E-book VAT: the other side of the story

From The Bookseller:

In his recent blog, ‘Amazon’s VAT Windfall’, Anthony McGowan expressed concern that the Bezos behemoth had not changed e-book prices following the recent VAT cut, and were set to profit to the tune of millions as a result. He and I have been arguing on Twitter, very politely I might add, about this as I think he’s got it wrong.

Where I do agree with Anthony is regarding Amazon’s monopoly when it comes to e-books. They won’t share figures, so the numbers can’t be confirmed, but I would be amazed if there is any publisher in the UK who doesn’t receive 90% or more of their e-book turnover from Amazon. And for some it will be close to 100%. That is a monopoly, pure and simple.

But are they ignoring the VAT cut and pocketing the difference? In Anthony’s blog he said he had checked and “the prices don’t seem to have come down at all”. I had a look moments after reading his blog and the Kindle charts were full of books at odd prices – £2.07, £3.29, £0.83 – which certainly strike me as ex-VAT. Sure, there were still lots at 99p price points, and I assume Anthony viewed those as evidence of Amazon shenanigans, but there is a perfectly logical explanation for this.

Publishers tend to sell books to Amazon in one of two different ways, using a wholesale or agency model. With the wholesale model, the publisher sets a wholesale price for the e-book – usually an amount that, once VAT is added, results in a .99 RRP – and then sells to Amazon at that price minus any agreed discount. Now that VAT has been scrapped, those 99p prices have dropped by 20%, and that seems to have happened pretty much straight away.

The other prevalent model is the agency model, where publishers set an RRP – again, nearly always a 99p price point – and the retailer sells at that price and deducts a commission. Here the publisher has determined the selling price, in much the same way as they do with RRPs on printed books. Looking through those Kindle charts, I suspect many of the books that have not changed prices are sold on this model.

My take when I first heard about the VAT cut being brought forward was not that Amazon would make a mint, instead I saw it as an opportunity for publishers. Right now, publishers across the UK are deciding what to do with their e-book pricing. Should they reflect the VAT cut so that all e-books are now 20% cheaper than they were? Or do they carry on with a pricing policy that keeps those 99p price points?

If they go with the former, then readers get a 20% saving, which was Rishi Sunak’s intention. If they go with the latter, they increase e-book revenue by 20% and authors will see their royalties go up.

But which is the right thing to do?

Most of our bookshops are closed and the big chains are, it seems, not paying their bills as promptly as they once were. Publishers are facing a big drop in income and this will have a knock-on effect for authors in the next batch of royalty statements. Anecdotally, e-book sales are on the rise during lockdown. If a publisher’s duty is to support its authors, and its own business, then here is a chance to boost one area of turnover when others are taking a beating. It could be argued as the right thing to do.

But the point of the VAT cut was to make digital reading cheaper for consumers. Surely if we don’t ensure e-books are 20% cheaper then we are ripping off readers? And that is a reasonable point but, to be frank, will readers know, or care? The difference between wholesale and agency models means that there is no consistency in e-book pricing at the moment, anyway. And most publishers play around with prices regularly, with promotional offers, so a snapshot of the Kindle charts at any given time will see prices ranging from free to over a tenner.

How can anyone tell if a £3.99 e-book today is actually an old £4.99 e-book minus the VAT or one that has always been £3.99 and the publisher is pocketing the difference? Spoiler: they can’t.

Link to the rest at The Bookseller

As an American who has (alas) only spent several short weeks in Britain, PG doesn’t claim any expertise about the VAT and the ways in which it impacts prices at various stages in the chain between manufacturer and the ultimate consumer of the product and how various participants in that chain may respond to significant changes in the rates at which the VAT is levied.

However, as one who has observed the behavior of Amazon in the US and elsewhere for what has grown to quite a number of years, PG has observed that, with respect to prices for goods which are set by Amazon because Amazon has purchased the goods and is reselling them to consumers (as opposed to retail prices that are set by the owner of the goods when the owner is paying a fee to Amazon for its services in attracting customers, filling and delivering customer orders, processing credit card charges for the purchase, etc.), when Amazon is acquiring the goods and setting the prices, those prices tend to be very competitive when looking at the consumer market as a whole.

(Sorry for the over-long sentence.)

Amazon wants prices for goods on its website to be lower than prices for the same goods when they are sold by other retailers. The Amazon website is designed to highlight and boost the visibility of the lowest-priced vendors. As one of the most basic, but effective examples of this design, when operating in default mode, Amazon’s product presentation engine will usually show it’s best-selling products which tend to highlight the lowest-priced seller of a good at the top of its search results where their offer is most optimally exposed to purchasers.

Should the shopper explicitly want the lowest priced item in the category no matter what, in the upper left corner of the screen, the shopper can easily select “Price: Low to High” where, under some circumstances, the shopper may find that one can of soup is less expensive than four cans of the same brand of soup. In the default best-selling listings, those products that sell best typically provide the best overall value, albeit sometimes requiring the purchase of multiple cans of soup or another product.

This is basically an overly-long explanation that demonstrates that, per one of the claims reported in the OP that lowering or eliminating the VAT on books meant that Amazon would simply increase its profits from the sale of the books by the amount by which the VAT had been lowered is not the way Amazon does business. Even if every other bookseller did not adjust its prices in response to the VAT change, Amazon would do whatever was permitted to sell books at a meaningfully lower price than they were on offer elsewhere.

Amazon makes a great deal of money by maintaining itself as the place where, if a consumer is willing to wait for a couple of days, he/she will acquire a good for less than it could be purchased elsewhere. Amazon is unlikely to endanger that reputation among consumers to grab some money from book purchasers. After all, book purchasers are widely known to purchase other items besides books on a regular basis.

Sam Walton, the founder of Walmart, was an astute observer of human behavior and the ways of making larger profits at retail. His approach? “Pile it high. Sell it cheap.”

“Say I bought an item for 80 cents. I found that by pricing it at $1.00, I could sell three times more of it than by pricing it at $1.20. I might make only half the profit per item, but because I was selling three times as many, the overall profit was much greater. Simple enough.”

Due to its online existence and the extraordinary capacity of its cloud computing operation, Amazon can use techniques that Sam Walton would have loved, but Walmart couldn’t accomplish because Walmart stores were physical and Amazon’s store has always been digital.

From Quartz in 2015:

Amazon is famous for changing prices frequently to test the demand for products or undercut a competitor on hot items like Beats headphones or Razor electric scooters.

A generic King James version of the Holy Bible wouldn’t seem like an obvious candidate for such dynamic pricing.

But data show that Amazon has changed the price of the top Bible in a Google search for “Amazon Bible” more than 100 times since May 2010, according to price-tracking site Camelcamelcamel.

. . . .

The price changes have been significant. At its lowest price on Amazon, this version of the Bible cost $8.49, and at its highest, $16.99.

The shifts in pricing are presumably automated, as Amazon’s computer systems react to rising or falling consumer demand and other factors. But the fact that such a standard, age-old item as the Bible can change in price so frequently and dramatically suggests strongly that dynamic pricing affects almost anything a consumer can buy online.

Amazon changes the price on as many as 80 million items on its site throughout day, and went into overdrive to match prices of its competitors during last year’s holiday shopping season, according to Forbes. Amazon spokesman Scott Stanzel declined to discuss how the company’s dynamic pricing works, telling Quartz that it has ”a cost structure that allows us to adjust our pricing quickly.”

The e-commerce giant is apparently using dynamic pricing on other holy books beyond the Bible. Pricing data show that Amazon’s shifts affect the most-Googled Koran, Torah, and to a lesser extent, Bhagavad Gita, on its site.

