Book Pricing – Repeating the same mistakes only on a bigger scale

Last year I wrote a post about book prices in Australia. Sadly not much has changed with the price of books in Australia over the last 12 months. We have been above parity with the US dollar for quite a while now but there has still not been any significant drop in the prices of books in Australia. There has been a lot of rhetoric by publishers about why this is so. We have seen some movement on some titles, mainly the $32.99 price point for Trade Paperbacks dropping to $29.99 (which in my opinion is not enough). There have even been some Trade Paperbacks at $24.95 which I applaud. Unfortunately there are still a high proportion of books at $32.99. Similar price changes have occurred amongst the other formats with 10% price drops on some books and none on others. This movement is good but it needs to continue and it needs to be across the board and not selective. And 10% is not enough.

I am not arguing that there should be price parity for books in Australia. That is an impossibility. GST alone makes this impossible but there other fixed costs that both bookshops and publishers face that have not come down and have even gone up in some instances. Wages is the big one. I have argued in the past (before the exchange rate went crazy) that books in Australia despite their higher prices were more affordable. One of the big differences between book prices in the US and book prices in Australia is the minimum wage. On average a US bookseller would be paid around $US7.50 an hour with much fewer penalty rates and less holiday or sick pay. The minimum wage for an Australian bookseller is now almost $AUD20 an hour with massive penalty rates for weekends and public holidays. The property market in the US has also crashed meaning rents in Australia are also considerably higher. However these reasons do not mean book prices should not change at all. Many of the book s in the Australian market are produced and printed overseas so they should have experienced a price drop in the last 12 months but prices across the board have not fallen.

The real problem with book prices is perception. Before the Australian Dollar had parity with the US dollar there was a perception amongst readers that books in Australia were more expensive. This was one of the driving forces behind the Federal Government’s investigation whether or not to open the market for books in Australia. Personally I don’t think an open market is the solution to book prices and if you look at the NZ experience it can even result in book prices being driven up. Two years ago I would have argued that the perception of book prices being too high was only that, a perception, but the current exchange rate has made that a reality. But why did this perception exist?

In my opinion the perception problem was created by the growth of book sales in Discount Department Stores (DDS) eg Big W, Kmart, Target etc. These stores use books as a ‘loss leader’ to bring people into their stores (which shows the significance books have in retail terms). This is a common practice amongst big retailers where they sell a product at cost, or below it, to entice customers into their stores to hopefully sell them a product at a much higher margin. Unfortunately books became the pawn in this game. Under the Competition and Consumers Act “Suppliers may withhold supplies of goods to a company that engages in ‘loss leader selling'”. Indeed Foster’s actually did this to Coles earlier this year. However no Australian publisher has ever done this as far as I am aware. In fact we have seen publishers actually cater to this form of discounting by changing the formats of bestselling authors.

Some of Australia’s biggest selling authors, who careers were helped by independent and chain booksellers, have been moved from being new releases in Trade Paperback to Hardback. This has a number of affects. Firstly the author gets a higher royalty rate as the RRP or list price is increased. The publisher’s cost price to the retailer also goes up even though there is not much difference in productions costs between a Trade Paperback and a Hardcover when we are talking about fiction. Retailers who sell the book at the recommended retail price (RRP) are greatly disadvantaged by the higher price point. The reader, quite rightly, feels cheated at this new price point and is more determined to seek out a better price driving them away from their traditional bookshop. While in the short term there doesn’t appear to be any adverse consequences for the author or the publisher in the long term this is doing serious damage to the book industry.

The concept of a ‘loss leader’ is also becoming a furphy with the advent of volume rebates. This is a practice that has been used in the DVD industry where a retailer commits to a high volume of units and is rewarded with a rebate from the supplier if they meet their target. This rebate in effect underwrites any loss made by the retailer’s discounts. It is impossible to know how widespread this practice is in the book industry but it does occur. This practice can also result in stock being destroyed rather than sold or returned to the supplier so that the rebate is paid.

The same mistakes are being repeated now with eBook pricing, only on a bigger scale. Amazon have become the dominant eBook retailer by discounting all their eBooks to $9.99 regardless of the cost price. This is ‘loss leading’ on a gargantuan scale. It was so extreme that it was severely damaging the sales of physical books in the US. Thus was born the Agency Model. Under the Agency Model the publisher sets the eBook price and retailers become ‘agents’ of the publisher and therefore cannot discount the eBook. It also means all retailers are on a level playing field when it comes to price and must find other ways to compete, like service. The six major publishers in the US all now distribute their eBooks under this model and we have seen Amazon’s market share for eBooks start to decrease. However Amazon continues to price any eBook not under the Agency Model at $9.99 and this includes a lot of books from Australian publishers.

Australian publishers are still working out their pricing strategy for eBooks. Many Australian publishers are linking their eBook prices to the price of the physical book, which in my opinion is a mistake. This has resulted in Australian eBooks being priced at $29.95, $32.95, $40 and higher. These same eBooks are on Amazon for $9.95. Once again the short term affect for the author and the publisher is great. Amazon’s extreme discounting doesn’t affect their royalty or bottom line so they don’t see a need to change their pricing strategy for eBooks. The Agency Model could fix this problem but only if publishers find a flat rate to price their eBooks and not linking them to the physical book’s price. Only a small few Australian publishers are currently supplying eBooks under the Agency Model. There is also conjecture as to whether or not the Agency Model is even legal, both here and overseas.

The scale of Amazon means that this is a much greater threat than the ‘loss leading’ by DDS’s. It also means the damage to the Australian Book Industry will occur much faster. We are on the tipping point for eBook sales in Australia at the moment. I think post-Christmas this year we will start to see the rapid market share growth of eBooks as we have seen in the US and the UK. If the majority of this growth goes overseas to Amazon this will have a huge impact on the viability of the Australian Book Industry. Who will support the current or the next generation of Australian writers? I can safely say that it won’t be Amazon. It will not be sustainable for Australian bookshops to grow new authors only to see 20% or more of their sales go to Amazon when that author takes off. Local eBook retailers are key the future viability of an Australian Book Industry but repeating the mistakes of the past when it comes to pricing could ruin us all.

4 thoughts on “Book Pricing – Repeating the same mistakes only on a bigger scale

  1. There’s a lot of information in that – Ill probably have to re-read it again to get my head around it. Just briefly, I can see that the major retailers liek Target etc would definitely be causing issues. Yesterday we found a book we wanted at Target for $39.00, but sadly it was damaged. We went to Dymocks and it cost $69.00. Same book. I didn’t know though that some were seeling at a loss deliberately in order to get customers.

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