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Old 07-27-2012, 08:33 AM   #1
fjtorres
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eBook Price elasticity: Volume=f(price)

Intuitively, we all know that the unit sales rate of a product is a certain function of, among other things, price. For some products, the effect derived from price overwhelms the effects of the other variables. As a result, these products behave (in the marketplace) as if they were fungible commodities.

The change in demand/sales volume for a product as the price changes is what is known as Price elasticity of demand:
http://en.wikipedia.org/wiki/Price_elasticity_of_demand

For this exercise, the subject is eBooks.
The question is: "What is commercial eBooks' price elasticity in the *aggregate*? That is, eBooks as a whole, not individual titles. The interest is trends, not anecdotes.

A product with low elasticity will respond with small sales volume changes with price changes whereas a product with large elasticity will respond with *big* volume swings with price.

A recent Smashwords post by Mark Coker presents a case arguing that eBook price elasticity is very high and that a 70% cut in price can result in a 500% percent increase in sales volume. (Six times total sales at the lower price than at the higher.)

http://blog.smashwords.com/2012/07/h...ould-harm.html

Granted that he has an interest in presenting his company's business model in the best light and thus taking his claims with a grain of salt, I have seen similar results from analyses of Amazon ebook sales rankings.

He uses his findings to argue that the higher price limits the audience size for traditionally published titles (for comparable titles, obviously).

Anybody have other (semi-reputable) numbers that refute or support this thesis?

(For that matter, does anybody care? )
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Old 07-27-2012, 10:46 AM   #2
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I'm definitely interested, but it's hard to come by a trusted data source. To get an accurate picture of the Aggregate eBook Demand (AeD), you'd need a large amount of data, preferably from several retailers, in order to gauge price elasticity.
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Old 07-27-2012, 12:56 PM   #3
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This is pretty interesting, but I think you need a lot more data to see when this applies.

I would not be surprised if this rule applied to most self-pubbed books. I think that there is a general unwillingness to pay $9.99 for most self-pubbed books, and you really could see a large increase in sales by dropping the price to $2.99. However, part of this effect is accounted for by the fact that $2.99 is generally regarded as a standard price for most self-pubbed books, with $9.99 being pretty expensive. I think you might see an even more extreme example with books from BPHs being priced at $29.99 vs. $9.99 - but that would have a lot to do with the fact that $29.99 is kind of beyond the pale for normal fiction, even from a BPH.

The more interesting question, though, is whether a book from a BPH would increase its sales six-fold if it went from $9.99 to $2.99. In most cases, I'm skeptical that it would - I certainly don't think that James Patterson or Stephen King would sextuple their sales by dropping their prices. (The issue is also complicated by the fact that BPHs have fixed costs for editing, etc. associated with the books, so everything left over after the retailer's cut isn't profit...)

Finally, the other complicating issue for sellers is maximizing your income, which may be best accomplished by setting multiple price points over time. I.e., if you can sell 1,000 books at $10 or 6,000 books at $3, your best approach is not necessarily to price your book at $3. The best approach is likely to price your books at $10 until you've captured the people who are willing to pay $10 for the book. (1,000 people). Then price your books at $6 to capture the people who are not willing to pay $10 for the book but who will pay $6 for the book (say 2,000). Finally, price your book at $3 to capture the remaining people who were willing to pay $3 for the book (3,000 people).

Total revenues with this model are ($10x1,000) + ($6x2,000) + ($3x3,000) = 10,000 + 12,000 + 9,000 = $31,000 in revenue. Much better than $18,000 in revenue you would get by pricing the book at $3 to begin with.

