J.K.Rowling Under Amazon’s Imperius Spell In her eBook Pricing

A while back I wrote about two kinds of companies – Price Setters and Price Takers. Amazon is a Price Setter. When it comes to eBook pricing they have set the definitive reference price that is becoming to harder to break even with magic.

J.K.Rowling, a master business woman and author (I admire her for both), is fiercely protective of her copyrights and monetization. While other authors were happy to get the Kindle version of their book out she held back for a very long time.

If you have been waiting for Harry Potter eBooks the wait is over. These are now available exclusively from her website. Rowling, apparently not happy with Amazon’s royalty scheme, is taking control of her eBook distribution.  By selling direct she gets to keep most of the sales price vs. sharing considerable portion of it with Amazon.

Clearly she is betting that the popularity of the boy wizard will deliver her enough traffic to offset any advantage from a powerful distribution channel like Amazon.com.

A likely scenario. (I cannot afford it.)

She may have wrested control from Amazon but she could not price it much different from  the standard  $7.99 and $9.99 pricing Amazon has set for eBooks.

J.K.Rowling priced the first three volumes in the series at $7.99 and the last four at $9.99 – a pricing model that seem to be based purely on the size of the books (the first three volumes are really thin while the last four are tomes) rather than on any other value factor.

There is no magic in this pricing.

If she had consulted the sorting hat she would have found that the first step with pricing is finding customer segments

  1. Which segments would prefer the eBook over the paper version?
  2. Specifically what is the value of eBook versions of the first three books vs. the later books.

This was a great opportunity for an author (likely the first time in history) to take control of their book pricing, to find customer segments and their willingness to pay and price it accordingly. Instead we have same old boring pricing under the imperius curse of a powerful Price Setter.

Note: Imperius curse is one of the spells in Harry Potter books that allows the one who casts the spell to control the victim’s actions.

Cost Allocation Obfuscation – eBook Pricing

Cost, especially fixed cost allocation, has nothing to do with pricing. Unless you are selling to the Government which allows you to quote only cost plus pricing. Government contractors are more than happy to do so because they not only include the variable cost of making a toilet seat but also add to it its share of all their fixed costs. So when you assign each toilet seat its share of building cost, executive salaries, etc etc you get $2000 as price tag.

Allocating each unit produced, its share of fixed cost is a financial accounting artifact – required by GAAP accounting rules. When convenient, like in obfuscating the true marginal cost to justify higher prices, some businesses are happy to adopt it.

Now publishers are adopting the same obfuscation to justify their eBook prices. Since they  are not selling the value of the book, they are facing challenges from customers expecting lower prices on eBook over hardcover books.

Michael Connelly’s recent legal thriller, “The Fifth Witness,” has more one-star reviews on Amazon than five-star reviews in part because some angry reviewers focused on the e-book’s $14.99 price.

Customers expect publishers to pass on cost savings from paper and printing charges in the form of lower prices. What are publishers resorting to? Obfuscation

Publishers argue it’s impossible to break out a profit per title that includes a percentage of all their costs because all books have unique one-time costs which are broken out over an unknown number of copies. It’s also hard to apply corporate overhead costs against the sales of individual titles.

They are hiding behind cost argument to say their “margin” per eBook is still low and hence it deserves prices that are comparable to hardcover.

If they are not willfully obfuscating, they are just plain ignorant in their cost allocation. Hard to believe.

All these because publishers are not addressing , “what job is the customer hiring a book for”. There is no attempt to sell the value. If the publishers are not differentiating on the content and the customers are not seeing difference between different titles (not their fault), both sides argue about the cost.

Does the customer get any less information value from a eBook than a hardcover book?

The real disruption of the publishing industry is yet to come. We will start seeing, substitutable, undifferentiated, and copious content sold as commodities for less than 99 cents and high value content sold at prices that capture a fair share of the value created for customers.

Until then, publishers, customers and all the media bloggers will focus on costs.

The Many Reasons Why Borders Bookstores Failed – Courtesy of Management Gurus

None of the gurus named or implied actually said anything about Borders, just taking their stated recommendations and applying it to Borders. You can see the futility of adopting that single magic, one-size-fits-all and Guru’s pedigree based recipes for running a business.

