No Shelf Required

The Economics of Publishing and eBooks

by Ron Boehm, Chairman and CEO, ABC-CLIO Publishing

 

General groundwork:

The type of book makes a big difference in many areas of discussion about

eBooks.  It is important in discussions to talk apples and apples. Generalizations do not travel well across book types.

o   Production economics for a fiction mass market book, a reference book, and a monograph are very different.

o   Sales channels and associated cost splits vary a great deal.  For example, it is very expensive to run a bookstore. For a book sold through a bookstore, a significantly greater portion of the price goes to the store than if sold through other less expensive sales channels.  The percentage that goes to the different channels is between 15% and 55%.  So, using a book priced at $100, the publisher would receive between $45 and $85.

o   Variability of units sold: for short press run titles such as monographs and most reference books, a best seller might mean a book sells 200 to 500 more copies.  For a fiction title, best seller might mean 20,000 more copies sold. 

 

QUESTION:   Why are e-Books not priced lower than the equivalent print book, given that no printed book is needed?

 

The price of a book is based on factors which include perceived value, cost to develop and support, cost to produce, number of units which can be expected to be sold, and more. While I believe that most consumer pricing in our society is based on perceived value and not on cost (think Starbucks versus 7-11 for a cup of coffee, or doctor’s time versus car wash attendant’s time), let’s examine publishing costs and see whether eBook costs are less than print book costs. 

I’ll keep coming back to an example when explaining a point.  Our fictional publishing company, All-Reference Press (ARP), will publish the Encyclopedia of Widgets (EOW).  It is a one volume, 400 page, 7 x10 reference book priced at $100.  Since many of the topics in No Shelf Required are about reference books, and as Academic Publisher of ABC-CLIO I am most familiar with reference, EOW is a reference title for purposes of examining costs.

 

The first thing to understand about publishing economics and pricing is that librarians think of books in terms of a single copy, and the price of that copy, while publishers think about total revenue received for a title.  Revenue is the number of units sold times their net price. The net price is what the publisher receives:

o   from the customer directly, net of taxes, sales commissions, and shipping cost, or

o   from the book distributor, net of the distributor discount.

 

For simplicity, we’ll assume the net price is 25% less than the selling price of $100, or $75.  Over a three year selling period, ARP expects to sell between 800 and 1,200 copies, for a total net revenue of between $60,000 (800 x $75) and $90,000 (1,200 x $75). 

 

A second important concept to understand about publisher economics and e-Book pricing is to understand the schedule for EOW.  Let’s say that in 2002 ARP held focus groups and determined that there was an opportunity to publish a widget encyclopedia.  ARP contracts with a renowned widget scholar in 2003 who agrees to write a portion of the book and to find and oversee contributors.  He agrees to deliver the book in 2005. All-Reference Press makes progress payments to the editor, who delivers the book in 2006, about eight months late.  ARP carries out the editorial and production process and starts marketing the book, all costly activities.   EOW launches in 2007 and is expected to sell over a period of three years.  So, about six years after ARP starts investing in EOW, the company can learn if it is profitable or not.

 

The following scenarios are not at all uncommon:

o   ARP guessed correctly that there was a need for EOW, there is no competing publication, and EOW comes out of the gate strong.  ARP is now confident that over 1,000 copies will be sold, and revenue for the title will be at least $75,000.

o   Another publisher comes out with The Encyclopedia of Gadgets and Widgets around the same time as EOW is announced.  Take 200 to 400 units off of the projections ( $15,000 to $30,000).

o   2007 education budgets in five key states are reduced, and library materials budgets are cut significantly for public institutions in those states.  Scratch a hundred copies ($7,500).

o   The downward trend in total units sold per title impacts reference publishing as it has journal and monograph publishers. Scratch $10,000 to 20,000 off of the projected revenue. 

 

By the time EOW is available for sale, most of the investment in EOW has been made.  Most of the costs are in large chunks:

o   paying the author/editor and contributors

o   copyediting and page composition

o   printing

o   warehousing

o   promotional materials 

o   internal costs for editorial, management, marketing, sales, customer service, and general & administrative staff time

This cost is allocated to EOW and all other titles published by ARP.

 

So, when looking at whether an e-book should cost less than a print book, what costs are avoided?  All of the costs listed above have already been spent. What about printing costs which are supposedly saved?   The printer has been paid and the books are in inventory.  If a customer chooses to buy an eBook instead of a print book, the book is nevertheless still waiting in inventory for a customer.   Eventually, unsold books will be remaindered or destroyed, and they have been costing the ARP storage costs through their life. 

 

OK, let’s say that enough customers are buying e-books so that ARP decides to print fewer units.  What is the real cost reduction?  Shipping is a wash, as the customer usually pays.  The printing cost is broken roughly into three portions, the fixed setup cost, paper, and press/binder time.  The fixed costs don’t change whether you print 100 copies or 1,000 copies, but the paper and press time costs go down roughly in proportion to the number printed.  How much less would ARP spend if it knew it didn’t have to print a unit for Alpha University because Alpha was going to buy only the e-Book?  The marginal cost of that EOW book not being printed is approximately $2.50.

 

So, if the price of a book were set entirely by costs (which I’ll argue is a very poor way of setting prices) the price of the book could go down by only $2.50 BEFORE adding incremental costs which ARP incurs to sell the e-Book.  (Those of you who are good with numbers may realize that the list price could actually go down approximately $3.25.  The net amount for the publisher would then go down $2.50)  

 

However, there are additional costs incurred by ARP in order to offer e-books.  At the very least, if ARP uses only e-book distributors and does not host its own books, there will be some extra production costs to prepare the files into the appropriate formats, and staff time to transfer files and metadata to the eBook host(s).  For simplicity, let’s assume these are costs which roughly offset the $2.50 cent per unit printing cost reduction.

 

Sorry for the long explanation of the publishing economics, but I felt that it was necessary to provide it in response to the comment that e-book prices should be lower because the printing cost is avoided. 

 

I’ll end with the caveat that there are significant differences in the economics of short run (500-2,500 units) reference and monograph publishing and the longer print run (2,500- 5,000+) trade publishing.  Many of the same costs of approximately the same magnitude are incurred for either type of title, let’s say $40,000.  Spread across 1,000 units, each short run copy has to cover $40 of expenses.  Spread over 4,000 units, each longer run copy has to cover only $10 of expense, each.

 

I look forward to comments and questions.

 

Ron Boehm

President and CEO,

ABC-CLIO Publishing