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Amazon explains digital pricing elasticity

Written by Tom Ryan

Many budding writers claim to major in English because they hate math. But Amazon used a bit of math to explain its side in its prolonged contract dispute with publisher Hachette.

In a brief blog post from last week, the "Amazon Books Team" explained that it wants reduced e-book pricing primarily because "the total pie is bigger" with benefits falling to all parties involved — authors, publishers, consumers and Amazon.

The main point was that e-books are "highly price-elastic," meaning the lower the price, the higher the sales and vice versa. Quantified measurements inside Amazon show that for every e-book sold at $14.99, it would sell 1.74 copies if priced at $9.99. For 100,000 units offered, therefore, the haul would be $1.5 million at $14.99 and $1.74 million at $9.99.

As such, the benefits of the $9.99 price in the Amazon study includes:

  • The customer paying a third less;
  • The author receiving a royalty check that's 16 percent larger and being read by an audience 74 percent larger (potentially then landing on bestseller lists);
  • The publisher and the retailer both generate higher revenue.

While agreeing that a "small number" of specialized titles could be priced over $9.99, Amazon contends that e-books at $14.99 are "unjustifiably high" given that they're digital (no printing, no warehousing, no secondary market, etc.).

Books also compete against mobile games, television, movies, Facebook, blogs, free news sites and more. Wrote Amazon, "If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive."

Finally, Amazon surprised many by claiming to be willing to continue accepting 30 percent of e-book sales, its current take, if Hachette stopped pricing titles at $12.99 and $14.99. Amazon has been feared to be looking for a 50 percent cut.

The primary criticism of Amazon's analysis was that lower uniform e-book pricing would cannibalize print book sales. The other was that while the theory may work on average, popular authors and books longer in length could command a higher price and still see the volume. Sampling and the methodology of the study were also questioned.

In the Bits column in The New York Times, Farhad Manjoo pointed out that while iTunes had set a uniform price when it first arrived around a decade ago, subscription-based music services, games funded by in-app purchases, and ad-supported social networks are showing new payment mechanisms continue to arrive for digital media. He wrote, "Creating a single, typical price for e-books would stifle that potentially glorious future."

As part of the spat that began in May, Amazon has delayed shipment and prevented pre-orders of some books published by Hachette.

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