Ebook Pricing vs Revenue

Konrath Data Ebook Sales Curve

It’s amazing how often I see some variant of the phrase “We can’t afford to price our ebooks lower because we have costs to recoup.” 10 minutes ago I saw that in the current Locus magazine interview with John Picacio. He in general seems like someone who gets it, both here and in the Sidebar podcast interview with him that coincidentally I listened to last week. This is not to single him out, he is maybe the 10,000th person I’ve seen say this, only the most recent before I type this up. In his interview he says:

If pricepoints for e-books are forced down, do publishers simply slash budgets to achieve their margins? Does that inevitably mean a dramatic slash in quality of experience for the reading audience in terms of things like cover art, copyediting, and other services that readers take for granted?

This reflects a point of view so common in the publishing world that is received wisdom. No one questions whether or not lowering the prices of ebooks will make them more money in the end. They all know it makes less money.

I’m attaching to this post some graphs I generated. I did this early in 2010, based on then recent data that J. A. Konrath had posted to his blog. He’s a decent test bed for these numbers, as he had a number of ebooks out, some self-published and some published by a major publisher. These were priced all over the board. At the time, he was pricing his self-published books at $1.99, and the major publisher books were as high as the $8 vicinity. The commonality here is that none of them were getting much of a promotional push. There was no book tour, no advertising campaign so these numbers should be a realistic look at how price affects unit sales. It must be noted that I dropped two data points. He had two self-published books at $1.99 that sold so anamolously well that they blew out the chart. I dropped data to make the curve fit but the data I dropped would have biased this even farther to the low end of the curve. At the time, even Joe had no real explanation for why those books sold so well. He has since raised his price to $2.99 which is the same conclusion my data would lead you to. He’s a savvy cat, I’m guessing that sometime between then and now he also ran these numbers and raised his prices accordingly. (Update: yes, he did raise prices based on his observation of data.)

Konrath Data Ebook Revenue Curve

Let me disclaim my analysis by saying I am not an MBA or a business guy. I am however a scientist, once a chemist and now a computer scientist. I know a little bit about numbers. If you think I have a flaw in my analysis, please tell me where you think I’m wrong in comments. Civilly. Don’t bother flaming for I have a hard heart and admin rights.

Every single time I’ve heard anyone defend higher ebook prices, they cite the fact that “just because the publication is electronic, that doesn’t eliminate costs.” This fact is what I like to call “true but useless.” Yes there are costs associated, but all costs in ebooks are fixed. The publisher does whatever they need to do editorially, formatting wise, etc. When that is done, they push a file to Amazon/B&N/Smashwords et al and that is that. Whether there is 1 sale or 1,000,000 unit sales, the costs are identical. I’m treating promotion as a fixed cost although I can be argued on that. Regardless, the costs of promotion do not rise as a function of sales. They may drive sales, but if you sell 10x what you estimate, your promotion costs don’t expand ten-fold.

Since all costs that go into creating the publication ready file are fixed and there are no variable costs associated with providing copies to the market (from the publisher – Amazon et al are paying them) by my understanding the only factor that should be important is total revenue. If you lower the price of the book, you run the risk of pricing lower than a purchaser might have been willing to pay. That is an opportunity cost but not a hard cost. It’s not like in the paper world when publishers sell the remaindered book at less than the hard costs associated with the manufacture and shipping costs of those copies. That’s not possible in the digital world. Instead what is important is pricing the books so that the total revenue is maximized.

I took the Konrath data and did a logarithmic regression. You’ll see that the R^2 = 0.96, which is a pretty darned good fit. Then I used that equation to plot out the line that predicts the sales at any price point interpolated or extrapolated across the range and a little higher. I then made a second graph of the price multiplied by the unit sales (aka gross revenue) against the price. What you’ll see from the graph is that just a little over $3 per copy is where revenue maximizes. When you get under that, the per unit sales rise exponentially, but the price is low enough that the revenue drops. Around $3 is the sweet spot, again which I stress is for the data set that I have.