Stanzel declined to comment on whether Amazon’s prices change in response to real life events. But it’s interesting that the single largest price shift for the Bible happened around the same time as the world was predicted to end in December 2012. And there was a steady increase in its price when The History Channel’s miniseries “The Bible” originally aired in the US in March 2013.

Link to the rest at Quartz

One of Walmart’s most-used advertising slogans during Walton’s lifetime was “Low Prices Every Day.”

Amazon’s version of that same philosophy might be, “Optimum Prices Every Hour.”

The UK Scraps Its 20-Percent VAT on Digital Books

From Publishing Perspectives:

In the kind of major turnabout that publishing professionals normally can only dream about, Her Majesty’s Treasury in the United Kingdom has issued a statement today (April 30), announcing that as of tomorrow—May 1—the UK’s long-derided value added tax (VAT) on digital publications will be gone.

. . . .

Understandably upbeat, the Publishers Association’s CEO Stephen Lotinga says, “We’re delighted that the government has taken this step to significantly fast-track the plans to scrap VAT on ebooks and journals.

“This is a boost to readers, authors and publishers, especially important at this difficult time,” he says. “We hope that it will enable many more people to easily access and benefit from the comfort, entertainment and knowledge that books provide.”

Until now, the UK’s publishing industry has labored under a 20-percent tax on digital publications, while the print rate had been zeroed.

. . . .

Logic seems to have fallen on the chancellor of the exchequer, Rishi Sunak, who “said the zero rate of VAT will now apply to all e-publications from tomorrow (May 1)—seven months ahead of schedule—potentially slashing the cost of a £12 ebook by £2 and e-newspapers subscriptions by up to £25 a year.” That’s a saving of US$2.52 on a $15 book, and as much as $31 coming off the price of a digital newspaper subscription, by the government’s calculations.

. . . .

“We want to make it as easy as possible for people across the UK to get hold of the books they want whilst they’re staying at home and saving lives. That is why we have fast tracked plans to scrap VAT on all e-publications, which will make it cheaper for publishers to sell their books, magazines and newspapers.”

. . . .

  • The Financial Times has reported that nearly 40 percent of adults surveyed in the UK have said that reading was helping them cope while they stay at home.
  • The Reading Agency released a survey—here written up by our colleague Alison Flood at The Guardian–showing that one in three adults is reading more since the lockdown was announced on March 23.

Link to the rest at Publishing Perspectives

The 2010s were supposed to bring the ebook revolution. It never quite came.

PG’s last post on December 24 was about the following Vox article that purported to talk about what a bust ebooks have turned out to be.

If you missed it in the holiday rush, there were some good comments and, yes, it is a Vox article, so you can assume the author was born yesterday.

From Vox:

At the beginning of the 2010s, the world seemed to be poised for an ebook revolution.

The Amazon Kindle, which was introduced in 2007, effectively mainstreamed ebooks. By 2010, it was clear that ebooks weren’t just a passing fad, but were here to stay. They appeared poised to disrupt the publishing industry on a fundamental level. Analysts confidently predicted that millennials would embrace ebooks with open arms and abandon print books, that ebook sales would keep rising to take up more and more market share, that the price of ebooks would continue to fall, and that publishing would be forever changed.

Instead, at the other end of the decade, ebook sales seem to have stabilized at around 20 percent of total book sales, with print sales making up the remaining 80 percent. “Five or 10 years ago,” says Andrew Albanese, a senior writer at trade magazine Publishers Weekly and the author of The Battle of $9.99, “you would have thought those numbers would have been reversed.”

And in part, Albanese tells Vox in a phone interview, that’s because the digital natives of Gen Z and the millennial generation have very little interest in buying ebooks. “They’re glued to their phones, they love social media, but when it comes to reading a book, they want John Green in print,” he says. The people who are actually buying ebooks? Mostly boomers. “Older readers are glued to their e-readers,” says Albanese. “They don’t have to go to the bookstore. They can make the font bigger. It’s convenient.”

Ebooks aren’t only selling less than everyone predicted they would at the beginning of the decade. They also cost more than everyone predicted they would — and consistently, they cost more than their print equivalents.

. . . .

When the Kindle entered the marketplace in 2007, Amazon had a simple sales pitch: Anyone with a Kindle could buy all the ebooks they wanted through the online marketplace, and many of those ebooks — in fact, all New York Times best-sellers — would cost no more than $9.99.

$9.99 is a steal for a new book. At the time, most hardcovers were averaging a list price of about $26, and many cost more. But for Amazon, this price point was an apparent no-brainer. The first generation Kindle was expensive, and value conscious customers needed some incentive to buy into it. Why would anyone spend $399 on an e-reader if they couldn’t expect to make up at least part of the cost in a discount on ebooks?

And while this point is often glossed over, Amazon was actually following a precedent set by publishers in its pricing model. In her opinion for US v. Apple, Judge Denise Cote noted that before 2009, most publishers discounted ebooks by 20 percent from the price of a hardcover, which often led to a suggested list price of around $9.99.

But by 2009, publishers had changed their minds. Now they considered the idea of $9.99 ebooks to be an existential threat. Printing and binding and shipping — the costs that ebooks eliminated — accounted for only two dollars of the cost of a hardcover, publishers argued. So the ebook for a $20 hardcover book should cost no less than $18. And according to publishers, by setting the price of an ebook at $9.99, Amazon was training readers to undervalue books.

. . . .

Before we delve further into the weeds here, a quick primer on how book prices are set. Print books are generally sold under a wholesale model, which works like this: First, the publisher will set a suggested list price for a book; say, $20. Then it will sell the book to resellers and distributors for a discount off that suggested list price. So if Simon & Schuster wants to sell a $20 book to Amazon, Amazon might negotiate a discount of 40 percent for itself and end up paying Simon & Schuster only $12 for that book.

But once Amazon owns the book, it has the right to set whatever price it would like for consumers. The $20 list price that Simon & Schuster set was just a suggestion. Under the wholesale model, Amazon is free to decide to sell the book to readers for as little as a single dollar if it chooses to.

Until 2010, ebooks were sold through the wholesale model too. So if Simon & Schuster was publishing a $20 hardcover, they could choose to set a suggested list price of $18 for the ebook — two dollars less than the hardcover — and then sell that ebook to Amazon at a 40 percent discount for $10.80. And Amazon could, in turn, feel free to sell that ebook for $9.99 and swallow a loss of 81 cents.

To be clear, the numbers we’re using here to get a handle on how pricing works are imaginary. (Amazon negotiates different discounts for itself at different times from different publishers, sometimes around 40 percent, but at other times higher and at other times lower.) But we do know that Amazon was making very, very little money off ebook sales in 2010, and was in fact probably losing money on most of them.

. . . .

“Amazon can still discount whatever they like on the print side,” explains Jane Friedman, a publishing consultant and the author of The Business of Being a Writer. On the ebook side, however, Amazon now lists publisher-mandated prices, often with the petulant italic addition “Price set by seller.” “So the market is very weird, and often the ebook costs more than the print,” Friedman says. “Sometimes it feels like Amazon is trying to make the publishers look ridiculous.”

And because ebooks are often more expensive than Amazon’s heavily discounted print books, traditional publishing’s ebook sales seem to have fallen off — and Amazon is more dominant than ever in the print book market. “It’s so much cheaper,” says Friedman.

In this new market, high ebook prices make it harder than ever for young authors in particular to survive. “The split has really hurt debut novelists,” says Friedman. “It’s hard to ask readers to take a chance on someone unproven at that high price point, and since the ebook market does lean towards fiction, it’s hurting the new people.”

