Priceless

The myth of fair value--and how to take advantage of it.

How Much Should an eBook Cost?

The hidden psychology of iPad Bookstore pricing

The iPad's release has renewed the question, what should an eBook cost? Answers range from “free” to “whatever the market will bear.” Psychologists would say the operative word is “whatever.” At issue is the phenomenon of “anchoring,” discovered by Amos Tversky and Daniel Kahneman. When people don’t know what a fundamentally new product should cost, they are strongly influenced by the first price they encounter. It’s like the way a baby chick decides that whatever creature it sees first is its mother.
For Kindle readers, that all-important first price is likely to be the $9.99 price that Amazon pioneered. Publishers fear those readers will thereafter take that as the “fair” price for eBooks and resist any attempt to charge more. What’s wrong with that? Well, Amazon is using another, more familiar pricing trick, the loss leader. It’s been reported that Amazon is losing money on each eBook sale, as it’s paying publishers more than $9.99. This tactic is probably a smart way to promote sales of the Kindle and to burnish Amazon’s reputation for low prices.
Apple's new iPad Bookstore allows publishers to set prices. Contrary to early speculation, Apple is selling many bestsellers for the "Amazon" price of $9.99. Otherwise $12.99 is a common price point at the iPad Bookstore. Meanwhile, Amazon has quietly raised prices for many eBooks — often inscrutably — as a result of new agreements with publishers. (My book Priceless originally sold for $9.99 in a Kindle edition. Amazon raised the price to $14.99, then cut it to $12.99. That's three prices in the two weeks it's been out. By the way, don't blame me: Authors have nothing to do with setting prices.)
The net effect of the iPad so far: There's a wider range of eBook prices and less price difference between Apple and Amazon than the pundits predicted.
We would like to believe that the free market, and not corporate posturing, sets equitable prices. On closer inspection, the “market” price of a book has always been a chimera. Should Don Delillo’s Point Omega cost less because it’s only 128 pages? Should Stephenie Meyer’s Twilight books cost more because some of her fans would pay almost anything? For the most part, the publishing industry says no. In defiance of economics, there is only a limited attempt to price by wordage or reader demand. This is another demonstration of how peculiar a business book publishing is.
Any discussion of eBook pricing now has three psychological anchors. They are the current price of hardcover books (let’s say around $27), the once-standard Amazon Kindle price ($9.99), and the “information wants to be free” price of zero. All agree that the price of an eBook should be a good deal less than the price of a hardcover. There are no trees to cut down, and no boxes to ship. Everyone in the book business also agrees that the price of a new book must be a good deal more than zero. (We may or may not be heading towards an age of free information, but there will be no publishers, booksellers, or professional authors in that digital nirvana.) A reasonable person might ask, what does it cost to produce and market an eBook? But that's like asking what does it cost to produce and market a movie. The answer can be zero (YouTube) or $500 million (Avatar).
The biggest unknown of all is what the consumer will pay. I remember a time in my twenties when I realized, with delight, that I could afford to buy all the books I could read. I imagine I’m not atypical of avid readers in saying that I wouldn’t read any more books if they were all free, and I wouldn’t read much less if they cost twice as much. An economist would argue that most of the “cost” of a book resides in the precious leisure time expended reading it. Figure how many hours you spend reading a book and multiply by your billing rate. It’s going to be a lot more than $12.99. We’re dickering over the tip, not the restaurant bill.
But most people don’t think like economists. The value of one’s own time is not so easily quantified as a price printed on a jacket. That price carries disproportionate weight in purchase decisions, and people can get upset over the most incremental increase (“it’s the principle of the thing!”) Confirming the anchoring theory, it’s reported that some readers are upset at Apple for trying to raise prices above the God-, or Amazon-given $9.99.
Psychologists say that prices have an element of confabulation. We spin a mental narrative in which the prices we set are exact, rigorous, and inevitable —oblivious to how arbitrary those prices actually are. I suspect that everyone involved in the eBook price war would be just as upset, had the line in the sand been drawn at $4.99 or $19.99. I don’t know what eBook prices we’ll end up with, but I’m reasonably sure of one thing: If we think there’s an entirely logical price for a digital book, we’re only fooling ourselves.

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William Poundstone is the best-selling author of 11 books, including Priceless: The Myth of Fair Value (and How to Take Advantage of It).

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