Pricing ebooks

ebooks demand a new economic model - but it has yet to be devised

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eBooks are a new world and it shows only too clearly when you examine the price that traditional publishers charge for their wares. Let's be honest for a moment about the way books are priced. A traditional publisher sets a price that is similar to other books in the same subject area and with the same production values - i.e. number of pages, size, use of colour and so on. They then do a sum which gives them a cost per thousand curve and hence a model that indicates profit versus sales figures.

Most will look at the break even number - i.e. the number of books that have to be sold to not make a loss on the deal - and hope that this is ludicrously small. The idea is that if the break even is 500 copies then you'd have to be a very poor publisher to not sell this number and hence the risk on the entire project is very low.

This is a simple model but it hides various factors from what you might call the macro economics of publishing. In particular it hides the cost of all those copies of the book that don't actually get paid for. The reasoning isn't that complicated. If the purchase price of the book is $10 and you have a potential market of 1000 readers then your income is $10,000 but if half of your readers acquire the book without paying for it, i.e. they borrow it, buy it second hand or simply copy it, then you income is only $5,000. If you really need the $10,000 as an income then with a 50% rate of paid-for copies you have to increase the price to $20 per book.

Over time the book trade has adjusted its prices to take into account of the expected "rip off" rate for any given type of book so that it makes a satisfactory amount of money. If the "rip off" rate changes then slowly but surely the book price will adjust to take account of the increase or decrease in the lost revenue.

Now we come to the situation with ebooks. An average ebook reader allows the publisher to control their product in a way that is quite new. It is generally possible to limit books to a given unit of hardware, removing from the equation copying, lending, and the second-hand market. In this new world the rip off rate is close to zero unless there is a very rare catastrophic failure of the digital rights management system.

So by the above reasoning there are two very good reasons why digital book should be much lower in price. The first is the much lower cost of production, making the break even point and hence the risk much lower, and the second is the almost zero rip off rate, making the need to price to take account of lost sales unnecessary.

So why are ebooks mostly still so expensive? The simple reason is the very first observation that publishers price books by comparing what they are offering to the price of similar titles in the same market place. In this case however the comparison is being made with content alone. If there is a book on advanced programming selling for $50 then its ebook equivalent should be $40 after allowing for the $10 production cost saved. This is, of course ignoring the low rip-off rate which almost certainly means that the price should be much lower.

This unduly high cost to the customer is damaging the uptake of ebook formats and in the short term proving publishers correct in their pricing. If an ebook only sells a few copies because it is perceived by the reader as being over priced then it will indeed take longer to reach its break even point.

There is also a deeper issue - what is a book worth? Once it is dissociated from the obvious production costs, a book's worth depends on the achievement of the author in creating something that readers want. This is easy to say but it is far harder to work out the implications as the market increasingly becomes divorced from the old physical values of paper and print.

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