E-book VAT: the other side of the story

This content has been archived. It may no longer be accurate or relevant.

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.”