Setting MR equal to MC implies 18 4Q 10, or Q 2 hundred. The store
manager should keep 200 books to be sold at a price of 18 (2)(2) $14
each. She should return the remaining 200 books to obtain a $1,200 refund. As
Table 6.1 indicates, this course of action will minimize her overall loss in the
wake of the fall in demand. The table also shows that selling all 400 copies or
returning all copies would generate greater losses.236 Chapter 6 Cost AnalysisPricing E-books For book publishers, the penetration of e-books represents both an opportu-
nity and a threat. On the one hand, this new platform has the potential to spur
overall book sales. On the other, e-books threaten to cannibalize sales of higher-
margin print books. E-book sales were accelerating—growing from 2.9 percent
of total sales in 2009 to 8.5 percent in 2010. Book publishers faced the key
question: How should they market and price print books and e-books to
maximize overall profit?
Of one thing publishers were sure: Amazon, in its attempt to seize control
of the e-book market, was the enemy. Amazon’s $9.99 pricing strategy for most
e-books—though attractive to customers—had the effect of battering print-
book sales. In self-defense, five of the largest book publishers banded together
in 2010 to establish a key pricing agreement with Apple (and subsequently
Google). In short order, Amazon was forced to acquiesce to the same terms.
Under the so-called agency pricing arrangement, the book publisher would
set the e-book price, while the online retailer would serve as an agent. Sales
revenue would be split, 70 percent to the publisher and 30 percent to the inter-
net seller.
Book publishing has long been criticized for its culture of two-martini
lunches—that is, cultivating authors, and publishing a plethora of titles with too
little regard to the tastes of the buying public and to bottom-line profits.
Bookstores, not publishers, are the points of contact with readers. Today, the
catch phrase is “Profit or Perish.” So with profit in mind, let’s consider the
stripped-down economics of the book business. The typical hardcover best
seller is priced at about $26 retail. Of this amount the publisher keeps 50 per-
cent (or $13) and the remaining 50 percent goes to the bookstore. Out of its
share, the publisher pays a 15 percent royalty ($3.90) to the author and costs
due to printing, shipping, and book returns (typically about $3.50). The eco-
nomics of e-books are much simpler. The marginal cost per e-book is negligi-
ble, and as noted earlier, revenues are split 70–30 between the publisher and
the online agent.
Given the power to establish prices, what hardcover and e-book prices
should book publishers set? Part of the answer lies in recognizing the opportu-
nity cost associated with aggressive e-book pricing. Yes, selling additional e-books
provides publishers with additional revenue. But it also means selling fewer
print books and foregoing some of the associated profit from that high-marginc06CostAnalysis.qxd 9/29/11 1:46 PM Page 236