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On Testing Prices to Maximize Revenue

January 4th, 2012 by · 6 Comments · opinion

Over the holidays, Indie Reader ran a story on what it calls the “growing debate” about the wisdom of selling eBooks for 99 cents.  It’s a good overview of the discussion, but it also joins the list of stories that equates lower prices with less revenue.

The article asks, “How do we value our writing?” There’s no single answer to that, of course.

Newer authors may seek to lower any barriers to discovery, while established writers want to find the price that maximizes total income.  In both cases, lower prices can serve those ends.

As the marginal cost of a good (in this case, eBook) falls to zero, pricing becomes an exercise in revenue maximization.  Digital-first and digital-only imprints and authors have no reason to defend the higher price points in place for print products.

The video-game industry understands this pricing opportunity.  Kirk Biglione recently pointed me to an interview with Gabe Newell, whose company created games that include Half-Life and Portal.  The company also operates Steam, sometimes considered the “iTunes of the video game industry”, a tool that gives them some insight into pricing.

Newell’s experience reveals that video-game pricing is “perfectly elastic” when the price is more or less seen as permanent.  Any increase in price is offset by a decline in sales that keeps total revenue the same.

When price is used as a promotional tool – “75% off for a limited time” is his example – they found a very different result.  Total revenue in those situations grew 40-fold.

That’s not a typo.

There’s at least one member of the publishing supply chain that understands the value of digital promotions.  A few weeks ago, I described Amazon’s “free eBook for Prime subscribers” as an experiment that publishers could learn from.  After debuting with a small selection of 5,000 titles, Amazon has expanded to offer a reported 66,000 titles, including at least some independent and digital-only authors.

With respect to price, there are no easy answers for publishers that must continue to manage both print and digital platforms.  With respect to testing, though

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6 Comments so far ↓

  • Robert Nagle

    You are omitting the two most important parts of the issue.

    First, under 2.99 your royalty goes from 70 to 30%, and Amazon enforces a “match any price” clause in selling (which basically its competitors have followed).

    Second, paypal’s micropayment for digital cont have come down dramatically over the last year. Right now it’s 5% + $.05 for any price.

    If I sell directly via paypal, I can sell a 99 cent item and earn 85 cents in royalties, vs. 30 cents at amazon. Yes, Amazon has the market share right now and the “cloud”, but for indie authors I think selling via paypal is a great deal. And smashwords lets you sell with 85% royalties without a price floor (i think).

    i don’t deny that amazon provides visibility and business tools, but I think doing it on your own gives maximum flexibility over pricing. I predict in 5 years that the overwhelming majority of ebooks sold will be directly through publishers’ or author’s sites. Of course Amazon will try to convince the public about the value of keeping all your content in a single cloud….

  • Mike Cane

    >>>As the marginal cost of a good (in this case, eBook) falls to zero

    You mean distribution cost. And even that is fictional. Are you old enough to recall the PR BS about nuclear energy? It would be so cheap and plentiful that electricity would be unmetered. Has it ever been that, even where communities get nuclear-generated electricity? Storage for even zero-priced eBooks costs money. Electrons require atoms for storage and delivery.

  • MikeB

    Marginal cost is the appropriate term. It is defined as the total cost that arises when the quantity produced increases by one unit.

    Once the ebook is completed the costs are fixed. The cost to “produce” another digital copy is so close to zero as to be insignificant. The author/publisher incurrs no additional costs after the file is finalized whether the ebook sells one copy or 100,000 copies.

  • bob gallagher

    About to publish an eBook version of a cookbook and wonder how to max income. Price at $4.95 but $1.95 intro offer for first 30days.
    Any ideas would be most welcome.

  • Richard Adin

    @Robert Nagle — Selling via PayPal is a good idea as long as your audience is either “verified” or willing to become “verified”. Once a consumer has paid for $10,000 worth of goods via PayPal (and that’s lifetime), the person can no longer pay via PayPal unless they become verified. I know because I haven’t been able to buy anything via PayPal for a couple of years now.

    Verified means you give PayPal access to your bank account. I told PayPal I’d gladly do this as soon as they obtained a million-dollar bond that was payable to me should hackers get my account information from PayPal. Needless to say, I have had no response (typical from PayPal).

    I want to pay via credit card, but that won’t work either. According to PayPal, even though I can get a 30-second approval for a PayPal credit card, none of the credit cards I already have gives PayPal confidence that either I am who I say I am or that I can really pay my bill. I guess 30 seconds in PayPal’s credit approval world is much more assuring than 10 years of credit card history with, say, Citibank.

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