Book pricing—Solving the Great Mystery

Book pricing is difficult and a bit like cold fusion—many people claim to have discovered the key to success, but none can prove it. That being said, there are steps that publishers can take to eliminate some of the magical guesswork from the process of setting prices for books.

Publishers must always remember why prices exist. Prices exist to create profit. The publisher should strive to generate their desired profit from the primary audience. Understanding the primary audience and the price elasticity of the book within the primary audience is critical to designing success and achieving profit goals. What follows is the method that I use to decide prices for books.

An early, tough lesson

Five years ago I spent days obsessing over how to price the first book that I published. Most of my thoughts swirled around one aspect of the book pricing game: What price is the audience for this niche book willing to pay?

I priced the book at $14.95. However, I now know that I could have priced the book higher, at say $18.95, and I would have moved the same volume. Though the book has been successful, that error in pricing lost me about $5,000 in profit.

Where did I go wrong during my first pricing decision?

I focused too much on the price that I thought the audience would tolerate. While the question I asked when I set the price is a good question and an important one to answer, it is not the only question a publisher should ask. Asking only that question can create misconceptions with big consequences. As it turns out, I did not understand the audience as well as I presumed. Often, our assumptions are our worst enemies.

A better process for pricing a book

If I were publishing that book now, for the first time, here are some of the questions I would ask:

  1. Who is the primary audience? And do I have enough knowledge of and access (i.e. marketing and distribution) to the primary audience to sell the book?
  2. Is the primary audience fixed at a certain number of readers, and do I know that number?
  3. Using the answer from #1, what price at that volume covers my costs (including labor) and my profit?
  4. Is the primary audience going to buy this book regardless of price?
  5. Beyond the primary audience, can I sell this book to anyone else at a profitable volume?

These are very important questions. And I should ask them not only when setting the final price of the book, but also during the acquisitions process when deciding whether to even publish the book. Here is what I am looking for in the answers:

  1. The primary audience is going to generate the bulk of the revenue and momentum for the book. If I cannot answer either part of Question #1 with detailed, knowledgeable responses then I do not publish the book. It does not matter how passionate I am for the book, or how awesome the author is. If I don’t understand the audience, then I can’t sell the book. It really is that simple. Stick with what you know. Part of this question also deals with marketing, which I talk about in another chapter.
  2. Question #2 is one of the most important questions I can ask, and this is especially true for niche publishers and self-publishers. If I can answer yes and I know the approximate size of the audience, then this answer will decide the price of the book. Then I only need to use the following equation to set the price: cost+profit/volume. I love it when I get books like these because I know from the beginning how much profit I am going to clear on the project. This question is also connected to Question #4. Knowing the size of the audience and an affirmative response to #4 is the best outcome for most small publishers.
  3. This is a great question because it forces me to understand the true cost of pursuing a project. See the next section for an example of the spreadsheet setup that I use to create a variety of profit predictions at various price points, discounts, and volumes. I believe it is very important to visualize this part of the pricing process, and so I recommend that every publisher use a similar spreadsheet when setting prices. This spreadsheet not only gives me the answers to Question #3, it also forces another gut check when looked at after getting the answers to the other questions. And it automatically triggers other questions. Is the primary audience big enough to buy the minimum volume for the book to create a profit? Do I understand enough about the primary audience to move the needed volume?
  4. If I can answer yes to this question then I am very happy. I still need to figure out if the primary audience is big enough to provide the needed profit, and I can determine that using the data from the spreadsheet that I will use to answer Question #3.
  5. This is often a difficult, but very important question to answer. If I stick to the model of generating desired profit from the primary audience, then finding new, secondary audiences puts icing on the cake. For each new audience, I try to use the same method just described—this is the best process for predicting outcomes and ensuring success.

The answers to these questions allow me to do several things:

  • Determine if a project is worth pursuing
  • Determine if a project is worth continuing
  • Determine how important the book is to the success of the business
  • Plan for the future by estimating expected cash flow

What I just described demonstrates that the process of choosing a price for a book creates a detailed qualitative and quantitative analysis that deals with more than trying to pick up a few more customers through clever price points. The process gets to the very core of the book, asking the core questions that many publishers willingly disregard at their own peril. I too have fallen into this publishing trap while in pursuit of creative passion and beautiful literature—enough times that as I write these words I grind my teeth thinking about all the profits wasted on projects that were long dead before they started. If only I had used this process …

Looking at all the options—quantitatively

Now that I have outlined the basic process, let’s go back to Question #3: What price and volume covers my costs, including labor?