  1. Marketing is about telling stories. Borders failed to tell a compelling story that customers want to believe.
  2. Borders did not have a Level 5 leader. That would have moved them from Good to Great.
  3. They should have focused on their existing customers and retained them. Because increasing loyalty by 5% will increase profits by 80%. Not only that, the loyal customers will continue to pay higher prices.
  4. Borders stores were not managed and run by designers, they lacked Design Thinking.
  5. They did not follow the Toyota Way of lean manufacturing and lean inventories.
  6. Borders should have been a Long Tail retailer. (while this may sound as plausible, I would point you to the fact that Amazon makes bulk of its revenue not from the so called Long Tail products).
  7. Borders failed to Enchant their customers, the should have influenced people to keep coming back and pay the full price even though Amazon was selling it at 40% off.
  8. Borders failed in the area of customer service. They should have under-promised and over-delivered.
  9. Borders should have increased their prices by 1% because that would have resulted in 12-15% profit they could have used to grow the business.
  10. Borders lacked good copy-writing in their Ads. If the copy is fun and engages the customer they would come and pay full price for the books.
  11. Borders failed to recognize that marketing is about customer conversations. Your customers are having conversations about you whether you are part of it or not. Borders was left out of the conversation.
  12. Borders should have adopted co-creation, working with the customers to design the books they want to read.
  13. They should not have been running the business based on Airport business books instead they should have run this like a Silicon Valley startup. They should have gotten out of the building and talked to customers and pivoted.
  14. They should not have been running the traditional media Ads. They should have been blogging and done inbound marketing.
  15. Their website should have been ridiculously easy to use. It is all about the user experience.
  16. Borders employees were not in the “flow“, when employees are really engaged in what they are doing the business results take care of themselves.
  17. Discovering books should be fun, a game. Customers must be surprised, not knowing what is going to come next week. They failed to recognize this.
  18. A street vendor selling vegetables in India is still in business. Borders is not. They should have learned from that vendor.
  19. Borders stores and their eBook were not remarkable. When you are remarkable, people will remark on it.
  20. Borders should have given free lessons on each subject. Like Lulu Lemon did they should have asked local speakers and tutors to come teach free classes on various subjects at their stores.
  21. The should have adopted , The Sony Way, The Motorola Way, The GE Way, The Apple Way, …
  22. They should have followed in the footsteps Justin Bieber, Lady Gaga, Bruce Lee, Michael Jordan, …

Do you have one?

 

Amazon Kindle – The Platform Wars

Back in July 2008 I wrote about Amazon’s Kindle Strategy. I said they are not in it to capture the devices market but rather win the distribution platform market.

It is driving the new format, reduce the value captured by publishers and position itself to be the distribution medium of choice. The goal is to capture the format market and control the value chain and not the devices market. Since no one else s making such devices amazon.com took this on itself.

There is news today from Amazon that signals the move in that direction. Amazon announced today that they will release a Kindle iPhone Application that lets iPhone and iPod Touch users read Kindle books on their devices instead of Kindle. This program is available for free, a right move that fits with the platform strategy to increase footprint. The Kindle App will be a bit with  iPhone users and it will reach top 10 among most downloaded.

Is this program targeted at its existing Kindle customers or new customers? While Amazon says it is adding convenience to Kindle owners allowing them to read books while they are away from their Kindle device, it is directly targeted at converting new users and increasing Kindle format footprint. For the very near term (within days) even if 1% of 10 million (approximate) iPhone/Touch users bought just 1 book at $9.99, that is  $1 million in new revenue. For the long term this translates into not only more revenue from repeat purchases and new customers but also delivers on Amazon’s goal to win he platform war.

Questions do arise on why Amazon introduced Kindle at all and why it did not go for iPhone application in the first place. I think Amazon’s strategy evolved since the introduction of Kindle. The biggest factor of Kindle device is the readability with its e-ink technology, there will always be a segment willing to buy this device for this factor alone. Techcrunch downloaded Kindle App for iPhone and reported they had same reading experience on iPhone as on Kindle. Amazon probably also wanted  to be negotiating with Apple from a position of strength having a powerful BATNA (Best Alternative To Negotiated Agreement).

Other Winners and losers? By giving the program away for free Amazon denied any revenue to Apple.  Authors and Publishers stand to gain more from increased book sales. Magazines and Newpapers  that received subscription revenue from Kindle subcribers stand to lose any additional revenue from new subscribers. This is because iPhone readers can access the content using the browser and with existing online subscription instead of paying a separate subscription fee for reading on Kindle. To some extent Sprint Nextel that has the contract with Amazon to deliver books on-demand to Kindle devices stands to lose.

Overall, Amazon will win because of its clear strategy and flaw less execution.