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Bundling!

May 13, 2014Filed under techMarkdown source

The following was originally published here. I am republishing it because I think its content remains salient in some way. I hope you enjoy it!

“Why do we have to choose between print and digital?” asked Richard Curtis at Digital Book World last week, before tackling the topic of bundling—getting ebooks at reduced cost or even free when buying a physical copy of the book. Drawing an analogy from music purchases that have moved in the same direction, he suggests that publishers ought to be bundling, and then poses the query: When you purchase a print book you should be able to get the e-book for…

  1. the full combined retail prices of print and e-book editions
  2. an additional 50% of the retail price of the print edition
  3. an additional 25% of the retail price of the print edition
  4. $1.00 more than the retail price of the print edition
  5. free

He suggests that this proves to be something of a conundrum for decision-makers in the publishing industry. With respect, and while recognizing that it probably feels like a conundrum to the publishers, I think the answer is really quite simple. Publishers can dramatically increase their profits, and do it in a way that readers will love. (This is the part where you call me crazy. Up next is the part where I show you why I’m not.)

All or nothing

First, we should note that while readers would always choose (e) and publishers would love it if they could get away with (a), the reality is that both of these leave one party out in the cold. Publishers need readers, and readers need publishers. Publishers need readers or they die. Readers need publishers as providers of quality content—not only as the gatekeepers but also as polishers who take good books and make them great. Any system that will pan out well must therefore respect both sides of that equation. Both (a) and (e) fail that test immediately.

In the case of (a), the consumer can rightly point out that the cost of distribution of a book is minimal, trivial even, in the grand scheme of book production. That goes double for ebooks: the cost of running a server is a pittance compared to the cost of writing, editing, and proofing a book. “So,” any smart reader says, “I’ve already paid for the book. Why should I have to pay just as much again for the ebook?”

In the case of (e), the consumer is getting something of real value—the ebook, with its associated portability, the ability to create [communal interactions][craigmod] around the content through shared marginalia, and so forth—but without recognizing any infrastructure costs this poses to the publisher. As always, there is no free lunch, and that is as it should be.1 The worker deserves his wages, and that includes the editor who turns a manuscript into ebook form—especially for good ebooks, which entail a great deal of work beyond simply running the print manuscript through a conversion script. That involves real people’s time, and therefore costs real money.

Neither of these options, then, is ultimately good for the market. The readers will rightly reject paying the full price again for a book in a different form; they’ve been conditioned by too many interactions on the internet not to recognize that digital transmission of files the size of a book is, while not costless, not costly either. On the other hand, publishers still need to make money, and they do sink real time and money into the ebook—not at the distribution point, but in the infrastructure involved in the preparation of the manuscript and readying it for digital and physical publication.

Again: publishers need readers and readers need publishers.

Percentage games

Percentage-based cuts—like Curtis’ options (b) and (c)—are much more sensible and reasonable from the perspective of both the consumer and the publisher. In each of these cases, the publisher is granting that the customer has already made a purchase—perhaps a significant one, in the case of a hardcover fiction book. Indeed, when we move out into the realm of reference books or textbooks, the consumer has already given the publisher quite a lot of money. Thus, options (b) and (c) are much friendlier to the consumer than choice (a), while still affording the publisher some profits, unlike (e). This is clearly a step in the right direction.

The percentage option quickly runs into issues when we start thinking about how such a scheme would work in practice, though. Is it 25% of the hardcover but 50% of the paperback, so that the publisher can recoup more of the costs? In this scheme, it is difficult to match the actual cost of the ebook sale to its relative value compared to the physical copy. Moreover, it’s difficult to standardize. When purchasing a textbook at $150, should someone have to pay another $37.50 or $75 to have a digital copy? It seems unlikely that preparing an ebook of a textbook is really 5-6 times more costly than the preparation of a fiction ebook, which on a percentage basis would come out around $6.50 or $13 for the hardcover at those rates, or $2 or $4 for paperbacks.

