• 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.