Self-published authors, meanwhile, are flourishing. They’re allowed to set their own ebook prices just like publishers are — and consistently, they set their prices very, very low. “It’s a shadow market,” Friedman says. “Novelists with huge backlists go and put them out as ebooks independently. And if a reader has a choice between reading this great series at $2.99 a pop or a $12 novel, what are they going to pick?”

Antitrust law professor Christopher Sagers argues that the outcome of the DOJ’sebooks case shows that the real problem with the industry is not just that Amazon has a monopoly. The big trade publishers, he says, have a monopoly too.

“There used to be hundreds of publishing companies. They’re now mostly owned by five,” Sagers says. (After that Department of Justice lawsuit, Penguin merged with Random House, and the Big Six became the Big Five.) “Why are ebooks expensive? It’s not because Amazon is vicious. It’s because there’s no competition at the wholesale level.”

. . . .

The Big Five publishers “are huge, and they have been able to put in place practices that are kind of unfair and that authors have to put up with,” Friedman allows. “That said, they need that kind of size to be able to effectively deal with something like Amazon. If you look at an indie publisher, I wouldn’t want to be one of them.”

Link to the rest at Vox and thanks to DM for the tip.

PG notes that the OP devotes one paragraph to independent authors and that paragraph implies that indie authors are primarily publishing their revered backlist titles.

Unlike Big Publishing, nobody is really beating any publicity drums for indie authors.

One other point the OP doesn’t discuss is that Barnes & Noble is still cratering and, when it finally goes down the drain, retail bookselling via physical bookstores will take a huge hit and publishers who have failed to develop their chops selling ebooks and encouraging readers to buy them will regret that their profitability will take an enormous hit.

Fixed Book Prices in Germany

From Publishing Perspectives:

A new defense of Germany’s fixed prices for books has been issued this morning (November 8) by the Börsenverein des Deutschen Buchhandels—the country’s publishers and booksellers association.

In 2018, the Börsenverein commissioned new research on the issue—described as a team of economists and a legal scholar—to study what the organization today calls “the impact and legitimacy of Germany’s fixed book price system in an independent and comprehensive manner using the most up-to-date information possible.”

. . . .

For some brief background on the issue, fixed prices on books in Germany have long been a tradition and were codified in law in 2002. The effect of the fixed price is that a book—whether sold online or in a physical retail setting—has exactly the same price nationwide. A publisher sets the price for its books in each format. After 18 months, that publisher can cancel the fixed price, and discounting is allowed in cases of defective copies or bulk pricing.

As today’s media messaging points out, 13 European countries have fixed pricing on books, and those nations include Austria, Spain, Italy, the Netherlands, Norway, and Hungary. Outside of Europe, books are sold on a fixed price system in markets including Mexico, Argentina, and Japan.

And as it turns out, the Börsenverein’s study is a kickoff to a campaign hashtagged #dankbuchpreisbindung, or “thank fixed book prices.”

The organization is offering posters, site banners, email signature graphics, and other collateral materials to spread messages—in bookstores and other venues—such as “Price Comparisons Are Futile” and “We Have More [Books] for the Same Price.” This signage also reads, “You pay the same for a book anywhere in Germany. With us you get competent advice and a smile for free.”

. . . .

And the release of the new pro-price-fixing report today—in news reports characterized as costing some €300,00—is an answer, in part, to a report from the country’s Monopolies Commission which, in 2018, recommended discarding fixed prices on books. In very general terms, the commission’s opinion last year indicated that price fixing wasn’t based on a clear demonstration of its value and was out of step with contemporary market dynamics.

. . . .

The key statement issued today by the Börsenverein is: “Germany’s system of fixed book prices and the extensive landscape of bookshops it supports play a key role in the dissemination of books as essential cultural goods, while also fostering the quality and variety of books available to consumers. The system is also in line with EU law.”

. . . .

In a prepared statement, Skipis is quoted, saying, “Once again, it’s all there in black and white. Germany’s fixed book price system acts as a guarantor of quality and diversity on the book market.

“It’s one of the factors contributing to Germany’s reputation as a role model across the globe and its status as the second-largest book market in the world.

“The findings show very clearly that fixed book prices fulfill their obligation to protect books, especially in the contemporary market situation.”

. . . .

“For almost 150 years now, Germany has had a system of fixed book prices. The system guarantees a dense network of bookshops that act as key locations for the dissemination of literature and as indispensable distribution channels, especially for small and medium-sized publishers. Precisely because of this key role, price fixing for books is also widely supported in the political sphere.”

. . . .

Beurich, the bookseller, adds, “The research findings show how indispensable the stationary book trade is, especially for cultural diversity in our country. When bookstores disappear, people lose important contact points and thus access to books. Bookstores are places that foster exchange among local residents, while also promoting literary education, cultural work, literacy and a love of reading.

“The study also showed that a number of highly interesting books and authors would never have been discovered without stationary bookstores.”

. . . .

“Fixed book prices make books less expensive on average. Following the abolition of the system of fixed book prices in the UK, the average price of books there rose by 80 percent between 1996 and 2018. The increase was much stronger than in the same time period in countries that have fixed books prices, such as France (+24 percent) and Germany (+29 percent).

“Only bestsellers are less expensive in the UK than in Germany. With roughly the same share in overall sales, the 500 top-selling books make up roughly 26.6 percent of total revenue in Germany; in the UK, they make up 21.5 percent of total revenue. The analysis of the 50,000 best-selling books in the UK from 2005 to 2018 showed that the higher the sales rank a book has, the higher the average discount retailers offer on the publishers’ suggested retail price, and therefore the less expensive the book will be for the client.”

. . . .

“The stationary book trade fosters the discovery of unknown titles and authors. The studies showed that sales at stationary bookshops foster the future success of a large number of lesser-known titles and authors. Out of 420 fiction titles that did not reach the top twenty spots on the bestseller lists until after three weeks or more between 2011 and 2018, sales in local bookshops were solely responsible for that rise in 237 cases (56.4 percent) and largely responsible for that rise in the case of 171 other titles (40.7 percent).”

. . . .

  • “The system of fixed book prices in Germany does not hinder market access for foreign mail-order companies or online sellers;
  • “If, in a hypothetical case, there was an existing interference with the free movement of goods, it would be justified by the protection of books as essential cultural goods; and
  • “Germany’s system of fixed book prices is compatible with European competition law.”

Link to the rest at Publishing Perspectives

“[A]ll is in a man’s hands and he lets it all slip from cowardice, that’s an axiom. It would be interesting to know what it is men are most afraid of. Taking a new step, uttering a new word is what they fear most.”

– Fyodor Dostoevsky, Crime and Punishment

New Ways of Selling Books Clash with France’s Old Pricing Rules

From The Economist:

A book is so much more than mere ink and paper. So insist French booksellers, who for nearly four decades have successfully lobbied to keep the forces of the free market at bay. A law passed in 1981 bans the sale of any book at anything other than the price decreed by its publisher. Authorities are cracking down on those trying to flog the latest Thomas Piketty or j.k. Rowling at a discount.

The fixed-price rule is meant to keep customers loyal to their local bookshop and out of the clutches of supermarkets and hypercapitaliste American corporations. But the advent of e-commerce and e-readers has prompted questions worthy of their own tomes. Can you fix the price of a book if it is part of an all-you-can-read subscription service? Are audiobooks books at all? And what of authors who self-publish?

Tweaks have been made to preserve the principle of one book, one price. In 2011 the rule began to apply to digital tomes. Free delivery by online sellers was prohibited on the grounds it implied a subsidy on the delivered books (prompting websites to charge all of €0.01 for postage). But a new challenge to the policy is proving thornier.

