Value of a Book, its Price and Cost

How do you measure the value of a book, or more specifically its content? How much are you willing to pay?

The answers lie in what the reference price. For people like me who wait for the book to come to public library and read it, the reference price is $0.00. For those who wait for the paperback, the reference price is somewhere in the $6-$12 range. For those who frequently buy hardcover books when there are published the reference price is what they typically for their purchases.

All these three segments may very well derive a high value from the books be it entertainment or education, but their willingness to pay is decoupled from the value due to reference price.

Now Amazon is trying to shape this reference price among frequent book buyers to be $9.99, the price they charge for Kindle books. Before Kindle, Amazon was a price taker. The publishers set a price and Amazon decided its retail price based on its cost. Now with Kindle Amazon can become the price setter  and gain upper hand in the value chain. The first step is training the customers to expect a fixed price of $9.99 on books.

(As an aside, I think Kindle is a great device and provides an easy way to read books. I would love to get a Kindle and hope someone will give this to me as a gift.)
Amazon argues that the cost structure of physical books and Kindle books are different and hence the Kindle books should be sold at a lower price than paper books. The New York Times quoted Mr. Jeff Bezos, CEO of Amazon, saying

“E-books should be cheaper than physical books. Readers are going to demand that, and they are right because there are so many supply chain efficiencies relative to printing a paper book,”

How does the cost matter when the value people get from a book is the same? A reader derives same vaue from the information content of the books regardless of the format. There are differences in convenience factors but Kindle’s advanced featurs like highlighting and  notes taking etc makes it superior to paper books. It does not because customers do not care how much it costs to produce a book.

But Amazon is happy to talk about cost here for two reasons. First it stands to gain from switch to electronic format from logistical savings and second its price to customers is based purely a markup on prices publishers sell their books to Amazon. Furthermore talking about costs only helps to build a reference price in the minds of customers that Amazon can use to negotiate better prices with publishers. As I said before I still believe Amazon’s strategy is to be THE distribution channel for books by owning the format and the medium. Training the customers and shaping their reference price is the first step.