After all the comments on the last post about electronic pricing, it became very, very clear to me that indie fiction writers seem to think that pricing an electronic book is done in a vacuum. They just make up some number that feels right or is what they heard and then stick to that price without any thought of customers or history of publishing or what anyone else in publishing is doing.

And most importantly, writers give almost no thought to the perception of the buyers. The decision is often made on pricing because it’s what the writer likes, or how the writer personally buys, or what the writer can afford. That’s usually as far as the thinking goes.

And worse yet, indie books are often priced because a writer doesn’t think their work is worth the same as a traditionally published book. That’s just flat sad.

Of course, all the confusion makes sense considering how new all this is and that indie publishers are just writers who (before now) never once thought about how a price got put on a book, electronic or paper. Just not something that comes up in the “training” of being a fiction writer.

Honestly, as a writer, I can’t remember ever having a conversation longer than a minute about pricing of any of my books in thirty years of writing. Just never happened. However, when I was the publisher of Pulphouse Publishing Inc., pricing was a constant topic from before we published our first book. Hmmmm….

And then, of course, over the last few years, we had major bloggers who pushed the 99 cent idea and the cheaper-the-better idea in a race to take all indie publishers to the bottom of the electronic pricing structure. This race even went so far as having indie writers figuring out ways to give their books away before Kindle allowed it.

Yeah, it got that bad and still is among some groups of indie writers.

As is normal with most fiction writers, any thoughts of logical business just flew out the window with the sudden new power and control over their own work.

Thankfully, that strange, no-thought pricing trend is starting to shift as more and more indie writers are understanding they have to run their own publishing companies, even though they only publish their own work. A publisher is a publisher is a publisher.

And some of us writers feel our work and our time has value, which is also changing the discussion.

Book Pricing: Some Minor History

A few short years ago most paper books were sold in real brick and mortar stores or large box stores. Then came electronic books and electronic bookstores and the world started to shift.

A few short years ago the major publishers and some of us smaller publishers (Pulphouse Publishing Inc. for example) had the knowledge and the ability to access the book distribution system. Most writers thought it far, far too complex to worry about. Then came electronic books and electronic bookstores and the world started to shift.

A few short years ago three things happened. Distribution directly to the readers became possible, the silliness of thinking of self-publishing as a bad thing got shot in the head after fifty years of life, and some midlist writers finally got completely sick of the bad contracts and even worse treatment from traditional publishers.

A few short years ago some writers started going directly to readers with electronic books (helped along greatly by the KDP program and the brains of Mark Coker at Smashwords).  And some of us jumped on early and got publishing and talking and teaching other writers how to climb on board. And the focus was on electronic books because they are so darned simple to produce and get to readers (even with the costs I’ll talk about below.)

A few short years ago, even though electronic publishing at the time was only a few percent of all books sold, indie writers seemed to latch onto that area of book sales with all their focus because it was easy.  And honestly, even at a small percent of available readers buying electronic books, the money was stunning for some writers.

And now, two plus years later, we find ourselves here, almost to the new normal in publishing.

Today, traditional publishers are making large profits and print books are still being produced (no matter how much some writers wanted that to stop). Electronic books have exploded to 20% of the total book market and is looking like it will level in a few years around 30%. Stunning growth when looked at with a business reality and in a short time frame.

And finally, today indie writers are starting to catch a clue that the future for their personal publishing company is in doing both electronic and paper books (just as traditional publishers are doing) and reaching 100% of their reading public. And thanks to indie publishers, the number of paper books went up 6% this last year (2011). Again, amazing growth and only starting.

So Back to Pricing

When a publisher (all traditional and some small presses and very few indie publishers) sets a price for a paper book, the publisher (in general) looks at the following factors in a profit-and-loss calculation:

1) Costs of product (author)

2) Costs of production and overhead

3) Costs of distribution (discounts including bookstore percentage and shipping)

4) Desired profit levels after all costs

In traditional publishing, those factors are worked into a profit-and-loss sheet with projected (hoped for) sales over a fairly short period of time. (Remember, to traditional publishers, books are still just like fruit that spoils. That’s still how most of their accounting systems work.)

To a small or mid-size press, the concern is getting the money spent on the book back as soon as possible and then letting the book sales grow over time for the profit. So small and midsize presses tend to walk a line between indie and traditional presses in this area, with books being both fruit and nonperishable goods at the same time.

Most indie presses, meaning writers self-publishing, tend to take a longer-term look. That’s also what I have talked a lot about here. Get in for the long haul and let the money just flow every month, even though it may only be a trickle for a year or two or more. Just keep writing and thinking long-term. Books don’t spoil when you own the copyright.

But indie presses, how do you set your book prices with the above factors?

Actually pretty simple, but it requires some math, so hold on…

Indie Press Calculations

1) Cost of product.

This is the cost of the time it took you to write the book at a reasonable rate, the cost of the overhead of your office space, cost of supplies, and so on. (Yeah, I know, you ignore that, but stop being naive and start giving your time and your work some value. If you don’t, no one else will.)

2) Cost of production and overhead.

This is the cost of your time to do covers, both paper and electronic, the cost of proofing your book, cost of your time formatting, the cost of your time uploading your book to all the sources. And if you must, the cost of your time for promotion.

3) Cost of Distribution.

