I have read several recent posts (this one is a good example) where the burning question is how to price e-books. This is "fun" because it reminds me of the hot debates we used to have in class when I was teaching microeconomics and the difference between average cost and marginal cost. This also reminded me of an old post of mine entitled 2+2 = 8 where I tried to explain in layman's words what the implications of a low marginal cost are.
Microeconomics 101 teaches that the (competitive equilibrium) price has to be such as it is equal to the marginal cost. This is the production point where "normal" profits are made by firms. But what about a situation where you have significant initial fixed costs to come up with the first unit of your product but minor costs afterwards (that is whether you sell 1 unit or 100 000 units does not make a difference costwise)? Well, it is obvious that if you charge the marginal cost, you won't be able to recover your initial cost outlay. Situation is worse when your clients have indeed the perception that your (marginal) cost is almost nil.
Well (re)-read as I did 2+2=8 (apologies for the self-reference) to get the broader business picture and a view on increasing returns to scale. It suggests a bunch of questions:
- what is the true inescapable fixed cost to produce the first e-book unit?: How will it evolve when e-books will be different from what we know now?
- what is the split between fixed costs and variable costs? : This has an obvious implication on what royalty percentage publishers should pay to authors?
- what do publishers try to monetize? : Time, attention, service, content ...
- paying huge advance to authors? : Does it sill make sense when the first thing you want to achieve is precisely minimize the cost of the first unit?
- How do you convince readers to pay more than the marginal cost? : huuuu... certainly not by starting punishing them with DRM...
Large publishing houses should know all the answers... After all don't they hire bright all guns blazing MBAs who are supposed to know everything about the cost shabam?
Again, asking the right questions usually leads to the right answer ;-)