Used books are exempt from the pricing rule. Third-party sellers on Amazon are accused of using this as a way to apply forbidden discounts: selling brand-new books as “second-hand” to make them cheaper. So fans of bleak fiction can purchase a copy of the latest Michel Houellebecq novel, “Sérotonine”, for €11.71 ($13.21) on Amazon, roughly half its mandated price. Its seller claims it is in “perfectly new” condition.

Amazon claims its practices are legal. But booksellers are fuming, and their political allies with them.

. . . .

Even with a plethora of subsidies, bookshops are among the least profitable retail businesses. Books are expensive in France—an odd way to encourage people to buy more. For now, constraining the market in the name of l’exception culturelle remains an article of faith for French policymakers. “On the internet you find what you look for,” Mr Riester told his literary allies. “But only in a bookshop do you find what you were not looking for.”

Link to the rest at The Economist

PG suggests that ebooks and the Internet make protectionist laws difficult, if not impossible, to enforce without governments attempting to disable the Internet.

PG has always loved books and bookstores, but acquiring a book through a physical bookstore is becoming a rarer and rarer practice for him (and, from the looks of the physical bookstores he has entered in the past couple of years, for a lot of other readers as well).

Amazon has spoiled PG by feeding his appetite for books on obscure and exotic topics (as perceived by most other readers) and, fortunately, PG’s local library offers an enormous online collection of ebooks through a regional library association, so an unrealistically high online price set by a publisher can also be avoided.

As an example, via Overdrive through his local library, PG is currently reading the ebook version of the English translation of Stalingrad, by Ukranian author (and Jew) Vasily Grossman, a long-suppressed book about the epic siege of that city by the German army during World War II. (PG first mentioned the book here.)

Given the publisher’s price for the printed version of Stalingrad, PG might not have risked adding it to his large collection of abandoned-partway-through-because-it-turned-out-not-to-be-PG’s-cup-of-tea physical books. Also, PG is less entranced by the chest-loading involved in reading thousand-page printed books while lying in bed than he was in former days.

Regarding the OP’s characterization of happy accidents of discovery in price-fixed physical bookstore, PG thinks most readers are far more likely to experience such discoveries online rather than in meatspace.

 

Yes, Retailers Are Colluding to Inflate Prices Online

From Fast Company:

Have you ever searched for a product online in the morning and gone back to look at it again in the evening only to find the price has changed? In which case you may have been subject to the retailer’s pricing algorithm.

Traditionally when deciding the price of a product, marketers consider its value to the buyer and how much similar products cost, and establish if potential buyers are sensitive to changes in price. But in today’s technologically driven marketplace, things have changed. Pricing algorithms are most often conducting these activities and setting the price of products within the digital environment. What’s more, these algorithms may effectively be colluding in a way that’s bad for consumers.

Originally, online shopping was hailed as a benefit to consumers because it allowed them to easily compare prices. The increase in competition this would cause (along with the growing number of retailers) would also force prices down. But what are known as revenue management pricing systems have allowed online retailers to use market data to predict demand and set prices accordingly to maximize profit.

These systems have been exceptionally popular within the hospitality and tourism industry, particularly because hotels have fixed costs, perishable inventory (food that needs to be eaten before it goes off), and fluctuating levels of demand. In most cases, revenue management systems allow hotels to quickly and accurately calculate ideal room rates using sophisticated algorithms, past performance data and current market data. Room rates can then be easily adjusted everywhere they’re advertised.

. . . .

These revenue management systems have led to the term “dynamic pricing.” This refers to online providers’ ability to instantly alter the price of goods or services in response to the slightest shifts in supply and demand, whether it’s an unpopular product in a full warehouse or an Uber ride during a late-night surge.

. . . .

However, new algorithmic pricing programs are becoming far more sophisticated than the original revenue management systems because of developments in artificial intelligence. Humans still played an important role in revenue management systems by analyzing the collected data and making the final decision about prices. But algorithmic pricing systems largely work by themselves.

. . . .

The algorithms study the activity of online shops to learn the economic dynamics of the marketplace (how products are priced, normal consumption patterns, levels of supply and demand). But they can also unintentionally “talk” to other pricing programs by constantly watching the price points of other sellers in order to learn what works in the marketplace.

These algorithms are not necessarily programmed to monitor other algorithms in this way. But they learn that it’s the best thing to do to reach their goal of maximizing profit. This results in an unintended collusion of pricing, where prices are set within a very close boundary of each other. If one firm raises prices, competitor systems will immediately respond by raising theirs, creating a colluded non-competitive market.

Monitoring the prices of competitors and reacting to price changes is normal and legal activity for businesses. But algorithmic pricing systems can take things a step further by setting prices above where they would otherwise be in a competitive market because they are all operating in the same way to maximize profits.

This might be good from the perspective of companies, but is a problem for consumers who have to pay the same everywhere they go, even if prices could be lower. Non-competitive markets also result in less innovation, lower productivity and, ultimately, less economic growth.

. . . .

The European Commission has warned that the widespread use of pricing algorithms in e-commerce could result in artificially high prices throughout the marketplace, and the software should be built in a way that doesn’t allow it to collude.

Link to the rest at Fast Company

In the US, price-fixing is illegal under U.S. antitrust laws.

From The Federal Trade Commission:

Price fixing is an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.

A plain agreement among competitors to fix prices is almost always illegal, whether prices are fixed at a minimum, maximum, or within some range. Illegal price fixing occurs whenever two or more competitors agree to take actions that have the effect of raising, lowering or stabilizing the price of any product or service without any legitimate justification. Price-fixing schemes are often worked out in secret and can be hard to uncover, but an agreement can be discovered from “circumstantial” evidence. For example, if direct competitors have a pattern of unexplained identical contract terms or price behavior together with other factors (such as the lack of legitimate business explanation), unlawful price fixing may be the reason. Invitations to coordinate prices also can raise concerns, as when one competitor announces publicly that it is willing to end a price war if its rival is willing to do the same, and the terms are so specific that competitors may view this as an offer to set prices jointly.

Not all price similarities, or price changes that occur at the same time, are the result of price fixing. On the contrary, they often result from normal market conditions. For example, prices of commodities such as wheat are often identical because the products are virtually identical, and the prices that farmers charge all rise and fall together without any agreement among them. If a drought causes the supply of wheat to decline, the price to all affected farmers will increase. An increase in consumer demand can also cause uniformly high prices for a product in limited supply.

. . . .

Antitrust scrutiny may occur when competitors discuss the following topics:

  • Present or future prices
  • Pricing policies
  • Promotions
  • Bids
  • Costs
  • Capacity
  • Terms or conditions of sale, including credit terms
  • Discounts
  • Identity of customers
  • Allocation of customers or sales areas
  • Production quotas
  • R&D plans

A defendant is allowed to argue that there was no agreement, but if the government or a private party proves a plain price-fixing agreement, there is no defense to it. Defendants may not justify their behavior by arguing that the prices were reasonable to consumers, were necessary to avoid cut-throat competition, or stimulated competition.

. . . .

Q: The gasoline stations in my area have increased their prices the same amount and at the same time. Is that price fixing?

A: A uniform, simultaneous price change could be the result of price fixing, but it could also be the result of independent business responses to the same market conditions. For example, if conditions in the international oil market cause an increase in the price of crude oil, this could lead to an increase in the wholesale price of gasoline. Local gasoline stations may respond to higher wholesale gasoline prices by increasing their prices to cover these higher costs. Other market forces, such as publicly posting current prices (as is common with most gasoline stations), encourages suppliers to adjust their own prices quickly in order not to lose sales. If there is evidence that the gasoline station operators talked to each other about increasing prices and agreed on a common pricing plan, however, that may be an antitrust violation.

