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Cheap, but not free - eBook Economics

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Yesterday, Jim C. Hines (/me waves at Jim) brought up a good point about lower prices on eBooks in the comments:

It occurs to me that the exact same arguments could be made for printed books. Because yes, if printed books were cheaper, they'd probably sell more copies too...

Jim's correct - but it doesn't apply so cleanly to physical products.

Economics Demotivator(I get completely economics-geek in this, so if anyone needs clarification, please ask. And if you disagree with my economic interpretation, please feel free to say so in the comments.)

There's an inherently supply limitation when you're talking about any physical object. A cheap printed book would still need physical manufacturing costs per unit, rent (for shelf space in the stores or storehouses), and transportation costs.

Even if the creation costs are low, there's a cost associated with getting the product to the consumer. In print, that's primarily borne by the distributors, but those effects are felt up and down the supply chain in the same way a company can pass a tax increase on to consumers.

The two things that make digital distribution different are these:

1) Per-unit costs are low. After initial production (which can still be pricey, mind you), the incremental cost of each additional unit sold is negligible.

2) Storage and transportation costs are reduced to near-nothing.

This lets us take advantage of the long tail in a way that print simply cannot. It allows us to reach those niche audiences in a cost-efficient way.

A practical example: My father is a Master Gardener (yes, the caps are real). He's got a lot of knowledge about gardening - and having his degree in botany doesn't hurt either. People who want the kind of knowledge he has are a niche (admittedly, not the most niche-y of niches, but work with me here). A quick perusal of Amazon shows that most gardening books on the first page of search results are $12 - $25 (paperback). So now you've taken the niche of "people interested in gardening" and narrowed it by the additional term of "people willing to shell out more than $10". Add in one additional narrowing: "people willing to buy a book by someone they don't know." My dad has a reputation locally - but outside of WV/PA, I'd be surprised if people knew him in that aspect of his life.

Digital publishing lets us widen this audience. In reverse order: He could build an online presence so that people know him on a bigger scale. (This is outside the direct scope of the answer, but it's worth mentioning.)

But here's where the difference is: He could price his book for $5 (or $2), and still reach enough people (worldwide!) to make it profitable. More people will be willing to try a book by someone they don't know at a lower price point. It will be able to stay "in print" indefinitely as well.

I've had people visit this blog (and comment, sometimes) from all of North America, most of South America, all of the EU, and most of Asia. They could (if my dad's book existed) all buy a copy of the book and not have to worry about shipping.

When you've got a physical product, there's a point where volume doesn't justify lowering the price. With digital distribution, there's a lot more plasticity in that kind of pricing.

One second, though: There's two HUGE disclaimers here I didn't mention. First, the price cannot approach zero. While you can reach a lot more consumers from a much wider geographic net, there is still a limit to demand. You gotta still pay production costs, right? The 230,630,000 United States internet users (1,586,272,555 worldwide - World Bank Data) are still a finite number. (There's no hard sales data for smartphones + eReaders.)

Second, there is a point where people do not value what they receive because it didn't cost enough. We presume we get what we pay for - even if that's not true. That's one reason why free downloads of novel-length work are problematic. I've got a few (legit) free novels from people I've met that I haven't bothered to read yet. It was "free", after all...

We're still figuring out what the real "market" value of eBooks should be. Big publishers largely seem to be insisting that the best price is about 10% off the paperback cover price. Konrath - and others - suggest that it should be far lower. Economics would suggest that they're both right - the price shouldn't be too low - but keeping it artificially high isn't maximizing profits and isn't maximizing societal value.

Honestly, what I'd love to see is advocates sharing more hard data - especially big name proponents like Stackpole and Konrath. (I realize this isn't going to happen, but I can dream.) Right now the market is differentiated not only by quality, but by sales model. And for both consumers and new players entering the market, that sucks.

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