Below is an image of the spreadsheet that I use for making the calculations that will answer my question. I call it the Publisher Profit Calculator.

Book_Profit_Calculator

This spreadsheet includes a lot of parts. No unique piece of data provides that much information. But the relationship of all the pieces provides an incredible amount of useful information that will influence the final price of a book.

Here is an explanation of each part:

  • Retail: This is the retail price. It is a part of the calculation used in all the other columns.
  • Page Count: This is the final, total page count of the book. It is used to calculate the printing cost (used in the After Printing column) and the Page Profit column.
  • Discount: This is the wholesale or distribution discount. When estimating future cash flow and profits, always reference the biggest discount given. Referencing only the biggest discount will keep expectations realistic, provide room for error while forecasting, and sometimes it results in unexpected profits later in the life of the book. Just like disaster preparedness, always plan for the worst—but in this case using the biggest discount and slimmest margins.
  • Royalty: This is the percentage the author receives. It is used to calculate the dollar amount that the author receives in the Author Royalty column.
  • Wholesale: This is the wholesale or distributor price. It is calculated using the Retail and Discount columns.
  • After Printing: This is calculated using: Wholesale less printing cost (printing cost is calculated in the background based on the Page Count). This number gives the gross revenue before royalties.
  • Author Royalty: This is the amount the author receives per book. For the purposes of this example spreadsheet, the Author Royalty is the Royalty percentage multiplied by the Wholesale price—which is based on a net-price received royalty model.
  • Pub. Profit: This is the amount the publisher clears after printing costs and royalties. This is an important column in the final price making decision.
  • Profit Margin: This column uses the Retail price and the Pub. Profit columns to calculate the percentage of the retail price that is publisher net profit. This is a good column to watch across all the books being published under an imprint. I try to the keep the Profit Margin around 30% with margin of +/- 5%. Remember to look at the row with the largest expected Discount.
  • Min. Volume: This is the minimum volume that I must sell to recoup the cost of publishing the book. The total expenses for this example are listed in the upper right corner: $2,200. The column uses the Publisher Profit calculation and the total expenses to calculate the number of books that must be sold to break-even. This number should include the publisher’s labor. This column has the most influence on my final price setting decision. This number can be modified to include profit as well.
  • Page Profit: This is the publisher’s profit per page. It is calculated using the Page Count and the Pub. Profit columns. This column has a similar role to the Profit Margin column—it gives the publisher a benchmark to aim for. I must note that profit per page tends to decrease with longer books because the retail price has a hard time keeping up. But that is okay because I am selling more pages and so profit holds steady.

Example of my method in action

Let’s say I’m getting ready to acquire a new book. Before I begin the publishing process, I want to get a good idea for the primary audience and whether I can make a profit publishing the book. Let’s pretend that the book title of the book is “Paddling Missouri’s Big Rivers.” It is a guide, a memoir, and a history to the big rivers of Missouri.

Now let’s work through the questions and the Publisher Profit Calculator to find out if I should publish the book.

  • Who is the primary audience? And do I have enough knowledge of and access (i.e. marketing and distribution) to the primary audience to sell the book?

The primary audience is paddlers, people interested in the Missouri’s natural and cultural history, and people who know the author. I am connected to the Missouri paddling community and I was born and raised in Missouri, so I believe that I have enough knowledge and access to the primary audience to sell the book.

  • Is the primary audience fixed at a certain number of readers, and do I know that number?

The size of the primary audience is limited, but I do not know the exact number. Using my unique knowledge of the primary audience, I estimate that the primary audience is 300 strong. I believe that this is a conservative estimate, but when estimating it is always best to err on the side of caution

  • Using the answer from #1, what price at that volume covers my costs (including labor) and my profit?

My costs, including labor but excluding printing, are $2,200. The book is 200 pages long and I already entered the cost of printing the book using Print-on-Demand into the above spreadsheet. Using the Book Profit Calculator spreadsheet, I see that I need to price the book at a minimum of $24.95 to break-even, given that the primary audience is 300 strong. This price assumes that I will sell all 300 books at a wholesale discount of 50%. In reality, I know that the margins are often better because I will sell a few at full retail value and I will sell many of the wholesale copies at a 40% discount. Again, I am creating a safe forecast.

  • Is the primary audience going to buy this book regardless of price?

This can be a hard question to answer. Much of the time it is qualitative question. From market research, I know that similar titles have sold at prices ranging from $22.95 to $29.95, and the primary audience did not balk at the higher prices. They are a passionate primary audience and will pay a premium, up to a point.

This is good news. At $29.95, I will make a profit on 61 copies, a net profit of $561 after covering my labor costs, other expenses, and royalties.

