Consumer Expectations and Price

I am publishing a collection of short stories as an e-book. Continuing a series from last week, I’m trying to work through the relevant pricing issues and set a price for that content.

We all have expectations. Sometimes, particularly when we’re young or old, our expectations can be out of step with reality. When we’re young we don’t have the cognitive ability to understand the world as it is, so we fantasize. When we’re old we may have trouble keeping up with the pace of change, and the world may move on without us.

Perhaps no other aspect of daily life in America defines our expectations more than the price of goods. We are a consumer society, and as such we gauge our worth and meaning by what we have and what we can afford. Goods that are priced out of reach make us feel poor. Goods that are within reach make us feel wealthy — or at least as if we have options.

Everyone has heard a child request a new car or new house in the same way that they ask for a piece of candy or scoop of ice cream. To a child price is no object because money has no meaning. And who hasn’t heard an elderly person comment that a candy bar used to be nickel or a gallon of milk a dime? To an elderly person prices may mark the zenith of their life experience, while also serving as a reminder of the threat posed by inflation and rising prices.

People in the prime of their working lives generally have more realistic expectations about prices, but they can still experience dissonance when the cost of goods change. Gas at $4.00 a gallon is an outrage. Gas falling back to $2.50 is a windfall. But note: these emotions and responses are usually relative, not based on an actual understanding of the costs of production. Because we live lives abstracted from our own survival needs, and because our economic lives are abstracted through bank accounts, direct-deposit paychecks and credit cards, there is often no contextual reality to the prices we pay. We pay what we pay because that’s what an item costs, not because we know that’s what an item is worth.  

Establishing the price for a new product, then, involves two objectives. First, there is the direct question of recouping costs in order to ensure a profit, or at least the minimal ability to continue production. Fortunately, even allowing for changes in the price of labor or materials, understanding production costs is an almost purely mathematical exercise. Second, there is the question of meeting (or establishing) consumer expectations. Unfortunately, math is of almost no help here. As noted in a recent post, a software developer might justifiably consider what seems an absurd range of prices for a new application, simply as a test to determine what each price point means to various market segments. (The frightening reality is that this critical knowledge cannot be known in advance by any other means.)

Note also that consumer expectations are not a one-way, lower-is-better street. A high-end jeweler or automobile manufacturer might be justified in setting a high price for a new product in part because of materials and technologies involved in production, but also because of consumer expectations. People who want the best of everything generally assume (if not insist) that the products they buy should cost the most.

Consumer expectations are not simply the end result of pricing decisions, they also help shape pricing decisions and drive competition between players in any market segment. To the extent that any product is worth what the market will bear, it’s also possible that the market may not be interested in a given product at any price, let alone a fair price. Which brings us back to the central question: what is an e-book worth?

The more I think about the question, the more I’m convinced that e-books are not simply a new product in an already-established market, or even a new line of products in an already-established category. I think e-books are an entirely new thing, and that predicting or even understanding consumer expectations about e-books is impossible because of that fact.

Disagree? Well, consider that all other content mediums have been available in multiple formats for decades, if not longer. Music has been defined by changing formats, from wire recordings to various platters to various tapes to various file types. Television has gone from black-and-white to color to cable to HD. Movies have been fairly static as theatrical presentations, but VHS sales have evolved into DVD’s, which are evolving into streaming, on-demand, home-theater nirvana.

Contrast all this with the book as a printed physical object. It is sacred text, printed on a sacred page, by sacred scribes. It is both the television and the sitcom. It is the radio and the song. It is the theater and the movie.

The closest examples I can think of involving a similar transformation from physical object to digital content are the printing-press cousins of newspaper and magazine. That those industries are hurting, if not doomed, is a frightening portent to the book industry. Truly horrifying, however, is that even as such publications inexorably move to the internet and die off in the wild, nobody knows what they’re worth in digital form. Or rather: nobody known how to get consumers to pay for magazine and newspaper content in digital form that they gladly paid for in a printed publication. Everyone has an advertising-revenue plan or a subscription plan or a desperate, I-was-totally-wrong-about-MySpace pay-wall plan, but nobody knows how to make it work.

Why? Because consumers decided at some point that information they used to pay for in print magazines and newspapers should be free if it’s on the internet. (I am not saying consumers did this on their own. It’s pretty clear that magazines and newspapers have been complicit in creating this expectation, just as it’s equally clear there may not have been much they could do about it.) Absent a physical printed publication to pay for and receive, consumers have decided that the content in magazines and newspapers is literally worth nothing. And that’s true even as everyone including those same consumers knows that it takes money to create that content.

This is the nightmare scenario the book industry is trying to avoid: the calcification of a belief in the collective consumer consciousness that digital text should be free text, including Stephen King’s latest thrill ride.* And who can blame them? If it costs money to make a product, but the market is willing to pay you nothing for that product, you’re toast. And I mean burnt toast. (And here I mean the kind where you can’t scrape the burnt part off, no matter how hard you try.)

The saving grace, of course, is that books as a category of product are much more diversified and flexible than magazines or newspapers, and generally more robust in terms of content. To the extent that articles in magazines and newspapers are generally limited in length (as determined by publications costs, advertising rates and subscription revenue), books as a product offer the same subject matter, only in massively extended, tightly-focused volumes uncluttered by advertising and extraneous content. In this sense books exploit market niches much more efficiently than either magazines or newspapers precisely because they allow greater focus. (This is true even relative to magazines or newspapers that are themselves considered niche products.)

