Full disclosure: I am not on either Hachette’s or Amazon’s “side.” I am on the side of not distorting facts. This particular “fact” has been bothering me for days.
In Amazon’s recent statement about its contract negotiations with Hachette, it has stated (among other things) that it thinks the correct retail price for ebooks is $9.99 or less. It makes its case for this claim in part with the following factoid:
“For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99,” the company wrote. “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.”
On its surface, I suspect this seems pretty reasonable and a lot of people have bought the logic. If books sell more copies at $9.99 than at $14.99 and thereby generate more revenue, why on earth would publishers insist on setting prices at $14.99? They are clearly losing money!
Except it isn’t clear at all. If you read this statement carefully, you’ll realize that for every 100 copies that sell at $14.99, another 74 would sell at $9.99. But the 100 copies will still sell at $14.99. And therein lies to the falsehood in the math. The retail price of an ebook isn’t a static value. Publishers don’t release ebooks at $14.99 and then leave the price there forever. They leave the price at $14.99 until the market of consumers who will buy at $14.99 is tapped and then drop the price (often in conjunction with the release of a cheaper paper format).
A traditionally published ebook (especially a successful one) often goes through many retail price changes. This is annoying for consumers, I grant you, who may feel shafted when the ebook they purchased for $14.99 goes on sale for $1.99, but they got to read the book three years ago instead of waiting until the price dropped to the bargain basement.
Amazon’s claim that total revenue for books at $9.99 is greater than that for books at $14.99 doesn’t take this pricing mechanism into account. The simple fact is that if the publisher can get 100 customers to buy the book at $14.99, the total revenue for those sales is $1,499. When sales being to flag at this price, the publisher can then drop the price to $9.99 and presumably sell another 74 copies for total revenue $739.26. This amounts to total revenue of $2,238.26.
By contrast, if the publisher starts at $9.99, all 174 of those sales are at $9.99 and total revenue is $1738.26. That amounts to the publisher (and Amazon) losing $500 in revenue for every 174 sales. Multiply that over thousands of sales, and it’s a LOT Of money to leave on the table.
If this is the case, why does Amazon want the retail price of ebooks to be $9.99? After all, it looks like they are, in fact, losing money. I don’t know the answer for certain, but I can speculate.
If the retail price were capped at $9.99 (not just at Amazon but everywhere), Amazon would not have to discount as often or as deeply to be the cheapest game in town (which is what they want). Discounts come out of Amazon’s portion of the sale price, not the publisher’s, so less discounting may mean greater revenue for Amazon, even if total revenue is reduced.