Obviously, this is just a model; and of course it may be hard to know when you should drop your prices. But, clearly, the corollary to the idea that you can sextuple your sales by dropping prices by 1/3 is the fact that 1/6 of your customers would have paid 3x as much for the book.
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Old 07-27-2012, 01:10 PM   #4
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I don't agree with Mark Coker's assumption that the authors are getting four times as many readers. I will impulse buy a $3 book that catches my interest but that doesn't mean I'll actually read it. I can only read so many books in a lifetime but I'll foolishly buy more then I can read if they're cheap enough. At some point I'll probably cut myself off though. I think the race to the lowest price to see how many sales you can generate is short term.
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Old 07-27-2012, 01:23 PM   #5
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Quote:
Originally Posted by fjtorres View Post
A recent Smashwords post by Mark Coker presents a case arguing that eBook price elasticity is very high and that a 70% cut in price can result in a 500% percent increase in sales volume. (Six times total sales at the lower price than at the higher.)

http://blog.smashwords.com/2012/07/h...ould-harm.html
This assumes that the demand function is linear and most economists would suggest it behaves as if it is linear for small changes. But, what you have quoted is a large change.
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Old 07-27-2012, 01:50 PM   #6
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It is hard to measure how many people buy a book without reading it. But sales are sales, even if it never gets read. Even if a book is cheap, I still read the sample. But I don't know which is typical, to buy books on impulse and not read them, or to only buy books when you're pretty sure they will get read.
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Old 07-27-2012, 02:46 PM   #7
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Originally Posted by QuantumIguana View Post
It is hard to measure how many people buy a book without reading it. But sales are sales, even if it never gets read. Even if a book is cheap, I still read the sample. But I don't know which is typical, to buy books on impulse and not read them, or to only buy books when you're pretty sure they will get read.
I agree, a sale is a sale. I was just picking on his argument that if you lower the price, sell more books and make the same money you're better off because you have more readers.

Quote:
If an author can earn the same or greater income selling lower cost books, yet reach significantly more readers, then, drum roll please, it means the authors who are selling higher priced books through traditional publishers are at an extreme disadvantage to indie authors in terms of long term platform building. The lower-priced books are building author brand faster. Never mind that an indie author earns more per $2.99 unit sold ($1.80-$2.10) than a traditionally published author earns at $9.99 ($1.25-$1.75).
I suspect that the lower price sales are impulse sales where the books aren't read for a long time (if ever). I don't have data to support it, just personal experience.
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Old 07-27-2012, 03:14 PM   #8
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Some of the Sale sales (hmm) are also likely to be time-shifts, and distort the big picture. If a book from my wish list gets reduced, I'll buy it. I might still have bought it full-price, but not for a while.
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Old 07-27-2012, 06:46 PM   #9
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This assumes that the demand function is linear and most economists would suggest it behaves as if it is linear for small changes. But, what you have quoted is a large change.
That is what Coker is claiming and one of the reasons I suggested keeping the salt handy.
(The implications if those numbbers are anywhere near accurate...)

The thing is, Smashwords has a deep catalog on most of the major ebook retailers and they know exactly how well they sell (revenue listing) and they have access to the sales ranking lists at Amazon and elsewhere so they can see how their titles perform compared to their competitors'.

So while I'm supicious of the actual numbers, I don't think they can be dismissed outright. The underlying principle rings true.

I don't think any $2.99 title is going to outsell any $9.99 title but I could see how a random "basket" of $2.99 titles in a given genre could outsell an equal number of randomly-picked $9.99 titles by comparable authors; say newcomer to newcomer or midlister to midlister.

Not sure who could run such a drill outside the vendors and publishers, though.

Last edited by fjtorres; 07-27-2012 at 06:49 PM.
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Old 07-27-2012, 07:08 PM   #10
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Something tells me that you would have to break the book market down into much smaller segments in order for an analysis to be useful. For example:

Academic books are probably going to have the same volume, almost regardless of the price. Students have to pay. For researchers, it is a necessary expense.

The volume of popular novels may or may not respond to price, at least within a fairly large range. It is almost a mob mentality that drives these sales. On the other hand, this market segment is probably more prone to piracy than other market segments.