I make this point not because it helps price e-books, but rather to show the opposite: that even the most closely-analogous situations offer no insight into solving the e-book pricing problem. Unfortunately, the same holds true if we attempt to price e-books based on digital content consumers are willing to pay for.

The current price of digital music files seems to relate more to the historical price of content in that industry than to anything else. A twelve-to-fifteen-song CD used to cost $15, so it’s not much of a surprise that a single song now costs a buck. Single tracks as a product also have a long-established history in the music business. E-books, on the other hand, are not smaller versions of larger compilations. And nobody is begging to have Chapter 9 of the latest vampire romp made available on its own.

The price of software applications relates both to the market being served and to the costs associated with development. Even if an e-book is seen as an application because it runs on hardware, there is almost no code required to make an e-book ‘app’ function. To the extent that Apple’s iPhone store sells low-priced apps, and e-books could be priced the same way, there is nothing about an e-book that demands that association. (The association keeps coming up because there’s nothing better, not because it’s a good analogy.)

As far as I can tell, there is, quite literally, almost nothing compelling the price of an e-book to be X versus Y. This helps explain why publishers recently launched an offensive to arrest the falling price of e-books and to challenge the rapidly-setting consumer expectation (driven in large part by Amazon) that e-books should be cheap, cheap, cheap. Because consumers are eventually going to develop settled expectations about the price of e-books, it’s clearly in the industry’s interest to make sure those expectations tolerate higher prices rather than insisting on lower (discount) prices. Getting locked into low prices (or worse, an expectation of free content) would be a nightmare.

To the extent that I have no existing infrastructure to support, and no overhead** to account for, my pricing task should be simpler, but it isn’t for these same reasons. The product I want to sell has never existed before, and there is no equivalent market I can use as a guide. I know, and consumers know, that a digital version of a print book should be cheaper due to cost-savings during production, but that really only exposes the fact that nobody has been valuing books based on their content. Walk into any bookstore in the world and you’ll find a world-changing manifesto in hardcover selling for the same price as — if not less than — a hardcover book full of tasteless-yet-hilarious jokes. (None of which I would personally laugh at, by the way.)

It’s at this point that true madness sets in. If the market were more mature I wouldn’t have to ask what the price of my e-book should be. The question would have been asked and answered so many times that the number would be obvious to everyone. Precisely because the market is so new, however, this uncertainty in pricing seems like an opportunity in two ways. First, it means I don’t have to be precise. If I’m off a little bit from the optimal number I may not price myself out of sales because consumers haven’t fine-tuned their own reactions. Second, it seduces me into believing that prices that are higher are just as rational as prices that are lower. I mean, if the consumer doesn’t yet care, I should charge more — right?

Wrong! The fact that prices are not stable implies nothing positive. Price uncertainty is to business what fog is to archery. The very fact that I’m having to come at this issue from twenty different direction just to feel as if there’s some rationality to the process defines the irrationality of the process. I’m grasping at straws, the consumer is grasping at straws, and none of that is good for the business of making and selling content in the marketplace. (Straws, yes: content, no.)

As an independent author trying to use internet to publish and distribute my work, one of the stark realities I’ve had to confront is that I’m completely in the dark about the consumer expectations I am faced with. Not in the dark the way the traditional industry is in the dark, with their massive data-collecting abilities and market-moving muscle, but totally and completely all-alone-in-the-woods-with-my-eyes-gouged-out in the dark.

During such in-the-dark moments the questions really begin to fly, like so many pieces of shrapnel leaving a disintegrating flywheel. Why do people buy books? Why might people buy my e-book? How might the price of my e-book impact anyone’s desire to make that purchase? If I’m selling short stories now, but a novel later, should they be priced the same, or are they different products with different markets and different consumer expectations? If I price them differently, which should cost more? Should I charge by page count/length as opposed to genre? How do consumers feel about such things? Are consumer expectations on Smashwords different than consumer expectations on Amazon? Do consumers assume that an independent/self-published work should sell at a discount? To what extent do I need to worry about establishing my own pricing elbow-room? I’m not trying to scam anyone (or even imply that I’m worth anything), but I don’t want to box myself in or leave money on the table.

Seriously: is there anything about consumer expectations that is actually knowable in advance, rather than only in hindsight or after testing prices in the market? The only thing I seem to know for sure is that consumers prefer a cheaper price, but even that doesn’t say anything about what they will pay!

In the end, I arrive back where I started. Except for one thing. I now know that there is no point in trying to factor consumer expectations about price into my pricing plans. Beyond my already-established range of possible prices, it’s all a guess. Maybe an educated guess, maybe a wild guess, maybe a wild-hare guess, but a guess.

* Concerns about abetting consumer expectations which starve artists are a considered part of my decision to eschew the free/freemium marketing model. It may well be that I could generate more interest, and perhaps even more total revenue over time, by giving my content away, but in the current context that act is not benign. Giving away content implies that it is worthless, and I don’t believe that it is. To the extent that I might be able to seduce consumers into paying more later by paying nothing now, the free/freemium model still teaches consumers that digitized text is and should be free, and that’s a moral position I don’t agree with. I’m not making the case that analog business models should port effortlessly to digital by right, or that online content should always have a price attached, or that everybody who has something to say deserves to get paid. All I’m saying, in putting a price on my content, is that the content itself has value. If the market wants to value my work at nothing it can do so by refusing to make a purchase.

** I tend to think of myself as having no overhead because I don’t pay employees or own factories or have transportation costs. It would probably be equally correct, however, to say that my entire life is overhead relative to my career as a writer. In neither case does this help me price my e-book.

— Mark Barrett