of time.Enhanced product listings on the Amazon system.A special data "concierge" service. Amazon will assign a dedicated person to work with your company to optimize your sales through its system. The cost of this starts in the low six figures and is only available to high volume customers.
From the standpoint of indie publishers, its most important MDF programs is Kindle Select. The program incorporates the following components:
Increased royalties on some international sales.
Participation in both Kindle Unlimited and the Kindle Owners' Lending Library.
Promotional programs that include a free giveaway period and discount period.
Over time, you can expect that many new components will be added to the Kindle Select program. Most, if not all of them, will be funded by paying increased retail usage fees (increased margin), to Amazon. Again, despite the "royalty" language the company insists on using, the revenue you receive from sales of your book will decrease the higher your MDF expenditures are.
How Are Traditional Authors Impacted by MDF Programs?
If you are traditionally published, MDF certainly impacts your royalties, though you are so cut off from the process that you don't feel it. As I stated earlier in the series, publisher don't want authors to dig into how the book selling channel operates.
If you are a well known and/or strong selling author, you will often be asked to participate in high profile events such as signings and interviews. These are paid for by increased margin to the reseller, and yes, your book may be on the discount list. But if you are a mid-list author, it's unlikely you'll be signing autographs in B&N soon. Traditional publishers almost always execute MDF programs only on behalf of their top-tier authors. (Yes, I know, life is unfair, but that's the way it is. But things are changing. Some of the changes you may like!)
How Are Indie Authors Impacted by MDF Programs?
Currently, the impact is low, but this will changing dramatically over the next several years. Channels love selling MDF and love the increased margins it brings. It also loves attaching MDF costs to things that currently aren't part of an MDF program. (Often times, this charge will be "buried" if you agree to participate in a MDF bundle.) Below are some new MDF programs and charges you can anticipate will be part of your indie future:
Charges for book storage.
Charges for enhanced book reporting.
Charges for enhanced product placement and display.Web based virtual tours.New micro targeted direct marketing programs.New micro targeted catalog mailings.
Web hosting, creation, and SEO services.Possibly direct access to your book's readers via opt-in options (though I wouldn't hold my breath. Channels like to disintermediate suppliers from their customers and remember, as an indie, you're a supplier.)New micro targeted catalog mailings. Community enablement of your book.Integration of interactive components into your book.Promotional bundling.Enhanced couponing and discounting.
This is by no means a comprehensive list. The channel's fertile imagination will create many more programs.
One important point to not lose track of is that suppliers will be in position to demand high quality performance analytics from the channel. For example, if you wish to charge me for sending a micro-targeted mailing to a list of people who love book where a zombie apocalypse takes place in Newark, New Jersey (something about this sentence feels redundant), how many people exactly am I reaching and what type of conversion to sales figures can I expect to see?
If the channel is unwilling or unable to provide good data for its MDF program, you will know it's one you should steer clear of.
The next and last part of this series will discuss the future of the book publishers vis a vis the channel and the very real possibility that the resellers will use data and customer contacts to take complete control of book publishing. And where will you, the author, fit into the new world coming into existence around you?
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