Unknown indie titles are probably the most likely to respond to price, simply because there is a higher risk involved in buying them. Yet that may lead to impulse buys, and unread impulse buys are unlikely to contribute to the sale of future titles by the author. Thus it may be a net long term loss.

Of course, it probably needs to be broken down much more than that. Readers of different types of books are going to respond differently at a psychological level. Everything that I've seen suggests that readers of genre titles are more prolific readers than those who read general fiction.

Sorry about the lack of numbers, but those seem to be closely guarded by the industry.
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Old 07-27-2012, 07:26 PM   #11
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I'd like to speculate that if ebook prices were to drop to $0.99 per book, then price will become a non factor in people's purchase decision.
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Old 07-28-2012, 07:32 AM   #12
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I'd like to speculate that if ebook prices were to drop to $0.99 per book, then price will become a non factor in people's purchase decision.
Well, Sony tried 20p in the UK and Amazon price-matched so they at least know what that does. (Besides stir up hordes blaming Amazon for what Sony started.) Pundit hand-wringing:

http://www.guardian.co.uk/books/2012...-heavier-price

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But the thrill of a bargain soon gave way to post-purchase guilt. After all, there's no such thing as a cheap ebook. Seduced by predatory pricing, I had put selfish short-term gain over the long-term interests of civilisation: hastening the demise of bookshops and publishers.
http://futurebook.net/content/squash-and-squeeze

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Had the promotion been confined to Sony that enthusiasm might seem justified. As it is, Amazon's price-matching widens the cut-price campaign to an audience already being trained to look for low prices. The impact on print sales has been palpable, particularly for the two front-list titles— Perfect People and The Stranger's Child—which have seen print sales fall off over the course of the e-book promotion. Four weeks ago Perfect People sold 19,000 copies in print, last week it sold 7,000. Less well-known titles such as Monday to Friday Man, Playground and Pretty Twisted have all seen print sales rise, but here we are talking about double-digit numbers, so the impact, while positive, has been minimal. Only Karl Pilkington's Idiot Abroad has seen any significant uplift: it sold 1,700 copies last week in print, compared with 900 in the weeks before.
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Old 07-28-2012, 12:14 PM   #13
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Quote:
Originally Posted by fjtorres View Post
A recent Smashwords post by Mark Coker presents a case arguing that eBook price elasticity is very high and that a 70% cut in price can result in a 500% percent increase in sales volume. (Six times total sales at the lower price than at the higher.)
...

Anybody have other (semi-reputable) numbers that refute or support this thesis?

(For that matter, does anybody care? )
As a publisher and author, I care. I've also done a lot of experimenting with pricing. I had also urged Mark Coker to do this analysis of his data (actually, I offered to do it for him if he would provide sanitized data), and am glad he got around to it. So, some thoughts...

While unit sales may vary with price, one key point is that it likely isn't the number of copies that a publisher/author really cares about -- revenue is. (If someone's goal is not to make money but just to get a lot of people to read their work, $0 might be a better price. So let's focus on revenue as the goal, which is probably the most common case.)

Mark didn't publish highly precise data, just some charts, so let's look carefully at them. His "x=1.0" sales benchmark is the "$10 and up" price point, which could include books selling at $50 ea. Let's look instead at the $9.00-$9.99 part of the curve, where it looks like they sell about 1.5x his benchmark point. That compares to the 6.2x for $2-2.99 books, for a ratio closer to 4:1. (I'd rather he had broken out by 25cent intervals, since there's a big difference between $2 and $2.99, but let's assume that data point really holds true for $2.99 sales, and isn't primarily about $2.00 prices.)

So if I sell 10 copies at $9.99, that's $100 of gross in round numbers; if I sell 4x that, 40 copies, at $2.99, that's $120 gross.

Yes, that's ostensibly 20% more revenue, however that's not really a gigantic change. It may well be lost in the margin of error of his data and analysis: If it's 40 copies at $2.00, that's $80 gross, and a 20% drop in revenue. Or, another way to look at it, if the $3-3.99 data is what really reflects the $2.99 sales more accurately, which is about 3.3x the $9-9.99 data point, then we're looking at 33 copies x $2.99 = $100 gross.

