January 16, 2011 Why do ebooks cost so much?

JaneDear JaneAgency pricing / book business / book prices

Dear Jane:

Hi, I was wondering if y’all might know if any of the big publishers (Putnam in particular) have some sort of ebook deal with Amazon and B&N to exclude some of the smaller ebook retailers out there? I don’t remember you mentioning anything like this in your blog before.

The reason I ask is because I’ve been trying to buy Jayne Ann Krentz’s newest, In Too Deep; but can only find it at Amazon and B&N. None of the usual ebookstores have it. I’ve bought ebooks from JAK before, so I’m a little surprised – and irritated. I’d like to know who to blame before I start bitching. ;)

~Roxie

Dear Roxie:

In April of 2010, 5 of the major publishers (Penguin/Putnam being one of them) instituted what is now called Agency Pricing. Agency pricing has been instituted in US, UK, and Australia (even though some argue it is against the law in Austrialia) Under agency pricing, the publisher controls the price and the retailer is not allowed to discount. Some of the smaller retailers had a hard time coming to agreements with the publishers and that is why some of the books from certain publishers don’t appear in the smaller retailer catalogs. Additionally, under agency pricing, the retailer isn’t allowed to discount. This led to Fictionwise, for example, discontinuing Micropay rebates and a number of titles disappearing from its virtual shelves.

The five major publishers are as follow:

Simon & Schuster (Pocket),

Penguin (Berkley/NAL/Ace),

HarperCollins (Avon),

Hachette (Warner, Orbit),

Macmillan (St. Martin's Press, Tor)

Under the traditional form of selling, the publisher sold the digital book to the retailer (or store) like Amazon or Barnes and Noble at a discount, often 50% off. The retailer/store would set the price for the readers. For example, if the retail price of a book was $7.99, Amazon would pay the publisher $3.98 for that book and then charge the reader some amount. Some retailers like Amazon or Fictionwise or All Romance eBooks would sell these books at a discount, either a straight percentage off or some amount returned to the purchaser in rebate form.

Under “Agency Pricing”, the publisher gets 70% of the book’s retail price and the retailer receives 30%. Under Agency Pricing, publishers are responsible for sales tax and thus have started to have to collect sales tax for many states in which it has “substantial physical presence” or a tax nexus. Many times, the regular presence of a single sales person can create a tax nexus and thus the increased number of states from which sales tax is collected for ebook sales.

If the book is discounted at a retailer or you can use a coupon on it, then it’s likely that publisher isn’t participating in “Agency Pricing.” Most small press publishers do not participate in that type of pricing and neither does Harlequin, Random House, or Kensington. Because those publishers don’t participate in agency pricing, they are more freely available at various retailers and not solely the big guns like Amazon or Barnes and Noble.

Interestingly Michael Hyatt, the publisher and CEO of Thomas Nelson publishing, recently stated on his blog that under Agency Pricing and with a reduced sales price of $9.99, the agency publishers are making the same amount of money as its hardcover revenue. Therefore, the publishers who are participating in agency pricing and not discounting are bringing in even more revenue than before.

Assuming all costs being equal (despite the fact that elimination of print related costs does contribute some cost savings), an agency publisher selling a digital book at 7.99 is netting $1.60 more or 40% increase.

Wholesale pricing model, assuming 50% revenue of $7.99 book: $3.995 revenue per book

Agency pricing model, assuming 70% revenue of $7.99 book: $5.593 revenue per book

For mass market paperback sales, publishers employing the agency model are going to come out ahead. The publishers could price the digital book at $5.99 and still be achieving higher revenue.

I think this and Hyatt’s blog post shows us that price for digital books are unrelated to the costs of producing the digital book.

That’s probably more than you wanted to know but it gives you a little understanding of the pricing of books. You can check out other Dear Author articles on pricing here:

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