Now, I acknowledge the limits of the data I used for this analysis. Even better would be if I could get all of Konrath’s data for his history but a publisher or e-retailer could do much much better. Let’s suppose the standard price for a given Kindle book is $9.99. Have Amazon show 55% of the users that look at that page the $9.99 price. Randomly assigned, 5% of users each would see a price from $0.99 to $8.99 in $1 increments. Analyze that data for the conversion rate to sales at each price and you could generate much better statistics than I have because all of those numbers will be for the same book at the same time. This is ultimately my larger point – in digital sales, this kind of experiment is possible. If the major publishers haven’t done this and don’t understand what this curve looks like for their books then they really have no excuse for stating definitively why they can’t lower prices.

The assumption under all those statements is that the demand for these books is inelastic. If you price it at $14.99 you’ll get about the same sales figures at $9.99 or $6.99 or $2.99 so pricing it high maximizes revenue. For certain well known marquee writers this might be true but my suspicion is that the market is far more elastic than any publisher would like to think. I think that’s the root of this mindset. Publishers and authors ultimately have a worldview that is the opposite of this analysis. They don’t want to believe that they have a commodity product that is price sensitive. No one sits down to spend a few months or years writing a novel thinking “wow, if this book is priced too high the Kindle readers will just move on to another book priced more reasonably with which they’ll be just as happy.” I feel for them as a person who has tried to write fiction and will do it again. That’s a hard fact to face but I think accepting it would make everyone more money.

Let me state this one more time: I don’t think lowering ebook prices costs anyone money unless and until they drop under that magic point. I think authors and publishers would make more money if they’d understand these principles, experiment to determine the revenue maximizing points and then price accordingly.

Here’s a real world example from my life on how this principle worked for me and how I hypothesize it works for more of my fellow Kindle and Nook readers. I am interested in Greg Graffin’s book Anarchy Evolution. I heard the interview on Skepticality and went to buy it for my Kindle. At the time I looked, it was priced at $14.99. I came, looked at that and said “Well, screw this. That’s more than the book is worth to me. Pass.” I closed the tab in my browser and never thought about it again until today. When I needed a book I had previously passed on for high price for this anecdote, I thought of this one. Until assembling this post, I hadn’t even realized the price has been lowered to $9.99 for the Kindle version. HarperCollins had my attention months ago, got me to the page to purchase it but an excessively high price kept me from buying it. Iif the average book is priced above my impulse buy threshold, the purchase ain’t happening. If it were not for writing this post right now, I wouldn’t have ever thought about the book again so the one and only chance to flip me to a paying customer would have passed without conversion.

Publishers seem to fail to understand the low friction digital marketplace for ebooks. This is an impulse-buy driven mode. I am a reader of books and a lover of books but my wife has threatened physical violence if I bring in any more paper books without getting rid of some of the thousands that fill every available bookshelf in a house too big for two people. You will not sell me paper books except for those very few novels by special writers I must have in paper. On the Kindle, though, it’s fair game. The sad truth is that for my whole life, in any given time period I have always purchased more books than I read. Even though my physical capacity is exhausted, I still want to buy them. Even though I have every single Anthony Trollope novel you can get from Project Gutenberg on my Kindle, I still want more books. I’m a hoarder. Publishers have a chance to get my money even though I have more paper books and ebooks than I can reasonably expect to read in this lifetime. They have one and only one way to blow this, when I come to look at the page and there is a price above my impulse buy threshold for that item.

Publishers and authors continue to try to make this a moral argument. “What, you cheap bastard ebook readers don’t think we should get paid for our work?” I think if they suppress the ego driven umbrage reaction and instead get down to the realities of the market they are in, everyone can make more money and be more happy. The artistic goodness of the work isn’t tied to the price point, so don’t be offended if you make more money at $2.99 than $9.99. Instead, shut up and cash the check, friend.

I listened back to the first few minutes of a panel I moderated at Balticon 2010, and in my introduction I used the phrase “I’m done begging people to get in the lifeboats. If they don’t want in, that’s on them.” I’m not beating my head trying to evangelize to publishers why they should price appropriately. Some are and some aren’t; some will and some won’t. I have enough faith in the marketplace that in the long term it will all shake out. The question is, how much money are you leaving on the table while you get your shit together?

