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By Mark Coker via Publishers Weekly:
The mere thought is at once repulsive and terrifying: books as commodities. After all, a book is the original divine creation of its author, right?
We typically think of commodities as undifferentiated products such as corn or wheat. To a consumer looking for flavor and nutrition, one kernel of corn is the same as another. Though higher-quality corn can command premium prices, the price ceiling is ultimately determined by what the market is willing to pay for a given product.
In this respect, books are similar to any other commodity. Books are delivery vehicles for reading pleasure. Although each book is unique, the primary reason readers purchase books—reading pleasure—can be measured and commoditized.
If we divide the hours of reading pleasure one book offers by its price, we can create a simple metric: cost per hour of reading pleasure. This metric allows one book’s pleasure-delivery potential to be compared to another’s.
Readers are unlikely to consciously intellectualize their cost per hour of reading pleasure. Yet this metric guides consumer behavior much as gravity guides water to flow downhill. In a marketplace of interchangeable options for pleasure, consumers will gravitate toward the best-quality option with the lowest price, whether that quality is measured by brand, average review, or word of mouth.
How low can prices go? With agricultural commodities, the price floor is ultimately determined by the cost of production. If farmers can’t turn profits at the given market rate for their products, they stop producing those products. When farmers stop growing, supply decreases. This then causes prices to stabilize or increase to the point where new growers are incentivized to enter the market.
For decades now, most writers—even traditionally published writers—have maintained day jobs to make ends meet. This means authors are personally subsidizing the publishing industry by continuing to write books that don’t pay the bills.
Would we expect farmers to work for free? Certainly not. Yet many writers will continue writing even if there’s no money in it. Though one writer may write for the joy of writing and another to afford groceries, both require readers. And price is often the determining factor for finding readers.
. . . .
Kindle Unlimited causes significant devaluation on two fronts:
1. Amazon is training the world’s largest community of readers to expect five-star reading experiences for what feels like free. This makes readers reluctant to pay for books, which harms sales.
2. Because Kindle Unlimited decouples book price from author compensation, it means that Amazon has stripped authors of pricing power and can pay them less.
. . . .
2. Don’t underprice: readers will pay for quality. The e-book sweet spots for quality bestselling full-length indie fiction are typically $3.99 and $4.99, and $7.99 to $9.99 are good prices for quality nonfiction.
3. Avoid exclusivity. When indie authors make their books exclusive anywhere—even for a short time—it undermines their ability to build readership at other stores. Exclusivity makes the author vulnerable to exploitation when a single retailer controls the author’s access to readers. True independent authors publish, price, and promote with complete freedom.
Link to the rest at Publishers Weekly
PG says it’s a bear competing with Amazon.
The market value of an item is what a willing buyer will pay a willing seller for a book.
If market demand is elastic, the supply will adjust itself to the demand created by prospective purchasers.
PG suggests that Kindle Unlimited is wonderful for less-known authors because buyers don’t have to risk any money to see if they like what the author has written.
The factors governing the ebook market is different than the printed book market because, in the ebook market all the author’s (or publisher’s) costs to create the product are incurred upfront. Once an ebook is created, for the author, the direct costs of selling one ebook are the same as the direct costs of selling one million books.
Amazon incurs some per-unit ebook costs in the form of server time, credit card processing fees, etc., but for someone who is already running the world’s largest server farm selling zillions of different products, the incremental costs of selling a single ebook are the tiniest drop in an enormous ocean. For the cost of sending a single printed book to a customer who takes advantage of free Prime shipping, PG suspects Amazon could sell and deliver hundreds of ebooks to customers.
On a couple of specific points Mark makes in the OP:
Because Kindle Unlimited decouples book price from author compensation, it means that Amazon has stripped authors of pricing power and can pay them less.
Authors are not stripped of anything with Kindle Unlimited. They can price their ebooks pretty much any way they want to on Amazon, subject only (as far as PG knows) Amazon’s overall $200 max price for ebooks on KDP.
If PG writes a wonderful ebook for which he decides to charge $99 for each copy, he can do so. If a purchaser believes PG’s written ramblings are worth $99 or more, PG has demonstrated he has the pricing power to sell his book for $99 to an unknown quantity of readers numbering greater than one.
Pricing power in an open market is determined by supply and demand. Does the purchaser want $99 more than she wants PG’s book or does she want PG’s book more than $99? If PG prices his book at $1.00, the purchaser’s decision analysis is the same with $1.00 substituted for $99.
With respect to Amazon and authors, if Amazon can attract the kinds and quantities of books its customers are willing to purchase by paying an author 50 cents, why would a rational author expect that Amazon should pay more?
Traditional publishers and bookstores are a far less sophisticated system for determining optimum pricing than Amazon is. Their pricing decisions are pretty much a shot in the dark. For one thing, they’re dealing with thousands of different books and authors. They’re not set up to find the optimum price for any single book because they can’t pay as much attention to sales results for a single book as the author of that book can.
If Author A writes a 300-page romance novel that 50,000 readers are willing to pay $8.99 to acquire and Author B writes a 300-page romance that 50,000 readers are willing to pay $1.99 for, how likely is it that the publisher/physical bookstore will price each book at an optimal manner? If the publisher/bookstore releases each romance at a retail price of $4.99, Author A and Author B will both have lower royalties than each would have had with optimal pricing.
Whatever pricing power publishers and traditional bookstores have does not benefit any individual author. Rather these players use their pricing power to maximize prices from a large group of books. Ultimately, they don’t care if Author A sells many more books priced at $4.99 than Author B sells for the same price so long as the total take from all books, including those from Author C through Author Z, meet the store’s and the publisher’s sales and profit objectives.
PG says some authors will always make more money from their books than other authors do. However, Amazon has developed a much, much more sophisticated and powerful system for determining the optimum sales price of an author’s books than any publisher or bookstore has.
If the author permits Amazon to set the price of a book at zero under Kindle Unlimited and the author is satisfied with the amount of royalties the book generates, is the author treated unfairly?
The author is not permanently locked into Kindle Unlimited (unlike an author dealing with a traditional publisher), so the author is free to withdraw the book from Kindle Unlimited (and KDP Select) every 90 days and engage in more price experimentation through Kindle or through Smashwords.