Monday, March 30, 2009
Prices, discounts, markups
Every book, like every other item that is sold, needs a price.
Unlike clothing and cars however, the price a book is sold for -- like the price of other artistic expressions like paintings and neckties -- does not have to be related to its cost of production.
When I was in high school I had a part-time job in a men’s clothing store. Periodically, we’d receive a shipment of ties from a manufacturer in India. The wholesale cost to the store was $36 per dozen, $3 per tie.
At that time the normal markup (gross profit) in menswear and in much of retailing was 40%, meaning that 40% of the retail price was markup. If something cost the store $6, it was sold for $10. The $4 markup paid for the costs of operating the business, and taxes. Hopefully there would be something left over to be kept as “net profit” for the owners of the business.
Theoretically the retail price for those ties that cost us $3 would be $5 each. But that’s not the way it worked.
The menswear buyer — sometimes with assistance from his boss, the merchandise manager — would spread out the shipment on a counter. Typically 12 dozen ties came in at one time. He’d then sort them into stacks to be sold for $5 each, $10 each, $15 each and various prices up to $30 or even beyond, solely on the basis of perceived beauty. Some of the “uglies” were ticketed at $2.99 or even 99 cents to get rid of them quickly.
There was absolutely no difference in the value of the raw material or the labor of the silk worms or the tie-makers that resulted in a 99-cent tie or a $35 tie. The only difference was perceived value. Ties that looked nicer could be sold for a higher price. One of the requirements of a menswear buyer was the ability to pick the right products and — in cases of non-branded “blind items” like ties — to judge how much to charge for them.
Sometimes a buyer could earn a bonus based on his department’s profitability. Sometimes a buyer would get fired if he made too many mistakes, buying products that had to be marked down rather than be sold at full price.
Traditional publishing has a traditional formula for calculating the retail list price, the price printed on the book. That list price is typically about eight times the cost of manufacturing. In clothing retail terms, that translates into a markup of about 88% between publisher and reader.
There are several reasons for the big percentage. Not only does the actual bookseller require a markup, but there can be one or two “middlemen” between the publisher and the bookstore: a wholesaler and perhaps a distributor who must each get a piece of the action. And of course the publisher wants to make a profit and can't sell merely for the cost of manufacturing.
In the book business, the "trade discount" is the percentage off the retail price that a bookseller, wholesaler or distributor pays for a book. Because the bookseller's retail markup is a part of the trade discount percentage, the trade discount has to be more than the retail markup. A wholesaler will probably want about 55% to cover its cost and profit, and still give the bookseller the profit margin it needs or wants.
Some booksellers, such as Barnes & Noble, are also the publishers of some books they sell. Amazon.com has subsidiaries that publish books for authors, so there is no intermediary involved when Amazon sells the books.
The entire bookselling sales channel is complex and costly and filled with waste. Publishers -- and therefore writers and readers -- must somehow pay for the cost of warehousing, handling, transporting books through the pipeline, and even sending them back if they are unsold.
With Print On Demand, in contrast, the sales channel is much simpler. In many cases a book is sent right from the POD printer to the reader. Amazon may get a piece of the action but it only has to cover administrative expenses, taxes and profit, not warehousing, order-picking or returns. There are no middlemen to keep their pieces of the selling price.
The obvious conclusion is that an independent self-publisher can work on a smaller markup and/or price a book lower than a big traditional publisher.
Obvious is not necessarily accurate.
One big difference between POD publishing and offset printing is cost. A 300-page book sold by a mainstream publisher may cost $2 to print, so it can support a $15.95 list price. The same size book produced with POD could cost $4 to print. Using the “8X” formula, it would be priced at $31.95 — and might be so expensive that no one would buy it.
But there’s another way to market books.
If you choose to ignore the physical bookstores (except for special orders) you can be much more flexible in your pricing.
Amazon.com will work on a trade discount of as little as 20% (or even less when they sell below list price). The book that costs $4 to print, can have a $19.95 list price, and be sold to Amazon for about $16, and the self-publishing author gets to keep the difference between $4 and $16 — a juicy markup of 75%.
But here’s where you have to work like the menswear buyer.
You have to figure out the perceived value of your book. If most of the competitive titles are selling for $12.95-$14.95, you better be very sure you can justify a $19.95 price and that potential shoppers will understand the difference and can afford the extra dollars. If not, keep your price in line, or even go low if you are trying to establish your “brand” and think you can attract buyers with a low price.
On the other hand, some books can demand higher markup.
If your book is vitally necessary for business, and doesn’t just provide entertainment or casual reading, a book that costs $4 to print could bring $29.95 or even $75. If businesspeople can be convinced that your reference work or new theory will save them or make them many times the investment, there is really no limit to the price it will bring.
Just keep in mind that at a certain price point, the book has to look better physically, and probably should be hardcover not a paperback, and have multiple strong endorsements (”blurbs”) from experts in the field.
With e-books, there is no printing cost, so price should reflect value and competition,