The Cost of Physical Book Publishing post was the first step in figuring out what kindle edition books really cost and whether the magical $9.99 figure is justified. This is the second.
We’ll look at –
- The costs of kindle edition publishing. For books that are only kindle editions and for books that have already been published physically.
- How the costs compare with a $9.99 price.
Hopefully we can develop a good understanding of what a fair price for kindle edition books is.
Important Note: Although publishers would want only a model where ‘efficient kindle edition books subsidize inefficient physical books’ we will NOT be looking at that model in this post. That’s for a later post in this series.
A look at the Traditional Publishing Model
Its good to look at the model for physical books and a rough guideline of how the pie is cut up -
- Author – Creation. 8-15% Royalties.
- Publisher – Being the Curator, Polishing, Manufacturing, Marketing. 45-55% (includes Author’s Royalties, so it’s 30-37% excluding those).
- Distributor – 5-10%.
- Warehouser – 5-10%.
- Retailers – 35-40%.
Note: Publisher’s 45-55%, in addition to author royalties, includes cuts of roughly 10% for printing, 12.5% for book production, and 7.5% for marketing. Publishers also pay for returns, including shipping them back and forth.
This is a simplification and if any publisher opens up their books and reveals the actual numbers I’ll gladly use those instead.
The costs of Physical Book Publishing
In our first kindle vs book cost post we looked at the different elements that make up the cost of a book. Add on numbers from the last section and we get -
- Author Royalty – 7 to 15%.
- Book Screening and Acquisition – Publishers cover this. Part of the 12.5% of book cost that goes to book production.
- Successful Books subsidizing failures. Publishers cover this. Unknown percentage of book cost – x%.
- Finishing the Book (producing the final book that will be printed and sent off). Publishers cover this and its included in the 12.5% book production cut.
- Printing. 10%.
- Book Distribution – Wholesalers and Distributors. Between 10-20% of the book’s cost.
- Book Retailing – 35-40% of the book’s cost.
- Book Marketing – 7.5% of the book’s cost.
- Book Returns – Publishers cover this. This is another unknown y% of the book’s cost.
- Customer’s Costs to get Book – This is not part of the book price. However, the cost in time and fuel for every trip to buy books ought to be compared against the upfront cost of buying a Kindle or eBook reader.
That’s a pretty straightforward division. We don’t know the x% cut that successes subsidizing failures gets, and the y% that returned books account for – however, it ought to be in the 10-20% range. Figuring out what a kindle book will cost based on the above numbers is a relatively simple problem.
The reason publishers don’t want to be transparent about it is they want to keep prices high while increasing their cut of the pie from 30-40% (for physical books) to 80-90% (for kindle editions).
Kindle Book Costs – What are the costs that apply to ’Only for Kindle’ books
Let’s look at book production costs, including all the additional costs that publishers claim, in the context of a book created just for the Kindle –
Author Royalty – 7 to 15%. Let’s keep this the same for the moment.
Book Screening and Acquisition- With Kindle Edition books (and in fact even for physical books) we now have a new model illustrated by Amazon signing up Cayla Kluver’s Legacy.
While it won’t be as simple as going to close to zero, it does mean that publishers can spend less to acquire books. The 12.5% comprised of this and book production ought to go down.
Successful Books subsidizing failures. Like for the previous cost we have a new model where it will be easier to tell winners and this ought to reduce prices. Lets say it goes from x% to (x/2)%
Finishing the Book (producing the final book that will be printed and sent off). Publishers cover this and its included in the 12.5% book production cut.
We’ll assume this is the same. Since costs of acquiring books goes down, we’ll assume the 12.5% that acquiring the book and finishing the book cost go down to 9%.
Creating Multiple Formats
As a tech guy its obvious that this can be automated and reduced to less than 1-2% of the current cost of a book. Even that figure (10-20 cents for formatting costs for every single ebook sold) seems high – however, we’ll be generous and stick with it.
Publishers are either getting fleeced by formatting software or by formatters. Since we’re talking about cost of a Kindle book, this should only include cost of formatting for the Kindle and we’ll assume 1%.
DRM
Again the claims of 5% of book costs being DRM is either publishers being fools or taking us for fools. Another 1% here.
Printing. 10%.
This doesn’t exist with Kindle books. Cost of printing estimates online fluctuate between 10-20% and keeping it at 10% is pretty generous.