There are people who understand the dynamic of this marketplace, J.A. Konrath being one of many. He periodically posts about some of the other self-published authors who are following the same path, pricing reasonably and moving thousands of units per month. (Side note: the Nathan Lowell mentioned in that Konrath post was also on that Baltcon panel with me. He’s a talented, hard working guy.) That translates to thousands of dollars per month in the pockets of these writers, since they are keeping the full 70% of the retail price by self-publishing. These people are out there, they are filling niches in the marketplace. Established writers, you could be doing this. Existing publishers, you can be pricing to fulfill this demand and bringing in more money. There will be a day in the future where I will be one of those self-published authors. Will my book be as good and successful as Joe’s and Nate’s novels? I hope so. I’m willing to fill that niche at that end of the pricing scale. Are you?

Updates: Paul Biba at Teleread asked for permission to reprint this post, which I happily granted and that is online here.

It’s a failure of clarity in my original article, but I’m not advocated for $2.99 as the perfect One True Price for all ebooks forever. That was true for this data set, which is already a year old. This might well change over time, differ from author to author, genre to genre or publisher to publisher. What I do want injected into the thinking is that these numbers are calculable and measurable. No one needs to say – as did Lou Anders later in the Locus Magazine I reference above – “We can’t lower prices because we still have costs.” How do you know you don’t gross more money if you lower prices?

The other big point is that unless your price is so low as to be left of the curve, you lower your total revenue by raising prices. J.A. Konrath was to the left of that curve at $1.99. I highly doubt HarperCollins is left of that curve with any $11.99 books.

49 Replies to “Ebook Pricing vs Revenue”

  1. A fascinating article that I am delighted supports my long held estimate of the magic price point.

    David wrote:
    ““What, you cheap bastard ebook readers don’t think we should get paid for our work?” I think if they suppress the ego driven umbrage reaction and instead get down to the realities of the market they are in, everyone can make more money and be more happy. The artistic goodness of the work isn’t tied to the price point, so don’t be offended if you make more money at $2.99 than $9.99. Instead, shut up and cash the check, friend.”

    David THIS is at the heart of the lot of the pricing problem I am certain. Too many authors and too many agents and publishers are still hung up on their emotional connection to how they value their title. I fear that it will take a few more years of bitter experience for them to climb down off their perch.

  2. I think the pay-what-you-want model could work very well for eBooks. Set a low minimum, maybe a buck for people who don’t know your work, and let your fans gleefully hand you fistfulls of cash.

  3. Very good. I couldn’t agree more. Surely part of the problem is that traditional publishers have a mass of hardware, printing presses, warehouses etc. that they have to continue to fund. I presume that they see e-books as a one for one swap with print copies, so they have to recover the same overhead on the e-books, the only saving being the actual paper.
    Another possibility is that e-books will expand the total market, a point you make well in relation to impulse buying. E-books also give opportunities to writers to bypass the agent/publisher gateways that have effectively decided what people should read.

  4. Not an important point, but it’s information, so I’ll leave it. You say, re: Konrath “He has since raised his price to $2.99 which is the same conclusion my data would lead you to. He’s a savvy cat, I’m guessing that sometime between then and now he also ran these numbers and raised his prices accordingly. (Update: yes, he did raise prices based on his observation of data.)”

    Actually, that $2.99 doesn’t have anything to do with Konrath’s savviness (or lack of). It’s the Amazon minimum price they require in order to participate in the 70% author royalty program and it went into effect last year, thus Konrath’s price raises.

    Here’s a direct link to the List Price Requirements: http://forums.digitaltextplatform.com/dtpforums/entry.jspa?externalID=453

  5. This price point issue is a good one. My ebooks are priced at 4.95 with Ridan because they did run a lot of numbers looking at pricing with Michael J. Sullivan’s books and determined that sales in that niche were maximized at the 4.95 price point.