Q: Our company monitors competitors’ ads, and we sometimes offer to match special discounts or sales incentives for consumers. Is this a problem?

A: No. Matching competitors’ pricing may be good business, and occurs often in highly competitive markets. Each company is free to set its own prices, and it may charge the same price as its competitors as long as the decision was not based on any agreement or coordination with a competitor.

Link to the rest at The Federal Trade Commission

Price fixing is illegal whether competitors set minimum or maximum prices or establish a range of prices within which they will price their goods.

One of the key elements of illegal price-fixing is an agreement (written, verbal, or inferred from conduct) among competitors. A third party that mediates, organizes or facilitates price-fixing among competitors is also guilty of price fixing. (See, for example, Apple and a group of major publishers agreeing to fix prices on ebooks and force Amazon to increase its ebook prices, in PG’s indescribably humble opinion, one of the more inept attempts at price fixing in the hundred-plus years that the practice has been outlawed in the U.S.).

The OP raises an interesting question about whether pricing systems executed by computers using artificial intelligence constitute illegal price fixing.

Under present law, it is clear that price-fixing agreements established among competitors through a third party are illegal and, per Apple and other cases, the third party is also chargeable with price-fixing. If each competitor appoints a third party and the third parties agree to fix prices or set up a system for establishing uniform prices, PG believes that’s also a slam-dunk price-fixing violation.

The issue of whether artificial intelligence systems that look at the same market data and set prices in a similar manner are engaged in price-fixing is very interesting.

Competitors who each look at market, pricing and available competitor data without using artificial intelligence and set the same prices are not guilty of price-fixing so long as there is no agreement between them to fix prices. Competitor A can look at the prices being charged by Competitor B and use that information to adjust its prices. As described in the OP, that’s how many gas stations typically set prices within a given geographic area.

In the gas station illustration, each station is sending pricing signals to the general public, including other gas stations.

If gas station A reduces its price, other gas stations may respond by matching the price cut, cutting prices below those of A as a competitive move, or leaving prices higher than A and banking on other competitive advantages – a more convenient location or better prices on Diet Coke, for example – to offset A’s pricing advantages.

Not matching a price cut represents a temporary strategy, however, because, based on its own decision factors, a competing station can adjust its prices at any time if it perceives its pricing strategy is less than optimum.

Going back to the OP, PG doesn’t see that AI systems watching the prices other AI systems are setting constitutes illegal collusion. If the AI systems somehow communicated with each other and simultaneously increased or dropped prices, the owners of those systems might be guilty of price-fixing.

However, in the absence of some sort of connection beyond closely watching the public pricing activities of competitors, PG doesn’t see any sort of illegal collusion or conspiracy to fix prices. Setting prices to maximize profits is not, by itself, a violation of any law of which PG is aware. It’s a fundamental principle of capitalist economies.

Back to the gas station example – If two gas stations are located across the street from each other and each station assigns an employee to watch the posted prices of the other station and immediately change prices whenever the station across the street changes its prices, that’s not an illegal price-fixing agreement between the two stations.

 

 

Amazon’s Curious Case of the $2,630.52 Used Paperback

From The New York Times:

Many booksellers on Amazon strive to sell their wares as cheaply as possible. That, after all, is usually how you make a sale in a competitive marketplace.

Other merchants favor a counterintuitive approach: Mark the price up to the moon.

“Zowie,” the romance author Deborah Macgillivray wrote on Twitter last month after she discovered copies of her 2009 novel, “One Snowy Knight,” being offered for four figures. One was going for “$2,630.52 & FREE Shipping,” she noted. Since other copies of the paperback were being sold elsewhere on Amazon for as little as 99 cents, she was perplexed.

“How many really sell at that price? Are they just hoping to snooker some poor soul?” Ms. Macgillivray wrote in an email. She noted that her blog had gotten an explosion in traffic from Russia. “Maybe Russian hackers do this in their spare time, making money on the side,” she said.

. . . .

“Amazon is driving us insane with its willingness to allow third-party vendors to sell authors’ books with zero oversight,” said Vida Engstrand, director of communications for Kensington, which published “One Snowy Knight.” “It’s maddening and just plain wrong.”

. . . .

The wild book prices were in the remote corners of the Amazon bookstore that the retailer does not pay much attention to, said Guru Hariharan, chief executive of Boomerang Commerce, which develops artificial intelligence technology for retailers and brands.

Third-party sellers, he said, come in all shapes and sizes — from well-respected national brands that are trying to maintain some independence from Amazon to entrepreneurial individuals who use Amazon’s marketplace as an arbitrage opportunity. These sellers list products they have access to, adjusting price and inventory to drive profits.

Then there are the wild pricing specialists, who sell both new and secondhand copies.

“By making these books appear scarce, they are trying to justify the exorbitant price that they have set,” said Mr. Hariharan, who led a team responsible for 15,000 online sellers when he worked at Amazon a decade ago.

Amazon said in a statement that “we actively monitor and remove” offers that violate its policies and that examples shown it by The Times — including the hardcover version of the scholarly study “William T. Vollmann: A Critical Companion,” which was featured for $3,204, more than 32 times the going price — were “in error, and have since been removed.” It declined to detail what its policies were.

. . . .

Buying books on Amazon can be confusing, because sometimes the exact same book can have more than one listing.

. . . .

“Let’s be honest,” said Peter Andrews, a former Amazon brand specialist who is manager of international client services at One Click Retail, a consulting firm. “If I’m selling a $10 book for $610, all I need to do is get one person to buy it and I’ve made $600. It’s just a matter of setting prices and wishful thinking.”

One of the sellers of Ms. Macgillivray’s book is named Red Rhino, which says it is based in North Carolina. The bookseller’s storefront on Amazon is curiously consistent. One of the first books on the store’s first page was Anthony Bourdain’s “Kitchen Confidential.” It was priced at $607, a hundred times what it cost elsewhere on Amazon.

All the books on the first few pages of the storefront — including such popular standbys as “Fahrenheit 451,” “The Very Hungry Caterpillar” and “1984” — also go for $600.

Link to the rest at The New York Times and thanks to Nate for the tip.

PG says buying dishwashing detergent in Kroger can be confusing because Costco can sell the exact same detergent for a different price. And so can 7-Eleven. With all the confused consumers, it’s a miracle that there are any clean dishes in existence. Maybe that’s why Costco also sells clean dishes.

 

Five Years is Forever in Indie Publishing

From Dean Wesley Smith:

Well, I spent the last two nights going back and trying to update and then even fisk my own post from five years ago about pricing. What a fool’s errand.

The post was so out of date, I just kept shaking my head in amazement and wondering who wrote it.

I was looking at it through 2017 glasses and a ton of new knowledge. Stunning, just stunning how many changes in this business have happened.

. . . .

Electronic Pricing… Novels

Genre matters. Range from $3.99 to $6.99, with romance being on the lower side, mystery on the upper side.

Length does not seem to matter at all.

All the studies have shown that you get above $6.99 and you start hitting price resistance for electronic books unless the book is something really special.

You go below $3.99 and you leave yourself no room for discounting or short-term sales.

You get down into the 99 cent area and you are in a trash ghetto.

And yes, I do know about the stupidity of ever-free. Just say no. However, doing a deep discount on a first novel of a series will get you readers. But make sure those readers pay something otherwise you attract the wrong kinds of readers. And secondly, you have to have the rest of the series priced decently for genre to make the first book discount look worthwhile.

. . . .

Paper Pricing… Novels

The old general rule of $2.00 profit in extended distribution in CreateSpace has become meaningless. Get your price down as much as you can. Under $10 is the best for trade paper. $12.99 is fine as well. Above that you hit resistance unless the book is longer.

