Amazon explains price elasticity

Thursday , 31, July 2014 2 Comments

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive.

It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

The Castalia model is entirely in line with Amazon’s, although we price our books at $2.99 for novellas and $4.99 for novels rather than their suggested $9.99. It would be interesting to know the elasticity between $14.99 and the two lower prices as well, as it could be that we are pricing our books too low to maximize revenue. But, in any event, we are pleased to know that our books are a considerably better bargain than those published by the Big Five publishers.

  • TimP says:

    Smashwords version of this same data suggests that your prices are probably about right. $4 for the ebooks they distribute seems to be about optimum (interestingly with $10 as a close second). (in particular slide 68-91)

    I know for myself $4 seems to be a break point. I think I basically divide prices up like so: $0, $1, $2-3, $4, $5-7, $7-9, $10-12, etc. Obviously everyone is going to be different though, and even on different days and for different books I’m probably going to act differently.

  • The CronoLink says:

    Scalzi is at it again with his carefully-worded BS (well, it seemed carefully-worded to me, but it’s entirely probable I’m wrong)

    Amazon’s latest volley

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