    I think there are two factors. One is “perceived value” and as more cruft gets pushed into the 2.99 bracket buyers are looking for pricing and ratings to differentiate. Two is that the Fantasy genre niche has a demographic that’s used to paying 7.99 and 8.99 for their bi-weekly fix of magic. Asking them to pay 4.95 is waving candy.

    The meta-view from my standpoint as a participant in the marketplace is that we’re looking at the return of “pulp” — a new kind of mass-market where, as you point out, it’s an impulse buy. Readers want entertainment – something they can grab, read on the bus or while they’re on the treadmill.

    There are other issues that contribute beyond the price point/impulse buy. Things like the author’s platform, the ability to sample, the social aspect of the “top 100” lists by genre, and the lack of “cover art embarassment” for those guilty-pleasure readings. Those go beyond the simple price point calculations but I think fall to the next level of analysis.

    My friend Brand Gamblin is currently experimenting with this 2.99 pricing with his novel Tumbler, trying to see if price point changes will pull his YA space opera up out of the doldrums and onto the lists. The experiment is still too young to draw conclusions from, but early results are optimistic.

    Thanks for the plug, Dave!


  6. Nate, thanks for the input. Your point is a good one and actually prompts a follow-on notion I hadn’t explored before:

    For all the prices from $2 to $5.50 on the revenue curve, they are all about +-6%. If you price anywhere in there, you are close enough to optimal. The difference between $4.99 and say $7.99 is more than 50% revenue reduction.

    This is also why I think anyone involved in price experiments should try enough different points to have statistically significant data to graph their line with confidence. “I tried price X, then price Y then went back to price X” doesn’t give you the good line nor allow you to plot the whole curve. Having a good idea at the price where revenue plummets and the range where it is relatively flat to small changes is WAY VALUABLE!

  7. Yeah – while two points are all you need to define a line, you need three to define a curve and having more … correlated by market and genre … makes this hugely valuable, particularly for back list “mature” properties that have reached their post-release sales plateau.

    I think the conclusions are:
    – the market is very price sensitive,
    – there is a sweet spot (and it’s a lot lower than NYC thinks)
    – the specific spot depends on the property and the niche (sounds like real estate, doesn’t it?)

  8. ok, i see joe already got here. good.

    congratulations on being one of the
    first people to bring in the concept
    of “elasticity”, which is a crucial one.

    many publishers have a _fatalistic_
    attitude about the number of units
    they will move, that it is completely
    static, that it is completely inelastic,
    such that any change in their price
    means equivalent change in profits.

    you’d think that these corporations
    would be economically savvy enough
    to understand a price-demand curve.

    but evidently not.

    fine. let the individual authors take
    all the money at the low-price end.

    joe likely now has more data, from
    a lot more authors, you can graph.


  9. Good article, but it is simply wrong to drop data that makes the curve look “bad” according to your own biases.

  10. Michael, I dropped data that would have ENFORCED my bias – which is that lower prices are better. There are two points that are anomalously high at the $1.99 point, and for which even Konrath was puzzled by how well they sold. I dropped those points. It would have moved the optimum price down to about $2.50 but then the regression line would have actually nowhere near any of the points.

    I’ve read way more scientific papers than a layman should, and this is very common in data analysis. You have data that fits a curve, but a few points blow it out. You drop that data, note that you did and why and move on.

    I think I might even have a suggested mechanism for the anomaly. Anything that makes any of the Amazon top N lists is probably going to blow out this chart, because there is a power law effect from being on the list. You get on the list, more people buy the book because it is on the list and it sells more and stays on the list. I would find it reasonable to exclude from this sort of regressions any books that were ever on those lists for more than a few days.

  11. I loved this post and it said a lot of what I’ve been thinking on this issue.

    I also think one reason publishers are trying to keep ebook prices high (despite evidence that it lowers sales) is b/c they don’t know how to effectively do business in an ebook market. They didn’t expect ebooks to be come as popular as they have. They are heavily invested in hardback books, and to a lesser extent paperback books. When I look through the Kindle store and see ebooks priced higher than the paperback and hardcover, it seems to me that they are trying to push readers back to that more traditional medium. But when I see that the kindle price is $12 and the hardback is $10-11, that doesn’t make me go “hey I guess I’ll get the hardback instead” even though I have Amazon Prime and could get it shipped free. I simply pass on that book, and like you, never think of it again.