I’d really not be surprised if in 6 months Publishers start claiming printing physical books magically reduces book prices and not having to print books actually increases prices.
Book Distribution – Wholesalers and Distributors. Between 10-20% of the book’s cost.
This doesn’t exist.
Any book publisher who is storing books and emailing them or uploading them to Amazon ought to be able to get these costs to 1% of the book price (that currently exists), if not less.
Book Retailing. 35-40% of the book’s cost.
This is the big challenge. We’ll discuss this later.
Book Marketing – 7.5% of the book’s cost. We’ll be generous and leave the same budget.
Book Returns – Publishers cover this. This is another unknown y% of the book’s cost.
This doesn’t exist. So y% goes to zero.
Customer’s Costs to get Book - With the Kindle this is zero.
Customers ought to factor in that they don’t have to spend time or money travelling to bookstores any more. This is offset by bandwidth costs that are included in ebook prices.
Which Means -
The costs we’re left with are -
- Book marketing – 7.5%.
- Author royalty - 7-15%.
- Book acquisition and production – 9%.
- Retailer cut.
- Publisher cut.
- DRM, formats, distribution of ebooks – 3%
- Half the price of subsidizing failures.
So that’s 26.5%-34.5% of costs, half the the cost of subsidizing failures, and the profits that retailers and publishers get.
I’m going to suggest something that makes both publishers and retailers hate me -
- 7% profit for publishers. Do note that the 7% cut on original prices translates to 14% profits on the newer price.
- 7% profit for retailers.
- 5% cut for subsidizing failures.
That gives us a grand total of 45.5% to 53.5% of the existing price.
- For a $24.95 hardcover, that’s $11.35 to $13.35.
- For a $14 paperback, that’s $6.37 to $7.49.
Amazon currently are exceeding expectations with their $9.99 price and also giving publishers 35-45% of the list price. One of the two is going to change.
If Publishers hoodwink users into believing that ebooks cost only 10% less than physical books, we’ll see prices go up to $15, and then to $20 – which will kill ebooks and make publishers happy as they can die slowly instead of the far more painful prospect of changing and surviving and saving the books industry.
Kindle Book Price Guide – Making Kindle Editions for Backlist Books
These are the books publishers don’t really talk about. These are backlist books that are already published, and still sell decently. They make up an important and big part of publisher’s revenue.
When we translate these into kindle editions, we have only two possiblities -
- The book has already broken even or made a profit as far as physical editions. That’s the scenario we consider here.
- The book hasn’t broken even, and book production costs etc. have to be made up. That scenario is identical to the scenario covered in the next post (so please wait for that if you’re a publisher and have no books in your backlist that have already covered their production costs
) .
The actual costs for converting these books to Kindle format and selling them and marketing them are -
- Author Royalty – 7 to 15%. This is the same.
- DRM – 1%.
- Format – 1%.
- Book Distribution – 1%
- Book Retailing. 7% for Amazon.
- Book Marketing – 7.5% of the book’s cost. This is super generous – let’s leave it in there.
That’s 32.5% of the original cost of a book.
- 32.5% of $24.95 hardcover price = $8.1.
- 32.5% of $14 paperback price = $4.55.
If Publishers sell this at the $9.99 price, they’re making a huge killing. They can sell them much cheaper and still make a huge killing. Which is what you see Baen and a few other companies do by selling books at $6 – $7 prices.
Short Note for anti-DRM People and people wanting prices less than $9.99
Quite simply -
- Quality writing cannot survive at prices lower than $9.99 for new books.
- There is no solution other than DRM to ensure people pay for books. Once you have a better solution than the hypothesis ‘people will behave perfectly if treated well’ (or a few solitary examples) then we can talk.
- Consider whether in your own work, you give away your work and hope people compensate you based on the goodness of their hearts or their sense of what is right. What if you never met these people and they could get your work anonymously over the Internet.
Prices are already going down a lot thanks to ebooks. $9.99 is a very reasonable price-point. Pushing for DRM-free or lower prices on top of $9.99 is being greedy and will probably kill the market.
Closing Thoughts
Thanks for getting this far .
The crux of my argument is that with Kindle books we’ve cut a sigificant part of book publishing costs PLUS a lot of the cost of ‘successes subsidizing failures’ and all of the cost of ’book returns’. In addition, thanks to Kindle purchase information and New Publishing, the risk for both Publishers and Retailers goes down significantly.
