At least once or twice a week someone asks me, “So why do eBooks cost so much?” This is a fair question. After all, digital publishing eliminates the costs of physical manufacturing and distribution. What expenses do publishers have left?

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As it turns out, plenty.

Let me begin by putting things in perspective. First, the retail price has already been adjusted. As you are probably aware, Amazon is selling most eBooks for $9.99. That is already roughly half the price (depending on the format) of the typical physical book.

While Amazon is currently buying these books from some publishers at a discount off the physical retail price of the book, this will ultimately change. When it does, publishers will net approximately 70% of the retail selling price or $7.00. (This is often referred to as “the agency model.”) This will fluctuate up or down, depending on where retail pricing levels ultimately land.

Second, physical manufacturing and distribution expenses cost less than you think. Some people assume that these two items represent the bulk of a book’s costs. They don’t. Together, they account for about 12% of a physical book’s retail price. So eliminating these costs doesn’t do much to reduce the overall cost structure.

Publishers still have to pay for acquisitions, royalties, editorial development, copyediting, cover and interior design, page composition, cataloging, sales, marketing, publicity, merchandising (yes, even in a digital world), credit, collections, accounting, legal, tax, and the all the usual costs associated with running a publishing house.

In addition, publishers have to incur at least three new costs:

Digital preparation. Granted, most new books start out as a digital file. If they aren’t already digitized, then they have to be scanned or manually keyed in. But that’s only the beginning. Publishers must then format the books, so that they work on all the various eReaders. Currently, there are about six major formats. Some are similar, but each has its own nuances and quirks. In addition, publishers must collect and add all the relevant metadata, so that customers can actually find the books when they search for them. Quality assurance. Once the publisher gets the eBook formatted for a particular eReader, he then as to take it through a quality assurance process (often referred to as “QAing” the book) to make sure that each of the major eReaders renders the pages correctly. This is a time-consuming and laborious process. This is fairly easy with books that are straight text. But few are this simple. When you add epigraphs, pull quotes, tables, charts, graphs, illustrations, footnotes, etc., it quickly becomes complicated. In this sense book publishing has become much like software development. At Thomas Nelson, we have seven full-time people managing this process, and we’re currently looking for three more. Digital distribution. Once publishers have finished the QA process, then they have to distribute the files to the various eRetailers. You might think Amazon, Barnes & Noble, Apple, and Sony are the only ones out there. They’re not. We are currently distributing our eBooks to more than twenty separate accounts. Each of these has a different upload protocol and digital asset management system. When something changes in an eBook (e.g., simple corrections or a new edition), publishers must re-distribute the new file and ensure that each eRetailer has the current version. Publishers must also collect payments from these accounts, ensuring that they are getting paid for each download, so they can, in turn, pay their authors.

So far in our experience at Thomas Nelson, the elimination of manufacturing and distribution costs are being offset by retail price reductions and the three additional costs I have outlined. The good news is that we are making about the same margins, regardless of whether we sell the book in physical form or digital.

As a result, I don’t expect eBook retail prices to come down any more. If they do, then publishers will have to figure out how to make it work. But for right now, I think the pricing is fair, based on the associated costs.

Question: What questions do you still have about eBook pricing?