« Growth Markets, Resources

The 1% Windfall: Why Publishers Need to Implement “Dynamic Pricing”

• A 1% increase in book prices could lead to significant change in the operating profits of many companies, argues pricing expert Rafi Mohammed. But, contrary to this fact, the publishing industry is under pressure to lower prices rather than raise them.

• The answer is to implement “dynamic pricing,” which will enable publishers to respond to the demands of the market. Often, this will mean raising the prices for a book as it becomes more popular, thus making the most of spiking demand.

Interview by Todd Sattersten

Rafi Mohammed is the author of The Art of Pricing and The 1% Windfall, which was published in March by HarperCollins. Mohammed has been working on pricing issues for the last 20 years and is the founder of Culture of Profit LLC, a Cambridge, Massachusetts-based company that consults with businesses to help develop and improve their pricing strategy.

Here, he discusses the concept of price elasticity and “dynamic pricing” applies to the publishing industry.

PP: In the last 24 months, price has been central to the prominent news stories, whether the run-up of oil to its 2008 peak or the falling prices of homes around the country to the price of e-books. What makes price such a common point of conversation?

RM: Pricing has long been that way. When I pitched my first book, The Art of Pricing, I told editors that you could find a major news story once a week that dealt with some aspect of pricing. I think that pricing had been tucked inside other subjects like marketing or sales. Some lament that pricing is the least loved of [Phillip] Kotler’s four P’s – product, price, place and promotion.

Perhaps the most important story in publishing this year has been about pricing, with the move by many publishers to shift from the traditional wholesale/retail model to an agency model for sales of their digital products. What should publishers keep in mind as the product mix shifts from physical books to digital books?

Resist the temptation to lower prices. I know the argument that e-books have lower costs and that prices should follow. I just don’t believe that prices should be created on the classic “cost plus” method. Books provide a high value and the pricing should reflect that.

The value to the consumer certainly varies across categories, from the entertainment value of a romance to the prescriptive value of a business book.

And that creates an opportunity to price those categories differently. Maybe romance titles are priced lower to drive demand and business books are priced the same in both digital and physical editions.

Author Cory Doctorow has framed this debate as price elasticity versus price discrimination, with Amazon believing that lower prices create more demand and publishers holding on to the belief that differing products released over time maximizes profit. Does this properly characterize the actions these companies have taken?

I disagree with Cory on both accounts. On the Amazon side, price elasticity is about choosing the right price to make the most profit. Amazon has been choosing to sell e-books at a loss for some time. That decision indicates to me a different strategy. Could it be about the profitability of selling devices and taking a loss on the content? Maybe it is about capturing market share while the e-reader market in its infancy and creating lock-in with consumers?

On the publisher side, price discrimination doesn’t exactly describe the choices they are making either. Price discrimination implies that prices fall over time as perceived value of the product falls and the choice by several publishers to create a second window for e-books, their most profitable product, after the release of the hardcover, doesn’t match up. There are again other motives at play. Windowing e-books protects hardcover sales and the retailers that depend on them.

Digital distribution creates a variety of new opportunities for how products can be priced including the price of free. What sort of experimentation should publishers be considering?

Dynamic pricing is the biggest opportunity for publishers. For example, if a new release catches on, the price of the book should be increased. I am not suggesting doubling the price, but adding one or two dollars to the retail price creates a huge impact on the profitability of that title. Hospitality managers change the price of the rooms at their hotels constants to match current demand. Publishers should consider the same.

DISCUSS: Should publishers raise the price when a book becomes popular?

VISIT: Rafi Momhammed’s website, Pricing for Profit

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6 Comments

  1. Posted August 17, 2010 at 3:48 am | Permalink

    In Australia, the largest book retailer, Angus & Robertson already puts up the recommend retail price of some of its top 100 bestsellers, presumably to make hay while the sunshines. This hasn’t stopped them from getting into financial difficulty, however (http://www.smh.com.au/business/redgroup-retail-will-be-colouring-its-books-red-20100729-10y4p.html). I agree that regular reviews of pricing should be standard publishing practice – whether booksellers would appreciate the price hike on bestsellers is another matter: these are normally the titles they discount heavily to get market share on.