Equally important: will people pay that much for a digital copy? Publishers may want to study the question in depth by testing the market, but this is a waste of time. The answer is obvious to anyone under the age of 30: no. The market simply won’t support those kinds of costs on the upper end of the spectrum.

Again, customers may recognize that they are subsidizing more than simply the cost of distribution, but the preparation and distribution of the ebook don’t justify an additional percentage on these scales beyond some point. I suspect that most customers are willing to pay extra to get the ebook in addition to the physical copy—just not, in most cases, that much extra.

Aside: on reasonability and trained markets

We must recognize that markets can be trained. People have come to see $0.99 as a reasonable price for individual songs. There was nothing inevitable about that outcome; it is a direct result of the success of the iTunes store. Had prices been set at $1.49 or $0.33, it’s likely we would have settled on that number as a reasonable price. Similarly, TV show episodes sell at $1.99,2 and people seem to treat that as a reasonable price: the perceived value matches the cost well. They could have been $1 or $2.50, and consumers probably would have settled in with those numbers equally well.

Of course, had the price been too high, we would have rejected it entirely: markets can be trained, but they’re not capable of stretching into just any shape at all.

Admittedly, the music market remains volatile, but consumers on the whole don’t seem to balk at spending a dollar on a song. While the piracy rate remains high, iTunes and similar markets provide an outlet for those who are interested in purchasing their music legitimately.3

This outcome results from the combination of a trained market and a sensible cost/value relationship that allowed the training to occur in the first place. Book publishers should aim for the same outcome: profitability on the basis of perceived reasonability of their prices. This will require training the market, but that is possible so long as their expectations are reasonable.

A reasonable target

Price points

Curtis’ final suggested price point is close to the mark, but I think some revision is in order. Remember: the aim is to buoy both customer satisfaction and publisher profitability. Here’s my proposed pricing scheme for fiction (which could be adapted to other parts of the market fairly straightforwardly):

  • Standalone ebook: $4.99
  • Paperback:
    • Book: $7.99
    • Bundle: $9.99
  • Trade paperback:4
    • Book: $14.99
    • Bundle: $15.99
  • Hardcover:
    • Book: $26.99
    • Bundle: $26.99

I’m basing these on the current pricing schemes in the market—these are the normal suggested retail prices for paperbacks, trade paperbacks, and hard covers—and on the assumption that the publisher’s goal is to maximize revenue, while the consumer’s goal is to get the most content at a price he feels is reasonable. I’m also taking into account the existing profit curves for publishers: paperbooks are relatively low margin, while hardcovers are the major profit points, at least when they’re successful.

Rationale

First, and most importantly, I believe the market will support these price points. The standalone ebook is less expensive than the paperback, as it should be, since its distribution costs are much lower than the costs of printing and shipping paperbacks. At the same time, ebooks sales will still generate revenue for the publisher; $5 is not a meaningless amount of money.

For each tier upwards, the cost of the bundled ebook drops. The publisher thus acknowledges the increasing profitability of each tier as well as the increasing cost to the reader. At the same time, the lowered bundling cost incentivizes the user toward the higher profit items. In each case, the bundling cost is sufficiently low as to be in the “impulse purchase” range for most users.5

Readers will be far more likely to front the cost of a hardcover if an ebook comes bundled with it, because the value proposition is so much better. At the same time, this is unlikely to decrease the profits of the publisher, because the margins are much higher for hardcovers.

In fact, bundling at these rates will likely increase publisher profits from ebooks, as most readers currently choose between ebook and physical books. The price of a hardcover is simply too high to allow for the purchase of both. (Even when this is not actually true, it seems true to consumers, which is equally important in determining their behavior.) With a sufficiently lower barrier to getting the additional content, the likelihood that the reader purchases both goes up substantially.6

This potential for increased profitability is compounded by the availability of the bundle at initial purchase time. A consumer who has already committed to spending $8 on a book is unlikely to balk at $10, and even less to balk at the transition from $15 to $16. In many cases, the publisher will earn more money from the book purchase than before, but the reader is still getting a good deal on the ebook. This is exactly the combination that makes for a flourishing market.