Length not only matters, it causes the price to go up. You have no choice, but try to keep the cost down as low as possible.

If you want to try to do some bookstore distribution (a folly in 2017 because as Author Earnings have reported, almost 80% of paper books are sold online these days. But if you want to try, go to IngramSpark to get into the Ingram Catalog. (Yes, you can do two editions, one on CreateSpace just for Amazon and the other at Ingram for larger distribution.

Link to the rest at Dean Wesley Smith

Here’s a link to Dean Smith’s books. If you like an author’s post, you can show your appreciation by checking out their books.

The Visibility Gambit

From David Gaughran at Let’s Get Digital:

Kindle Unlimited has received a fair bit of bad press over the last couple of years – some of it from me – but I want to balance that by looking at the positives.

Most pertinent is KU’s popularity with readers, meaning there can be huge opportunity for authors. Especially so if you make full use of the tools Amazon gives you, and understand that it’s all about visibility.

Enrolling in KU comes at a well-documented cost: exclusivity. But it’s the potential benefits I want to focus on today because some of that might be getting lost in the (well justified) complaints about scammers, transparency, and falling pay rates. Even though those rates have dropped by around 20% this year alone, KU is still paying out more dollars to indie authors than all non-Amazon retailers combined. And I think indies need to be selfish and do what’s best for them – whatever they decide that may be.

The other price of staying out of KU is arguably the bigger one: visibility. Each borrow is counted as a sale for rank purposes, and borrows can make up 50%-80% (or more) of a KU book’s rank – unless you are down in the telephone number rankings and invisible to everyone.

Borrows Cannibalizing Sales

When KU first launched the big debate among self-publishers was whether borrows would cannibalize sales – an important consideration when sales are more lucrative and puny humans tend to need food several times a day.

And it turns out they do, but of the books not enrolled in KU.

Think about it from the reader’s perspective, where the experience really is frictionless. Let’s say you have already shelled out for the KU subscription. You go scooting around the charts on Amazon looking for a new read and spot a few books that look interesting. One is $2.99, the next is $7.99, and the other is in KU. Which do you download?

The answer is obvious.

Link to the rest at Let’s Get Digital

Amazon’s Naggar tells publishers to slash e-book prices

From The Bookseller:

Amazon’s publishing chief David Naggar has said publishers should slash their e-book prices to 99p to sell more books. However, publishers have retorted that this move would be “economically unwise” and would damage the whole book supply chain.

Speaking to the Daily Mail, David Naggar, v.p. of Kindle Content at Amazon.com, suggested that traditional publishers should follow the lead of self-published authors when setting e-book prices, arguing that a lower price point is a form of marketing which would encourge more people to buy digital books.

“I look at price as a tool for visibility. You can either spend a lot of money on marketing or you can invest it in a super-low price until they get the flywheel going of the recommendation engines – and this is just for Amazon”, Naggar said.

He added: “What self-published authors will do is they will publish a book and sell it for 99p right out of the gate… Publishers [with new authors] could much more afford to do that than self-published authors. If I have two books in front of me and I don’t know either author, and one book costs £9.99 and the other is £2.99, which one am I going to take?”

However, professionals in the industry have pointed out there are big differences between traditional and self-publishing business models, with Nicola Solomon, chief executive of the Society of Authors, branding Naggar’s comments as “naïve”.

“He makes a direct comparison between publishing companies and self-published authors, but conveniently avoids the fact that the economics are completely different”, she said. “Self-published authors on the Kindle Direct Publishing (KDP) platform earn between 35%-70% of the e-book retail price (where traditionally-published authors earn 25% royalty on e-books)– that’s why they can discount to that level and still enjoy a decent income if their book is successful. But I doubt Naggar has considered the likely impact on the incomes of traditionally published authors if their e-books were discounted to 99p as standard. The routine discounting and implied devaluing of printed books – often at the authors’ expense – is already a big problem. The last thing we need is to encourage even more discounting on digital platforms.”

Stephen Lotinga, chief executive of the Publisher’s Association, also noted the difference in business models and added that Amazon thinks they have publishers “over a barrel” because of its high e-book market share – estimated to be around 90% in the UK.

. . . .

According to statistics from the Publishers Association’s Annual Yearbook, sales of trade e-books fell by 17% in 2016 to £204m.

Alessandro Gallenzi, publisher at Alma Books, argued that publishing books and nurturing authors requires long-term investment and that lowering the selling price of titles is “not only economically unwise”, but “damages the whole book supply chain – author-agent-publisher-wholesaler-bookseller-end user”. He added that cheap prices damage authors the most because it “devalues” and “homogenises” their work.

He added: “It is damaging also, in the longer term, for Amazon, because it is devaluing its offer across the board, when in fact it should be looking at encouraging publishers to increase their available e-book range. I think some publishers (and authors) are still reluctant to see their books be digitised, and perhaps Amazon’s drive towards skeleton pricing is one of the deterrents. I know I have already said it, but I’ll say it again: a book is not like a banana!”

. . . .

However, Matthew Lynn, c.e.o. of e-book publisher Endeavour Press, which recently launched a print arm, on the contrary maintained that “the market decides the price, and it’s the job of the publisher to make money at that price”, adding: “If you can’t make money, then lower your costs”.

. . . .

Andrew Franklin, m.d. of Profile Books, added that the self-published 99p Amazon e-book “bears no comparison whatsoever to a real book properly published”, and alluded to Amazon’s unwillingness to share data about the e-book market.

“The self-published 99p Amazon e-book bears no comparison whatsoever to a real book properly published. That is why the successful self-published authors will always move to mainstream publishers when they have a chance,” he said. “And there are almost no examples of people moving the other way. Of course I respect David Naggar’s position.  He has access to an enormous amount of data that nobody else ever sees. But I wholly disagree.”

Link to the rest at The Bookseller

PG says:

  1. Amazon sells more books than anyone else.
  2. Amazon sells more ebooks than anybody else.
  3. Amazon owns the world’s largest cloud computing system, Amazon Web Services.
  4. Among many other things, Amazon uses AWS to track:
    1. the impact of pricing upon the behavior of hundreds of millions of customers
    2. choosing from about 400 million different products (including books)
    3. sold and priced by hundreds of thousands of independent merchants (and Amazon)
    4. on a world-wide basis

But the chief executive of the Society of Authors (who hasn’t performed a math calculation beyond determining the amount of a restaurant tip in dozens of years and who calls tech support to reboot his iPhone several times a week) knows more about the optimum price of a book than Amazon does.

The cruelest insult of all was mentioning that self-published authors understand ebook pricing better than the humphing old boys of British publishing.

PG suggests that when someone says Amazon is devaluing books, what they really mean is Amazon is devaluing publishers.

But, nurturing!

It costs money to nurture. The price of nurts has soared over the past several years. Amazon is a mortal threat to nurticulture.

.

.

Save the Nurts!

What I’ve learned from giving my ebook away

From Chris Meadows via TeleRead:

So, I gave away a total of 703 copies of my ebook, The Geek’s Guide to Indianapolis, over the last five days, Friday through Tuesday. That’s considerably more than the 200 or so I gave away the last time I made it free, over just a Saturday and Sunday. What did I discover over the course of this giveaway?

For one thing, giving your ebook away only over the weekend might be a mistake; my two busiest days, in which I gave away nearly 200 copies each, were Friday and Monday. Saturday, Sunday, and Tuesday all hovered around the 100 mark.

Out of the giveaway, I picked up seven more five-star reviews, for a grand total of ten. It’s really rather impressive. I’m surprised i haven’t picked up any one-star “spoilers” yet, from people who weren’t as impressed—especially after I was fairly blatant in promoting it some places, such as Reddit. (But please don’t consider this an invitation!)