    Another recent development to consider is the fact that Borders Books is in serious financial trouble (having stopped payments to publisher in December). It seems very possible that Borders may go under in 2011. Largely in part, many say, due to their too-little-too-late buy-in to the surge in ebook demand.

    That will have a big effect on publishers, considering that Borders/Waldenbooks is the number two brick-and-mortar bookseller, and has over 600 stores nationwide that would close. And for many areas they may be the only bookstore within a reasonable driving distance. Some sales will shift to Barnes and Noble, but many more are likely to shift to amazon.com and the kindle.

    With less stores to present a physical copies of books for readers to shift through and make impulse purchases in the store, I would predict that ebooks would gain an even greater market share. And publishers will become even more dependent on their ebook sales to generate revenue. Especially since amazon.com recently noted that they now sell more kindle books than paperbacks (115 per 100 paperbacks), even including paperbacks that have no kindle version.

    And this would come at a time that the Agency 5 has already spent the last year raising ebook prices and leaving a bad taste in the mouths of ebook buyers. Which amazon.com has cleverly kept in the forefront of people’s minds with “this price was set by the publisher” followed by said publisher’s name.

    This will represent an even greater opportunity, I think, for indie authors (though I hate to hear that Borders may close). And if traditional publishers don’t wise up really quick I think they stand to lose even more. It doesn’t benefit then to have a death grip on the 20th century publishing model in this 21st century world of ebooks.

  12. Dave,

    Two things,

    1) I’d like to reprint this in two places, my main site, madhatter.ca, and also on Web Lit Canada (weblit.ca)

    2) I’d like to see a second set of the graphs with the outliers in. I’ve talked to a couple of writers who believe that the sweet spot is actually $0.99 and claim that they have numbers to prove it. As you said, impulse purchase.

    Very well written.



  13. Dave,

    One final point. Have you considered that rather than a linear progression for increase of sales as the price decreases, you could instead be dealing with a logarithmic or exponential progression instead?

    This would explain the ‘outliers’ that you’ve tossed. My feeling is that they might be valid data, but that we need more information to be certain.

    As you may have guessed, as someone who runs a site called Web Lit Canada, which is dedicated to helping Canadian writers, I’m very interested in what pricing model maximizes the writer’s payback.


  14. Dave,

    One final point. I mentioned Web Lit Canada. I didn’t mention a blog post I wrote there earlier in the month, titled EBook Sales Pass Paperbacks, which is reprinted below.

    That will give you an idea of where my mind is going on the issue.


    This is going to terrify a lot of people. It’s especially going to terrify the publishers and Brick and Mortar book store owners.. ReadWriteWeb reports that EBook sales have passed Paperback sales.

    Since the information is taken from a press release issued by the Association of American Publishers, it doesn’t tell the true story. This is the publishers numbers. It doesn’t include the numbers from self published authors, who use EBooks almost exclusively.

    Back in January I predicted that Brick and Mortar book stores would be extinct in five years. I may have been overly optimistic. They may be gone in two. With EBooks the reader will be shopping from home.

    At the same time, the pressure is on the publishers. Why would an author use a publisher, when they can work directly with IBooks, Kobo, or Amazon, and keep a larger share of the proceeds? Yes, it’s a bit more work, but the payoff is higher. Balance the two out, and the payoff wins.

    There is going to be a huge shift in the market. The publishers that continue to exist, will do so by transitioning to become service organizations, which provide editing, artwork, formatting, in other words the drudge work that keeps authors from writing. They won’t make as big a profit, but they will still be employed.

    The book stores that remain, will be the specialty shops. Many will own their own presses. Almost all will ship worldwide, and use the internet to take orders.

    The world has become flat. It doesn’t matter if your customer/reader is in Tehran, New York, Tokyo, or Timmins. All that matters is that they and you have an internet connection.