- Publishing physical books is a mix of curation, distribution and risk taking.
- Ebooks reduce the cost of distribution tremendously, reduce the risks, and we’re a few algorithms away from great semi-automated curation.
- Expecting prices that are 40%-50% of existing prices is perfectly reasonable. Amazon’s $9.99 guideline price is almost perfect.
The next post in the series will look at a model where efficient kindle edition books subsidize Publishing companes’ antiquated models and physical books. Whether we like it or not publishers are going to become rarer and physical books are going to become relatively more and more expensive (especially when compared to ebooks).
Also, these links were very useful (plus a few others – do leave a note if i missed crediting you):
- Publishers’ Weekly – The Ebook Pricing Conundrum.
- Inside Book Publishing by Giles Clark, Angus Phillips.
Filed under: kindle, publishing | Tagged: book costs, kindle book cost
Very good post! I was looking for this kind of information! But I’m wondering, does all this apply to textbooks too?! I think the margins on those books are even higher because of reprinting etc.
thanks for the kind words. textbooks are a different beast because their pritning costs are higher, the research and writing is more intensive.
check this link for a figure on textbook cost details (it is however from the national association of college stores so might be a bit biased).
http://www.nacs.org/public/nacs/mediaroom.asp
One question about the conversion of backlist books-
Are the calculations failing to take into account the additional cost of getting a backlist book, particularly an older one, into a format which lends itself to ebook production.
Moving forward, I can imagine publishers establishing workflow systems that can easily produce ebooks on the back end. For older books, what, if any digital products exist? Can one “easily” go back and produce an ebook from typesetter files, for instance?
you make a good point. so there are probably two types of backlist books –
1) those that were processed electronically and need minor formatting – so those would have 1% or so convesion costs.
2) older books – these would have to be scanned in and OCR’ed or typed in. The conversion costs for these might be a bit more. Perhaps even 3-4% of cost.
I’m not aware of any program that lets you produce ebooks easily from typesetter files. If I run across something I’ll add an update.
I don’t know about where you are, but around here the expensive mass market paperbacks are $10, most are $8. I can take those to a used book store and get credit to buy more books. Also, most grocery stores offer 25% off cover price, so I can get a new book for significantly less than $10 then loan it or sell it, or cut it up to make ransom notes.
Most people do not buy hardback books. I don’t think that using the price of hardback books is a fair comparison. Even so, Kindle II costs the same as 10-12 hardback books, or 40+ paperbacks. Then I have to pay the same price for electric content as I do for paper? And, as I understand it, there is no way to access free books from Gutenberg or other sites (although you can send yourself emails for a small fee). E-books will have to come down in price significantly, and the readers will have to be more rugged (read drop-able) before they have hope of true competition.
Kim, there are two ways of looking at it –
1) take a $10 paperback and expect ebooks to be cheaper – say $7-$8. That’s pretty much the bare minimum.
2) saying it should be even cheaper than $7 a book – then we’ll no longer be able to support high quality publishing.
Basically the true cost of ebooks is somewhere between where publishers are claiming (80-90% of hardcover book costs) and people would like it to be (25-35% of hardcover book costs).
Mp3s still sell for 1 dollar. You still have to pay $5-$10 bucks to go see a movie. Its unreasonable to expect that suddenly books will cost 25% of what they used to.
[...] is the second part of an excellent series by the Kindle 2 review. Having sat through innumerable cost analyses in my corporate life, I can [...]
I agree that $9.99 is a perfectly reasonable price for electronic editions of new hardcover releases, with the caveat that $9.99 is not appropriate for the electronic editions of books with a list price of $7.99 such as paperback originals.
DRM is not the only solution to ensure people pay for books: if it was I would not have spent several hundred dollars at Baen or bought any multi-format books from Fictionwise.
Is DRM a cost to the publisher or the retailer? For the Kindle it does not matter, because Amazon owns the DRM. If it comes out of the publisher’s cut, this might in part explain how Amazon can offer lower prices. Note that FictionWise gives a 5% discount for purchasing the eReader format that it owns.