  2. Posted August 17, 2010 at 7:44 am | Permalink

    So this guy has a POV and he’s going to sell the hell out of it, despite how reality will contradict him time and again.

    What would he have advised Henry Ford? To keep wages low and car prices high?

    We no longer live in a world that can afford boutique pricing.

    And books are supposed to be about *spreading literacy*, not feeding the egos of publishers who wish they could “graduate” to the movie business. Stop thinking the price of a book is equivalent to buying a ticket to Avatar in IMAX 3D.

  3. Martyn daniels
    Posted August 17, 2010 at 11:51 am | Permalink

    Sometimes textbook management works and the theory of ‘how to’ can be applied. However sometimes the textbook and consultants wake up with clean sheets every morning and loose their touch with reality and common sense.

    We wonder if its August and news is in short supply, or someone simply forgot to the reality check?

    His advocates ‘dynamic pricing’ where publishers respond to market demands and often raise prices as a book becomes popular. He argues that publishers should resist the temptation to lower prices. He argues that books provide a high value and the pricing should reflect that. He believes that because Hospitality managers change the price of the rooms at their hotels to match current demand, that publishers should consider the same.

    Hello even though a small number of major publishers believe that price control through the agency model works many don’t. The price decision rests with the retailer who actually sells the book and the publisher merely applies an RRP Recommended Retail Price. That is usless Mohammed believes that we can bring back the Net Book Agreement. What he also fails to state is the hotel prices go up and down on demand. He obviously fails to understand the logistics of price changes across many to many supply chain involving thousands of publishers and retailers. Finally he obviously doesn’t appreciate that publishers by setting the price printing this on the jacket create the value statement and control the margin.

    At this point we give up.

  4. Jussi Keinonen
    Posted August 18, 2010 at 10:38 am | Permalink

    I’m rather surprised that publishers do NOT use dynamic pricing more. Maybe the two critics of this blog entry work in a restricted market, or an area like the U.S. where publishing seems to have got stuck in it’s patterns on the physical side? (Meaning I’m leaving digital out of this.)

    Both the publisher and the retailer have their own possibilities in pricing. For publishers the dynamics possibility is raising the price and possibly making deluxe editions when they finally get a hit product. For retailers it’s normally the other way around: decrease prices for hits to increase market share and sell volumes, and slightly raise the prices of low volume product on offer for better margins when competition is lower.

    Very basic stuff and works the same in every business. Always make your profit the way you best can.

  5. Posted August 18, 2010 at 5:16 pm | Permalink

    Pricing shouldn’t be used for profit alone. That approach isn’t holistic enough. You need to be able to see the whole picture.

    First you need to decide what strategic function the product (book) has; revenue earner, footfall creater, profit generator etc.

    Only then can you truly use pricing to its best effect, but to do that properly, you need to understand (forecast) its elasticity and cross elasticity with other products.

    Let’s say you have two closely linked books (in terms of cross elasticity), one of them starts to sell well, so you increase the price. Good. More profit. or is it?
    Lets also assume that the other book sells less- demand for it is cannibalized by the first… What do you do? reduce its price, so it sells more?
    What if it’s a book that makes a better margin than the first book? In trying to maximize profit on one book, you could be killing a better profit on the other!

    There’s a balancing act to be done here. Few have achieved it, those that have made REAL profit improvements, but it has traditionally been expensive to do. It needs complex math, accurate historical data and very good forecasts.

    (Then, there’s the whole gamut of opmpetitor pricing, but that’s for another time!)

  6. Jussi Keinonen
    Posted August 19, 2010 at 4:05 am | Permalink

    Iain Nicol:

    “Let’s say you have two closely linked books (in terms of cross elasticity), one of them starts to sell well, so you increase the price. Good. More profit. or is it?
    Lets also assume that the other book sells less- demand for it is cannibalized by the first… What do you do? reduce its price, so it sells more?
    What if it’s a book that makes a better margin than the first book? In trying to maximize profit on one book, you could be killing a better profit on the other!”

    You’re partly right, for bookstores. But the article was about publishers. If you publish two closely linked books in one season, you are already cannibalizing your business. :)

5 Trackbacks

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