  • Beyond the primary audience, can I sell this book to anyone else at a profitable volume?

I believe that this book has the potential to be popular beyond the primary audience, especially in local bookstores (where I can organize signings and talks) and at local outdoor stores (where I can also organize signing and talks).

I have talked with the owners and buyers of the bookstores and outdoor stores. They tell me that $29.95 is too high for their regular customers. They suggest that a price of $22.95 would be perfect.

As much as I would like to price the book at $22.95, that price does not give me a break-even profit based on the estimated size of my primary audience. But I believe in the wider appeal of the book beyond the primary audience. I price the book at $24.95—the minimum break-even price.

The real price of books

The method discussed above takes a micro approach to book publishing and book pricing. Now lets switch to a macro perspective.

Macro is the big picture. It is the entire industry. It is books vs. music vs. movies vs. television.

The real cost of a book to the consumer is not the retail price listed on the cover. The real cost is the time it takes to read the book.

In the example above, the book costs $24.95. If the customer clears $25 per hour at their job, then it costs an hour of their time to buy the book. However, the real cost is in the time it takes to read the book and the other things the customer could be doing during that time.

Let’s estimate that the average reader needs 8 hours to read the 200 page book. For the customer making $25 per hour, that is $200 worth of time. The real cost of the book to the customer is $225. That is an expensive book!

A 2 hour-long, $10 HD movie downloaded from iTunes has a real cost of only $60.

Should this insight affect how I price books? Sometimes, yes. But it depends on the book. Is the book competing with other cultural products? Or does it stand alone? …

Consumer demand for books and price tolerance

There are several good academic research articles out there covering the book industry, including accounting, profits, and pricing.

The demand for books estimated by means of consumer survey data” by Vidar Ringstad Knut Løyland is a good resource to reference while reading this chapter.

Here are the highlights from the article:

  • Books are price sensitive and compete with other cultural goods.
  • Sex and age matter.
  • Single persons and households with small children, especially those with children less than 7 years, are frequent book buyers.
  • The decreased price of substitutes like TV, video, and music could crowd the demand for books.
  • Books are luxury goods.

When asking a question like, “Will the audience buy this book regardless of price?”, I am trying to get at the above points. Is the book a luxury item? Or is it something that the reader needs? Does it compete with other cultural goods? Or does it stand in a class of its own?

If the reader is an average hiker with no navigation skills and no desire to get lost in the woods, then the reader will probably buy a hiking guide because it is a tool that she must have to go hiking, just like good shoes. If there is only one hiking guide to the area she wants to hike in, then the reader cannot be overly price sensitive. If there are multiple guides to the area, then the hiker becomes more price sensitive because there is competition in the market. And if the reader is not sure if she even wants to go hiking, then the book is facing even more price sensitivity.

The points highlighted by Ringstad and Løyland in their study are important to consider beyond the pricing process. The publisher must also take them into perspective while acquiring material and editing material. Will the 800 page sprawling opus sell as well as a 100 page quick and intense read? And which will readers appreciate more? We must remember that we are in the age of short blog posts, tweets, and 30 second to 3 minute YouTube videos. How do books fit into this paradigm?

Using historical data to understand the relationship between price, volume, and profit

I have published books for 5 years and have about 60 titles in print across a diverse range of subjects. Using the consolidated sales data for all the years and all the titles, I have created the following two charts.

Looking at these charts I see that books priced under $10 account for very little of my gross sales and volume.

The majority of the published books fall between $10 and $20. While the $10-$20 range has the highest volume, the gross sales are too heavily weighted toward bottom.

The $30-$40 range has the fewest books, but they surpass in gross sales the majority of the books in the lower price ranges. Yet the volume is not all that impressive when compared to the high volume achieved by some of the $10-$20 books.

How do I interpret this data?

I look at these charts and conclude that, historically, I have under-priced my books. It is clear that assigning low prices to books did not help sales and assigning high prices to books did not hurt sales.

Of course, when I look at these charts I have the benefit market and business specific knowledge not displayed on the charts. Much of that knowledge came from asking the four questions that started this chapter. Asking those four questions has ultimately led me to the conclusion that I must give higher prices to the books I publish and that the primary audiences for the books I publish are not as price sensitive as I once thought.

Concluding thoughts

When choosing a price for a book, publishers must take many variables into account. Failure to consider all the variables can mean the difference between publishing a profitable book and losing money on the book.

The most important aspect of the pricing process is finding the break-even point and ensuring that the primary audience for the book will buy the needed volume to reach that point.