In other words, the relationship between revenue and price appears to be close to constant in his analysis.

His analysis also lumps a LOT of different kinds of work together: short stories in with novel length, fiction with nonfiction, science fiction with romance, etc. etc. etc. Each of those might have a widely different curve.

I've done a lot of experimenting with price myself, for both ebooks I've written and those of professional authors I publish. (e.g., changing the price on the same book. To explain the background of the data I'm talking about, I run ReAnimus Press; we do ebooks of all sorts, though a lot of science fiction from bestselling pro authors, e.g. Ben Bova, Robert Silverberg, etc. So these represent ebooks from both "big names" and unknowns; and we have an assortment of non-SF titles too. I've experimented with price on all kinds of these books.)

What I've found, fairly consistently, is that unit sales don't vary much by price. Books that are popular sell a lot of copies, and about the same number of copies, whether priced at $2.99 or $9.99 or points in between. Books that aren't popular sell not many copies, and lowering the price doesn't sell many more copies. Now, that means that revenue is much higher for us at the higher price points. If a title sells 10 copies per time unit at $2.99, for $30 gross, or say 8 copies at $9.99, for $80 gross, that's basically a no-brainer which path I should choose. (And at 99 cents, since Amazon cuts the royalty rate in half, I would have to sell 20X copies as at $9.99. I might sell 5x copies, but that doesn't justify a 99 cent price. At that, if I just plunk the price to 99 cents and don't do any marketing, they sell about 1:1 as at a higher price. It's only if I trumpet to the world that there's a 99 cent price do the sales increase. So, it seems that based on people looking for a particular title, $9.99 is just as attractive as 99 cents.)

My hunch is that in the under $10 price range, the value is mostly in non-price related aspects: The content of the book, the cover, reviews, etc. (And maybe it's higher than $10, but we small publishers can't really price higher than $10 -- Amazon cuts the royalty in half again, so we earn as much from a $10 as from a $20 sale per copy.)

So a good book will sell a lot, regardless of price (under $10). A book people aren't that keen on will sell few copies, regardless of price. Unit sales, for the titles I publish, seem related to content of the book, not to price.
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Old 07-28-2012, 12:39 PM   #14
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Finally, the other complicating issue for sellers is maximizing your income, which may be best accomplished by setting multiple price points over time. I.e., if you can sell 1,000 books at $10 or 6,000 books at $3, your best approach is not necessarily to price your book at $3. The best approach is likely to price your books at $10 until you've captured the people who are willing to pay $10 for the book. (1,000 people). Then price your books at $6 to capture the people who are not willing to pay $10 for the book but who will pay $6 for the book (say 2,000). Finally, price your book at $3 to capture the remaining people who were willing to pay $3 for the book (3,000 people).

Total revenues with this model are ($10x1,000) + ($6x2,000) + ($3x3,000) = 10,000 + 12,000 + 9,000 = $31,000 in revenue. Much better than $18,000 in revenue you would get by pricing the book at $3 to begin with.

Obviously, this is just a model; and of course it may be hard to know when you should drop your prices. But, clearly, the corollary to the idea that you can sextuple your sales by dropping prices by 1/3 is the fact that 1/6 of your customers would have paid 3x as much for the book.
I have been thinking along this line as well, but my conclusion is that you can get away with this pricing model only once. After that, the market will expect the price to drop to the $3 level and will wait for that to happen.
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Old 07-28-2012, 01:07 PM   #15
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Angry Hmmmph...

When I first saw this in the UK Sony shop, I thought "how silly, why not just make it free".

Then I saw the some of the books and thought I didn't want them even at that.

But as far as I'm concerned, I wish somebody would be a bit more "elastic" with the price of my fuel/mortgage/food/clothes/ son's upkeep/electricity/gas ........
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