Friday, February 5, 2010

The Agency Model for Book Pricing Doesn't Make Sense

The major publishers are pushing their heads into the sand once again. They seem to think that books are special products that deserve different treatment than any other retail product. The Agency Model that Macmillan and Hachette have adopted is just another way of clinging to obsolete business rules. Granted, Amazon's reaction to Macmillan's ultimatum was a little over the top, but I think they have a stronger leg to stand on.

If you've been watching the publishing news, you know that Amazon removed the buy buttons from all Macmillan books on Friday, January 29 after Macmillan informed Amazon of their intention to go to an Agency Model for book pricing. Although negotiations started immediately, the buy buttons were still gone on most Macmillan books well into this week, at least.

In a nutshell, the agency model means that the publisher sets the retail price of the book and gives the retailer a commission. This approach gives the publisher control over the price of the book and lets them stabilize the payments that get made throughout the channel along the way to the customer's hands, including author royalties and the publisher's profit margin.

But does this approach make any sense? Not at all.

With most retail products, the manufacturer (or publisher in this case) sets a wholesale price and retailers are free to sell the product at whatever price they can get. The manufacturer controls the wholesale price and the retailer controls the retail price. Each is in control of their own profit margin.

Yes, the book market has legacy business arrangements like returns and author royalties that complicate matters, but those elements should be simplified and incorporated into the cost of goods sold.

From Amazon's perspective, the Agency Model dictates what they can charge for their products and puts publishers in charge of Amazon's profit margin. No wonder Amazon balked.

The whole point of a retailer is to provide service to the consumer. They do that through marketing efforts, convenience factors, and customer services. On the other hand, a wholesaler/manufacturer/publisher has made a conscious decision to make their money on bulk sales to resellers (business-to-business) rather than deal with consumers directly (business-to-consumer). Wholesale is a very different business from retail, and wholesalers have no business telling retailers how to run theirs.

To be fair, it works both ways. Retailers have no business telling wholesalers how to run their business either. Amazon, Wal*Mart, and other superstores have shown how messed-up things can get when they do. In the name of "customer service," these retailers abuse their power in the marketplace to force wholesalers into a pricing model that is often not sustainable. This is a case where the retailer is trying to take control of the wholesaler's margin. The customer benefits in the short run with lower prices, but loses in the long run when their choices are reduced to the few high-volume manufacturers who were able to compromise product quality and improve production efficiency enough to satisfy the mega-retailer's demands.

In many ways, Amazon itself inspired publishers to implement agency pricing. The publishers were reacting in part to Amazon's strong-arm tactics of establishing a market price of $9.99 for an e-book because "that's what customers are willing to pay." What they really mean is "that is the price that will give us the sales volume we want," which is not the same thing. The problem is that even Amazon admits that they don't make any money at that price. And they are trying to force the publishers to accept even less?!

I believe both sides need to stop screwing with each other and get back to the basics. Publishers need to set a wholesale price that covers their costs and gives them the margin they want. Retailers need to resell the product at a marked-up price that covers their costs and gives them the margin they want.

It really is that simple.

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