Interesting article, but quite incorrect. Producing a book for any format costs a lot of money, and eliminating physical inventory and printing costs is not going to make as large a dent in the cost of acquiring, producing, and marketing and selling intellectual property as this article might imply.
i think the fact that some commenters think i’m keeping the costs too high while others think i’m putting them too low indicates something
i can understand why you’d feel that way. the thing is that more and more of the people who buy books are not used to the old models and are questioning it. and enough people are willing to question it enough to try new models. its like the 4 minute mile. once it was gone it was gone.
perhaps publishers just don’t realize that their model is destroyed. look at encyclopaedia britannica. ebooks give you an option – its your choice whether you take it.
There’s an easy way to backcheck his figures for plausibility.
Mass-market paperback originals already sell for $7.99 typically. There’s no way publishers are selling those at a consistent loss. And there is no way that publishers have higher costs for an ebook than for a paperback original, except possibly royalty rates.
If we assume ebooks cost fully as much as paperback originals except that the author’s payment is increased from an absolute bottom-of-market eight cents (1%-of-the-$7.99 paperback price) to a comfortable $3.75 (15%-of-$24.95 hardcover price), we add $3.67 to the cost of a paperback original to find the ebook original price that makes the publisher and the retailer at least as much money as they did on the paperback. $7.99+$3.67 = $11.66.
I agree with others, that this is an exceptionally well-thought-out essay. Great stuff. Thank you!
One thing that strikes me here is, ‘Expenses will have to come down.’ I’m thinking here of the costs of maintaining office space in Manhattan, and paying salaries to staff so they can afford to live there. Ebooks offer a small publisher in Podunk, Cheapsucka County, to compete with the big boys on costs, in a major way. My expectation though is that the Podunk Publisher will not beat the NY big boys, but rather that the NY big boys will maintain a small office, and skeleton staff, and farm out most of the work to Podunk Pubs and others like him.
One thing you write struck me as extremely odd – and wrong. ‘Quality writing cannot be had for less than $10′ as I paraphrase it. This is an argument as old as outsourcing, and outsourcing was never stopped by it. Look back at the Depression era pulp writers, now regarded as classics of entertaining fiction – Chandler, Hammett, Brackett, Robert Howard. These guys worked for pennies (literally) and they were glad to get them.
Never underestimate how cheaply a tale-spinner will be willing to part with his golden words, when he faces starvation for himself and his family!
On another note, some of your expectations for percentages of costs seem backwards to me. For instance, marketing, you say, you will be ‘generous’ and keep it at the same percentage. This, given that the ebook ends up costing less retail, means marketing expenses will go down, and you consider this to be a ‘generous’ estimate? Or are you thinking that the lower retail price of the ebook will result in total sales so much higher that the same percentage of money given to marketing will end up being the same?
Publishing (like moviemaking and the record business) is notoriously loath to open its kimono and reveal its true costs. This, I imagine, is prima facie evidence that something is rotten there. But we’ll never really know, alas.
I look forward to your next posts in this series!
thanks for the praise.
1) as far as quality of good writing – that’s a mistake on my part. If you consider publishing as finding, distributing the best writing, I’m saying that there are still costs associated with it and ebooks can help prics go down for published books – However, not so much that we jump from $25 for hardcovers to $5 for ebooks.
The whole process of finding good work and polishing it further and spreading the word still costs money.
regardless of how cheaply the author parts with his work, there are stil overall costs for publishing books and getting them out.
2) as far as percentage. all percentages used are percentage of current book costs.
so when i’m leaving 7.5% for marketing, that’s 7.5% of hardcover price books. which is 15% of half-priced ebooks.
all the analysis assumes worst case – so i’m not even using the rather obvious fact that cheaper ebooks will lead to more sales (Mr. Bezos has indicated that Kindle buyers buy as many physical books and 2.7 times kindle edition books).
Most new e-book publications from Baen cost around four to six dollars depending on whether you get it as part of a webscription bundle or individually.
As for the DRM I can only guess Baen counts as a solitary example since it has none and has never had any and seems to do quite well without it. I can say if they ever start infecting their product with it I’ll likely not be buying more of their books.