. . . .

And the promotion has had some other rewards as well. For one thing, I did pick up 1,353 total Kindle Unlimited page views over the weekend. Part of the reason I’d put the book up for free was that I’d heard that might happen. The only thing is, I’m not sure how much actual cash those reads are likely to translate into. How can I tell?

That’s not the only reward, either. A bit of an unexpected one is that I picked up $58.50 in Amazon Affiliate referral fees over the last week. That’s about half of what I’ve made from the book itself since first publishing it. A few of those are recognizably from Teleread articles I’ve done, such as Ready Player One or a SanDisk 32 GB SD card, but most of them are completely unfamiliar. I can only imagine that a lot of the people who followed the link to my book—which had my affiliate code built in—ended up making other purchases while they were there.

Link to the rest at TeleRead

Amazon’s Taking Another Bite of the Publishing Pie

From The Authors Guild:

The Authors Guild is deeply disturbed by Amazon’s new policy of allowing third-party book resellers to claim featured status in the “buy boxes” on Amazon. In a move that’s very likely to cut into publishing industry profits even more, Amazon will no longer automatically assign the main buy box for each hard copy, paper, audio and Kindle edition to the copies that Amazon distributes on behalf of the book’s publisher. Rather, a secret algorithm—which reportedly weighs factors such as price, availability, and delivery time, will now decide which seller (i.e., Amazon or a third party re-seller) gets the buy box. Amazon’s new policy states that “eligible sellers will be able to compete for the buy box for Books in new condition.” What this means is that second-hand book distributors—who often sell at extremely steep discounts—will be able to claim that premium real estate if they can beat out the publishers’ copies under the algorithm.

Until now, the second-hand book sellers, who offer books for as little as a penny, have been listed below the featured option, in much smaller font, as second-tier “Used” and “New” copies on a book’s product page, never as the default seller. While Amazon alone has the statistics, common sense tells us that the vast majority of purchases are made via the main buy buttons and not through the links to the other “new” and “used” copies. So, when the buy button is assigned to a third-party seller because its prices are lower and it can deliver quickly, most of the sales will be redirected to that third-party seller. In other words, those $.01 “new” or “new condition” copies that seem to be available for almost every book may well end up featured. (As a practical matter, most second-hand sellers today are slower than Amazon at fulfilling hard-copy purchases, but that could change and we do not know how Amazon weighs the factors.) The problem with this outcome from an author’s perspective is that neither the publisher nor the author gets a cent back from those third-party sales. Only Amazon and the reseller share in the profits. This has the potential to decimate authors’ and publishers’ earnings from many books, especially backlist books. (If you’ve noticed this happening on your own books’ product pages, please let us know at staff@authorsguild.org.)

One might wonder how there can be “new” copies offered by someone other than the publisher and how they can be sold for $.01 plus shipping (the high shipping costs are apparently where these sellers make their profit). The Authors Guild has spoken to several major publishers in the past year about where all these second-hand “new” copies come from, and no one seems to really know. Some surmise that they are review copies, but there are far too many cut-rate “new” copies for them all to be review copies. Could they be returns from bookstores that never made it back to the publisher? Did they fall off the back of a truck? We don’t know. What we do know is that the resellers must be acquiring them at cut-rate price and that there appear to be enough of these copies available that they could replace sales for the truly new copies—those that bring money to the publisher and royalties to the author.

. . . .

Publishers and authors report that Amazon’s justification for its new move is that every other product sold on Amazon works this “best offer” way, and that Amazon has treated books in a special way—until now, that is—by maintaining the publisher’s copy as the first listed seller. In reality, that is not the case for other copyrighted works.

Link to the rest at The Authors Guild and thanks to Jacqueline for the tip.

After everything Big Publishing and The Authors Guild have done to help Amazon over the years, how could Amazon possibly do something like this?

And, of course, Amazon invented the practice of selling books for less than their list price so more readers would buy them.

PG says this couldn’t happen to a more deserving group of people than those who inhabit the traditional publishing world and have been mistreating authors for years.

In point of fact, Amazon knows far more about pricing books to optimize sales and profits than Big Publishing does.

The biggest threat to the future of Big Publishing is the people who run Big Publishing.

How Online Shopping Makes Suckers of Us All

From The Atlantic:

As christmas approached in 2015, the price of pumpkin-pie spice went wild. It didn’t soar, as an economics textbook might suggest. Nor did it crash. It just started vibrating between two quantum states. Amazon’s price for a one-ounce jar was either $4.49 or $8.99, depending on when you looked. Nearly a year later, as Thanksgiving 2016 approached, the price again began whipsawing between two different points, this time $3.36 and $4.69.

We live in the age of the variable airfare, the surge-priced ride, the pay-what-you-want Radiohead album, and other novel price developments. But what was this? Some weird computer glitch? More like a deliberate glitch, it seems. “It’s most likely a strategy to get more data and test the right price,” Guru Hariharan explained, after I had sketched the pattern on a whiteboard.

. . . .

The right price—the one that will extract the most profit from consumers’ wallets—has become the fixation of a large and growing number of quantitative types, many of them economists who have left academia for Silicon Valley. It’s also the preoccupation of Boomerang Commerce, a five-year-old start-up founded by Hariharan, an Amazon alum. He says these sorts of price experiments have become a routine part of finding that right price—and refinding it, because the right price can change by the day or even by the hour. (Amazon says its price changes are not attempts to gather data on customers’ spending habits, but rather to give shoppers the lowest price out there.)

. . . .

It may come as a surprise that, in buying a seasonal pie ingredient, you might be participating in a carefully designed social-science experiment. But this is what online comparison shopping hath wrought. Simply put: Our ability to know the price of anything, anytime, anywhere, has given us, the consumers, so much power that retailers—in a desperate effort to regain the upper hand, or at least avoid extinction—are now staring back through the screen. They are comparison shopping us.

. . . .

“I don’t think anyone could have predicted how sophisticated these algorithms have become,” says Robert Dolan, a marketing professor at Harvard. “I certainly didn’t.” The price of a can of soda in a vending machine can now vary with the temperature outside. The price of the headphones Google recommends may depend on how budget-conscious your web history shows you to be, one study found. For shoppers, that means price—not the one offered to you right now, but the one offered to you 20 minutes from now, or the one offered to me, or to your neighbor—may become an increasingly unknowable thing. “Many moons ago, there used to be one price for something,” Dolan notes. Now the simplest of questions—what’s the true price of pumpkin-pie spice?—is subject to a Heisenberg level of uncertainty.

. . . .

The Quakers—including a New York merchant named Rowland H. Macy—had never believed in setting different prices for different people. Wanamaker, a Presbyterian operating in Quaker Philadelphia, opened his Grand Depot under the principle of “One price to all; no favoritism.” Other merchants saw the practical benefits of Macy’s and Wanamaker’s prix fixe policies. As they staffed up their new department stores, it was expensive to train hundreds of clerks in the art of haggling. Fixed prices offered a measure of predictability to bookkeeping, sped up the sales process, and made possible the proliferation of printed retail ads highlighting a given price for a given good.

Companies like General Motors found an up-front way of recovering some of the lost profit. In the 1920s, GM aligned its various car brands into a finely graduated price hierarchy: “Chevrolet for the hoi polloi,” Fortune magazine put it, “Pontiac … for the poor but proud, Oldsmobile for the comfortable but discreet, Buick for the striving, Cadillac for the rich.” The policy—“a car for every purse and purpose,” GM called it—was a means of customer sorting, but the customers did the sorting themselves.

. . . .

