Understanding Amazon’s Book Pricing – An Update

In my July 22^nd blog I discussed the mysteries (to me, and apparently also our readers) of the logic behind Amazon’s pricing. I promised to follow the pricing of Catherine Coulter’s Backfire over a three-month period to see what I could learn. Time’s up and as Regis would say, “Our survey said...!”

Below is a graphic depiction of Backfire’s price on Amazon (hardcover), Barnes and Noble (hardcover) and electronically for the Nook and Kindle.

One thing that is clear from this graph is the effect of publishers setting prices for e-books. Throughout the study period Amazon and Barnes & Noble priced their e-book versions of Backfire at $12.99. It will be interesting to see what happens to e-book prices after implementation of the judge’s order that now allows retailers, not publishers, to set e-book prices. I've decided to pick Michael Connelly's The Black Box to follow through a three-month selling cycle to see what I learn and then pass that information on. It's currently pre-publication hardcover price is $18.21 on Amazon and $18.93 on B&N. Both have electronic versions at $14.99.

Another clear point is that if you are patient, you can pay considerably less than the pre-publication price. Shortly after the book became available, the price dropped; it stayed lower for a bit more than a week, climbed higher and since then has bounced around both higher and lower. Marketers (and economists) know that people who pre-order something have a stronger motivation to buy it, and consequently are willing to pay a higher price.

In comparing Amazon and B&N, I must confess to several problems. First, I would usually remember to check prices first thing in the morning. I did not catch any mid-day adjustments. This is only a minor issue. However, in the midst of this analysis my father took sick and died, and I missed recording any book prices between 9/2/12 and 10/6/12. Consequently, the big long slide pictured after 9/2 is the program connecting two distant points with a straight line. I have no clue what happened in that month.

However, those flaws do not affect the general story of this analysis: prices fluctuate widely over time, but there is not much difference between Amazon and B&N.

Here’s a second graph that illustrates the comparisons between the two book sellers:

Fifteen of the twenty-two data points have Amazon and B&N showing equal prices. Four of the remaining seven observations show B&N with a higher price than Amazon. Of the three where B%N was lower, two were within the last week and a walloping $.02 lower. Is this price equality collusion between the booksellers?

Probably not and here’s why. Amazon has a link you can click for any book that allows you to report a lower price somewhere else. This mechanism alerts them to situations where they are priced higher than the competition. For another online retailer they only ask the date, book price and shipping cost; for physical stores they ask the store name, location (city, state), price and date. Amazon has enlisted millions of unpaid price-checkers to make sure they are the low-cost provider.

I recall a case study of the airline industry from my MBA days. An airline would publish a new (higher) airfare essentially as a trial balloon. If the other airlines matched the airfare, the new higher fare would stick. If the other airlines didn’t match the increase, the first airline would reduce their fare to the original level. (This was decades before the current airline pricing structure that prices each seat according to a plethora of factors—and that’s an aside I won’t pursue.) Airlines were big moneymakers back then—until the discount airlines entered the business and didn’t play by the gentlemanly rules of the day. Even so, just this week I read in USA Today that Southwest increased fairs by a few bucks and it was being matched by other airlines.

The big publishers were a closed club like the airlines of old and could dictate pricing. Was and could are the operative words here. They can still set a “retail” price for their books, but as evidenced by Coulter’s Backfire, which listed at $26.95, the online price has been discounted anywhere from 32% to 45% (as of this writing). Publishers still controlled pricing of e-books (at $12.99, a discount of 52% from the hardcover price), but have now lost that as well.

Others have done analyses comparing what an author makes on the sale of hardcover, paperback and electronic versions of the same book when using the big publishers. Amazon’s new pricing flexibility may change the mix of books sold—it may even change the number of books sold. A major factor for traditionally published author revenues will be whether Amazon’s pricing structure will also affect what they pay the publishers, which is what ultimately affects what authors make. If so, that will be another death knell for the large publisher’s model.

Next week, I plan to discuss what all this might mean for Barnes & Noble.

~ Jim