Thanks for an enlightening post. I was originally looking for information on digital editions of newspapers or magazines, having recently received an offer for £24/year for print version, £19 for digital edition (which incidentally is not designed to be downloaded into an e-reader, but to only read on-line). Overall the offer is not very attractive — only £5 per year for something I have to read on the internet. But it got me thinking. According to your figures here (if I can apply them to the magazien market), the £5 *is* about 20% of the standard print version price (say, 10% for production/manufacturing and 10% for distribution). So why does it feel like not enough of a difference in the price I’m being asked to pay for the digital version?
you’re welcome Jeannette. It doesn’t feel like enough because it seems like there ought to be other efficiencies magazines should be able to incorporate like not printing lots and lots of extra copies, paying (as a larger cut of the price) retail stores for shelf space, and so forth.
To be fair though, I don’t know much about the magazine business – perhaps there really isn’t much room to cut prices.
I agree, I don’t know how far the book model can be applied to magazines. But something doesn’t add up!
[...] are my posts explaining what book costs are, and what kindle edition books ought to cost - these clearly show $9.99 is a sustainable price point. No publisher is every going to release [...]
Thoughtful article, and I would be happy to pay the proposed $9.99 *if* I actually owned the resulting eBook and could view it on other hardware than the Kindle. If it were DRM free, I would buy
I love the smell of books. I love the feel of books.
I love their appearance on my bookshelf. I like lending them to my friends.
Hello
Two things I would like to point out:
1. Cost does not matter to pricing. You want to price a book or any widget based on economic value to customers. But, most of the time you fail to capture the value because of customer reference price – price they used to pay for similar items brings your price down. That is why you see similar pricing for all best sellers and very high price for textbooks. So it does not matter what the cost difference in between Kindle book and paper book. Kindle format provides certain value (ease of carrying, sharing, ease of purchase, etc ). In any case Kindle books are 1-2% of total sales so it should be priced higher to capture value from these 1-2% with higher willingness to pay.
2. In your cost analysis you are doing fixed allocation per book. This is not correct. Except for royalty, retailer margin, and publisher margin the rest are fixed costs. We could argue that cost to produce the book (materials and labor) are marginal costs, but you never make a decision to print one single book. You print 10,000, 25,000 or a million books. In this case it is not correct to allocate unit cost. The marketing costs are also fixed and not done on a unit basis.
Just my thoughts.
for your 1st point: you are correct. my job is to provide data so that people understand that $9.99 is a very reasonable price. The internet allows people to inform other people and thus remove the advantage retailers have always had.
for your 2nd point: yes, i could put in variables and ranges and then there would be no point to the article.
it’s to come up with something tangible. a guideline, rather than a solution.
Interesting analysis of how much a Kindle book should cost. I’d agree with most of the points made here, except maybe a few.
I noticed that you had considered marketing costs for even backlist books. I would think that backlist books wouldn’t really be promoted as they generally sell on word of mouth and by author reputation. In my opinion therefore, the marketing costs for backlist books ought to be greatly reduced.
My major gripe, is with your argument in favour of DRM. Here is what I think:
1. Yes, I agree that quality writing would not survive below a certain price point. I just dont think that $9.99 is that price point for e-books.
2. Rights management does not exist for any physical product or a book, magazine, music or movies to the best of my knowledge. Does this mean that if it exists in a physical form it is ok to let people use it any form they want? After all what would prevent a buyer from making copies, sharing a single copy of a book bought from a store? If publishers can trust buyers of physical copies to do the right thing, I see no reason why the digital consumer should be treated differently. In fact, the whole ‘people will behave perfectly if treated well’ hypothesis is in action every time you buy a book at a bookstore. The publishers use no other tool other than the copyright notice to protect their rights at the level of the book. So my argument is why should it be any different for electronic books? Because I believe that at the end of the day if you have spent you own money to buy a book, you are as likely to distribute it freely as you are to allow anyone off the street to take a joy ride in you new Porsche.
DRM in e-books, according to me borders on being farcical. First you are expected to buy an expensive device to take part in the ebook market (or strain your eyes reading off a computer screen). Then next you are sold products that are clearly not fairly priced (remember amazon sold ebooks for quite some time above $10, and quite a few stores still do). Then you are told that you cannot transfer your book out of your device, basically you are given a book chained to the bookstore (which as amazon showed with 1984, can be even be snatched away when you are still reading). Given this scenario, once the initial fascination with e-ink devices wears off, which self respecting person is going to stick with ebooks and continue to be taken for a ride by the publishers? I think in the long run, in its current form, DRM will spell doom for the industry.