    Wayne Borean
    Monday April 18, 2011

  15. Great analysis, but I think there are some important considerations missing. Your curve demonstrates optimal profit points for ebook pricing, but the goal of a publishing house is to maximize TOTAL profits. By high pricing on ebooks, they are losing some impulse and cost conscience buyers, but by lower pricing they would likely be driving people who would normally buy the more expensive hardcover over to the ebook market, and not just for the book in question but for future purchases as well. The value you use for total revenue would have to take account of the loses in hardcover (and paperback) sales as well. For newer or less known writers, these would probably not change the curve much, but for a new Grisham blockbuster I suspect it would be significant. The additional cost to future sales from having driven more people to the cheaper ebook format would be almost impossible to calculate. And, as already mentioned, the likelihood of more people self-publishing as ebooks become the norm means most publishing houses see their interests as being to hold back the ebook tide as long as possible, rather than attempting to change with the times.

  16. Whitney,

    1. Speaking only for myself, the choice isn’t between buying a Kindle edition and the paper edition. If the Kindle edition is priced too high, I buy neither. The choice is between the Kindle and nothing.

    2. Realistically, I have enough unread books in my house and on my Kindle now that they probably could last me the rest of my life. Despite that, I’m willing to buy more because I’m a physical and digital hoarder. All the publishers have to do is price ebooks lower than insanity level.

    3. I don’t really give a shit about publishers and their product mix. That traditional publishers can’t understand how to make money on a product that has some fixed upfront costs and is PURE MARGIN after that says that they might not actually be that good at business. Overpricing the product that is infinitely stockable to protect the sales of products with lots of overhead and lower margins seems kind of stupid to me.

  17. Great Read Dave. I’m surprised I don’t see more references (not just here) to the app store model. I realize apps and eBooks aren’t strictly equivalent; but I have a couple dozen apps on my iPad that I have NEVER used. They are there for those two hours on the Tarmac times when a book would put me to sleep but dammit, I want to be engaged. And they are there because they were < 5 bucks. I literally skipped the whole cost/benefit analysis part of the buying process. If the nitrite that run my neighborhood dollar store can get this concept, why can't the presumably highly educated folks at the publishing house put it together? I think an earlier comment hinted at the answer: it birders on conspiracy. It's still a Luddite world sometimes.

  18. Interesting research. So the optimal price point for an ebook would be between 3 and 4 dollars. I’ll be dropping the prices for my ebooks right away to see what happens.

  19. I think the problem is the presumption that print books and ebooks are parts of the same business. They’re not. Ebooks are an entirely different industry with a vastly different cost and revenue structure. I was working in the newspaper industry a decade ago and watched this same situation play out with publishers acting like the online world was simply an extension of business as usual and could be treated as such and you see how that worked out.

    Book publishers are behaving similarly, and largely approaching ebooks in a protectionist manner to try and add revenue to existing print sales, then seamlessly transition to digital as that segment grows. The problem is that there will be no graceful transition period. Publishers will wake up one day soon to realize their print book revenue is dropping by 20 or 30 % per quarter and they’ll be so far behind the eight ball on a reasonable digital transition that they won’t be able to simply catch up. It’s almost like these folks have sat back and watched what happened with the music industry and the newspaper industry and learned nothing. “Oh, we’re different, that won’t happen to us,” seems to be their mantra these days.

  20. Good stuff. However, as usual, all of this data and talk revolved around fiction work. I get it, that is what is driving the big eBook sales now.

    But I’ve found pricing strategies in the non-fiction space to be totally different. Especially in the business categories.

    What I’m testing, and seeing, is that lower priced books in certain categories like the one I mentioned do not sell as well as higher priced books. It’s because of the mindset of the reader in that niche.

    For example, I could list my book for $2.99, which I did, and then I crank the price up to $8.99. I saw no drop off in sales whatsoever. In fact, on one book I saw an increase in sales. So to me, for this type of book, it makes no sense to price low as you’re just losing money.

    I know non-fiction is still far behind in this eBook, self-publishing revolution we’re having, but it’s coming along. New authors in this space need to listen carefully to the arguments and realize everyone is talking about fiction stuff. Those rules may not apply.

    Jim Kukral

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