Thomas Nagle was teaching economics at the University of Chicago in the early 1980s when, he recalls, the university acquired the data from the grocery chain Jewel’s newly installed checkout scanners. “Everyone was thrilled,” says Nagle, now a senior adviser specializing in pricing at Deloitte. “We’d been relying on all these contrived surveys: ‘Given these options at these prices, what would you do?’ But the real world is not a controlled experiment.”

The Jewel data overturned a lot of what he’d been teaching. For instance, he’d professed that ending prices with .99 or .98, instead of just rounding up to the next dollar, did not boost sales. The practice was merely an artifact, the existing literature said, of an age when owners wanted to force cashiers to open the register to make change, in order to prevent them from pocketing the money from a sale. “It turned out,” Nagle recollects, “that ending prices in .99 wasn’t big for cars and other big-ticket items where you pay a lot of attention. But in the grocery store, the effect was huge!”

The effect, now known as “left-digit bias,” had not shown up in lab experiments, because participants, presented with a limited number of decisions, were able to approach every hypothetical purchase like a math problem. But of course in real life, Nagle admits, “if you did that, it would take you all day to go to the grocery store.” Disregarding the digits to the right side of the decimal point lets you get home and make dinner.

Link to the rest at The Atlantic and thanks to Nirmala for the tip.

Amazon and Walmart are in an all-out price war that is terrifying America’s biggest brands

From Recode:

Last month, Walmart gathered some of America’s biggest household brands near its Arkansas headquarters for a tough talk. For years, Walmart had dominated the retail landscape on the back of its “Everyday Low Price” guarantee. But now, Walmart was too often getting beaten on price.

So company executives were there, in part, to reset expectations with Walmart’s suppliers — the consumer brands whose chips, sodas and diapers line the shelves of its Supercenters and its website.

Walmart wants to have the lowest price on 80 percent of its sales, according to a presentation the company made at the summit, which Recode reviewed.

To accomplish that, the brands that sell their goods through Walmart would have to cut their wholesale prices or make other cost adjustments to shave at least 15 percent off. In some cases, vendors say they would lose money on each sale if they met Walmart’s demands.

Brands that agree to play ball with Walmart could expect better distribution and more strategic help from the giant retailer. And to those that didn’t? Walmart said it would limit their distribution and create its own branded products to directly challenge its own suppliers.

“Once every three or four years, Walmart tells you to take the money you’re spending on [marketing] initiatives and invest it in lower prices,” said Jason Goldberg, the head of the commerce practice at SapientRazorfish, a digital agency that works with large brands and retailers. “They sweep all the chips off the table and drill you down on price.”

But this time around, Walmart’s renewed focus on its “Everyday Low Price” promise coincides with Amazon’s increased aggressiveness in its own pricing of the packaged goods that are found on supermarket shelves and are core to Walmart’s success, industry executives and consultants say.

The result in recent months has been a high-stakes race to the bottom between Walmart and Amazon that seems great for shoppers, but has consumer packaged goods brands feeling the pressure.

The pricing crackdown also comes in the wake of Walmart’s $3 billion acquisition of Jet.com and its CEO Marc Lore. Lore now runs Walmart.com and has said one of his mandates is to create new ways for the retailer to beat everyone else on price, including Amazon.

. . . .

One piece of the battle, executives say, is an Amazon algorithm that works to match or beat prices from other websites and stores. Former Amazon employees say it finds the lowest price per unit or per ounce for a given product — even if it’s in a huge bulk-size pack at Costco — and applies it across the same type of good on Amazon, even when the pack size is much smaller.

So let’s imagine Costco is selling a pack of 10 bags of Doritos for $10 — or $1 per bag. Amazon’s algorithm notes that one bag is $1 at Costco and, in turn, lowers the price on Amazon of a single bag of Doritos to $1.

That is a great deal for customers — something that is likely driving the decision at Amazon, where an obsession with customer value dominates its strategy.

But now, Amazon is selling individual items at Costco prices while not getting the same wholesale price that Costco enjoys. In short, it’s going to be really hard for Amazon to turn a profit on those goods.

When Walmart sees this, it freaks out on the supplier, industry executives say. And it doesn’t matter to Walmart that Amazon may not be getting the same wholesale price that retailers like Costco or other membership clubs receive. In other words, even if Amazon isn’t profiting from its extremely low prices, Walmart is still demanding the same bulk-rate discount applied to individual items.

. . . .

Unprofitable items are known inside Amazon as CRaP products — the acronym stands for “Can’t Realize a Profit.” And Amazon is not afraid to kick off big and small brands alike.

Case in point: On a Friday afternoon last month, all Pampers diapers sold by Amazon were unavailable on the site. Industry speculation was that Amazon may have kicked Pampers off the site as part of a negotiation over prices.

Neither Amazon nor Pampers parent company Procter & Gamble would comment on whether this was the case. But the bigger point may be that senior industry executives thought such a move was even a legitimate possibility.

. . . .

As Amazon Prime becomes a bigger part of Amazon’s business, Amazon ships more orders that consist of just one item. These orders can typically be tougher to make profitable than multi-item orders — a trend that could explain the renewed focus on profitability.

. . . .

The longest-term solution, however, is perhaps the most difficult: Reimagining how a product should be designed and packaged from the ground up, specifically for e-commerce sales. That often means cutting the weight of low-price goods since shipping costs tend to eat into a product’s profitability. (Amazon, in fact, is trying to capitalize on this potential shift by asking brands to reformulate their packaging to make it easier to ship — all done via Amazon, of course.)

Link to the rest at Recode

Amazon Is Quietly Eliminating List Prices

From The New York Times:

In a major shift for online commerce, Amazon is quietly changing how it entices people to buy.

The retailer built a reputation and hit $100 billion in annual revenue by offering deals. The first thing a potential customer saw was a bargain: how much an item was reduced from its list price.

Now, in many cases, Amazon has dropped any mention of a list price. There is just one price. Take it or leave it.

The new approach comes as discounts both online and offline have become the subject of dozens of consumer lawsuits for being much less than they seem. It is also occurring while Amazon is in the middle of an ambitious multiyear shift from a store selling one product at a time to a full-fledged ecosystem. Amazon wants to be so deeply embedded in a customer’s life that buying happens as naturally as breathing, and nearly as often.

. . . .

“When Amazon began 21 years ago, the strategy was to lose on every sale but make it up on volume,” said Larry Compeau, a Clarkson University professor of consumer studies. “It was building for the future, and the future has arrived. Amazon doesn’t have to seduce customers with a deal because they’re going to buy anyway.”

Or so Amazon hopes. Digital stores live by Alec Baldwin’s maxim in “Glengarry Glen Ross”: “Always be closing.” The retailer has been experimenting with another method of closing a sale. It tells the potential buyer what the price used to be on Amazon.

. . . .

“We’ve been conditioned to buy only when things are on sale,” said Bonnie Patten, executive director of TruthInAdvertising.org, a consumer information site. “As a result, what many retailers have done is make sure everything is always on sale. Which means nothing is ever on sale.”

Amazon has both benefited from that conditioning as well as encouraged it, which is most likely why it is changing cautiously. It began eliminating list prices about two months ago, pricing specialists say, both on products it sold itself and those sold by other merchants on its site. The retailer did not return multiple requests for comment.

“Our data suggests that list prices are going away,” said Guru Hariharan, chief executive of Boomerang Commerce, a retail analytics firm. Last spring, Boomerang compiled a list for The New York Times of 100 pet food products that Amazon said it was selling at a discount to a list price. Only about half of them still say that.

“Amazon is a data-driven company with very few sacred cows,” Mr. Hariharan said. “At the very least, it is conducting a storewide test about whether it should change its pricing strategy.”

Link to the rest at The New York Times and thanks to Allen for the tip.