Finally, the simplicity of these numbers is extremely helpful. Standardizing these prices will decrease the friction inherent in making the purchase decision, which increases the likelihood that a purchase will be made. I’m not suggesting a cartel—price standardization is natural in this sort of market—and I believe the price points I’ve suggested are where the market will settle in the long run. The publishers who get there first will earn enormous goodwill from their readers in the short term, as well as demonstrating their leadership in the industry in ways that set them up for long term success.

Bundle up

A smart approach to bundling could be enormously beneficial to the publishing industry. In addition to the pure numerical profitability of the approach outlined above—no small detail in an industry struggling to adapt to the realities of the new economy—it establishes that the publishers are responsive to customers in a way that other large media have not seemed to be. Nothing is so helpful to a company’s long-term sustainability as for consumers to like it. Reasonable bundling prices would go a long way toward helping readers see publishers as friends, rather than enemies.

Obviously these numbers work best in the context of fiction. The value propositions are entirely different in other contexts; a cookbook is an entirely different thing than a copy of The Hobbit. Across the board, though, publishers should keep the same goals in mind: profitability by means of reasonability and approachability. Be allies of the readers, not their enemies. Make it easy and affordable for them to pay you for your work, and they will.

My thanks to Stephen Carradini for invaluable contributions to this piece in two forms: many long conversations about this very topic, and a helpful edit of the actual content.

[craigmod]: http://craigmod.com/journal/post_artifact/#section_4 “Post Artifact Books and Publishing, Section 4: The post-artifact system” from Craig Mod"

  1. Additionally, there is a signaling problem here: “free” suggests “low value” in a way that publishers rightly want to avoid. See “iA Writer: On Prices and Features”, Section 2: Cost, by Oliver Richtenstein for a lengthy and sensible exploration of this issue. The issue of signaling value should be taken into account in my suggestions later, as well. But more on that below.↩

  2. When they sell at all, of course. I’ve written about this problem [before][piracy]: piracy explodes when there is demand without supply. It also tends to grow at a higher rate when the cost is perceived as unreasonable. TV shows priced at $5/episode wouldn’t do well; they seem to sell quite briskly at $1.99. Publishers run the risk of fomenting piracy by setting their prices too high.↩

  3. I have never seen someone complain that a song is too expensive at a dollar who was willing to pay anything. A penny would be too pricey from the pirates’ point of view.↩

  4. Trade paperbacks (TPBs) are similar in size to hardcovers, but have soft covers similar to those in a paperback. Fiction TPBs typically go for around $15. Over the last few years, publishers have started shifting away from the low-margin paperback market into these trade paperbacks, which provide a bit higher profit for them. Personally, I don’t mind, because these books tend to be higher quality paper and bindings. If I’m sitting down with a monster like one of the books in The Wheel of Time, this is far and away the best format for a physical copy.↩

  5. On the signaling issue: the price of the ebook is sufficiently high as to continue to signal real value here, I think. However, in the case of other kinds of books, this scheme should be revisited. A complex EPUB3 with embedded videos or interactive content should signal that it offers a higher value proposition than other ebooks with a higher price point; in some cases, if that content is sufficiently central to the value proposition of the book, it might be more expensive than the physical copies.

    Similarly, a textbook might sell for $150, its ebook at $50, and the bundle at $165—because the cost of preparing a textbook ebook may be substantially higher than that of preparing a fiction ebook. Signaling matters, but overpricing is as much a risk here as underpricing.↩

  6. This has the added benefit of making the purchase of new books over used books more attractive to the consumer: if the coupon for ebook at reduced rate is only available at new book purchase, a $3 used book suddenly has a much lower value proposition relative to the original when the reader is interested in having an ebook copy as well, since the cost of having both is still $8.

    Of course, this leads us to the question of ebook resale, which is currently a legally murky area at best, and requires considerable legal and intellectual development.↩