For paper, figure a bookstore discount of 50% of retail cover price and a distribution fee of between 5 and 10% to get it to the bookstores through an indie distributor. (This is outside the extended and Kindle distribution on CreateSpace. I will be talking about the wave of indie distributors to bookstores over the next six months.)

For electronic, figure the discount of the major electronic bookstores and distributors. For example, in the $2.99 to $9.99 range you get just under 70% from Kindle for most sales. Smashwords takes 10% of similar numbers, and so on. (If you are pricing your novel under $2.99, I have a hunch this post won’t help you because you don’t have enough common business sense to even get the best discount for your work.)

4) Desired profit levels after all costs.

Figure all your costs, figure how much from each source with each price you would be getting, and then figure where your money comes back to you and when you books start breaking into a profit per sale. To do this, just as traditional publishers, you have to make a guess at sales.

(I have the numbers I use below that have proven over time to be fairly close for writers with more than a few books up under the same name. Not all. Some do more, some do less. So figure your own guess as to future sales and remember, it is a guess. And as I have talked about before, for the calculations below my time is worth at least $50.00 per hour when working for myself. I tend to charge $250 per hour and more when working for others. Not kidding. Write and edit as much as I have over the decades and you can get that rate as well. Or better.)

For example:

Three months to write a novel. 80,000 words. 80 hours at 1,000 words per hour plus 20 hours to fix mistakes makes the hours spent at a nice round 100 hours. No supplies for ease of calculation. $50.00 per hour x 100 hours = $5,000.00. (Do your own math at your own hourly rate and time to write a finished novel but please don’t mention it here. We’ve been though all that.)

Cost of production is $20.00 for a good cover art and twenty hours to build the covers and format the book for both paper and electronic and launch it in both electronic and paper. $25.00 for extended service on CreateSpace and $100.00 for proofing costs. Cost total then is $50.00 per hour x 20 hours = $1,000.00 plus $20.00 plus $100.00 plus $25.00 = $1,145.00.

Total Costs of the novel is $6,145.00. Keep that number firmly in mind.

Next Step: Costs of distribution. First look at your page length of your paper book and calculate your price plus $2.00 profit for all sales in extended distribution. (There is a chart on CreateSpace that helps with this.)

For an 80,000 word novel and decent trim and font sizes, this will usually take the price of a trade paper to the $17.99 range, which is fine in a trade paper.

Say your book publisher costs are $5.00 per book from CreateSpace (you get this exact number when you order the first proof). Retail cover price is $17.99.  Give a bookstore 50% max and a distributor another 10% of that and what do you have left over? 40% of course.

$17.99 x 40% = $7.19 minus the $5.00 costs is a profit margin per book of $2.19 before creation expenses in steps one and two.

(This is pretty close to the edge for my tastes for novels because in many instances there will be group shipping costs involved which will range from $.60 to $.85 per book. But for this example, you get the idea. And sometimes shipping costs will be paid by the buyer or the distributor, so that’s not on every book.)

Again, each book will be different, but make sure you  have that level of margin on both the extended distribution systems through CreateSpace and the outside distribution to bookstores. That will make sure you also have the same profit margin or better on other distribution methods as well as they emerge. And this also gives you a much bigger profit margin when the book sells directly through Amazon or CreateSpace.

Setting Electronic Prices

So back to the point of all this finally: Setting your electronic book price.

You have a paper edition of your book on sale for $17.99. Each paper sale will return at least $2.00 back against the $6,145.00 costs of doing your book. ($145.00 out of pocket costs, $6,000 time costs.)

So that will take about 3,070 paper book sales to return your investment in money and time completely. Possible, given enough years and some luck. But now we can add in the electronic sales to cut those years down some.

Note!!!!  When setting your electronic price, never forget that your paper book is listed and shows up at $17.99 on Amazon and B&N and iBookstore and Kobo and other places.

Now, are you going to want to price your electronic novel at 99 cents and link it to the $17.99 book with the same cover and title????

Of course not. That would just shout problems to every reader who sees it. And kill the sales on both sides.

The range of electronic book pricing that goes naturally with a $15.99 to $18.99 paper edition is $6.99 to $8.99 electronic.

In other words, readers like electronic editions OF NOVELS to be a little less than half of the paper edition. Generally.

Not a lot less, but a little less than half if the book is a full novel length. (I will mention shorter collections below.)

That price range feels right to book buyers and feels like a deal to electronic book buyers.

For example, this is what every buyer will see on all electronic bookstores.

TRADE PAPER…$17.99

KINDLE EDITION… $7.99

So what do the electronic buyers think? “Wow, good deal on that Kindle edition.” And more likely they won’t give it much thought at all because it looks natural and professional.

But any price too far under that for the electronic edition gives the readers a bad feeling. And makes them question the quality. And then not buy either edition.

In other words, set your electronic price in relationship to your own trade paper edition.

Also it would not hurt to make sure that your price looks comparable to electronic editions put out by traditional publishers.

In this instance, price is NOT an advantage. You cut your price too much and you cut your sales as well.

Electronic book prices are not set in a vacuum.

To finish off the math.

Electronic… $7.99 x 65% = $5.19 profit per book before set expenses of costs and time to produce.

(This is an assumption of sales…make up your own for your own profit and loss statement.) Sell 25 electronic copies and 25 paper copies per month (worldwide and assuming you are distributing to bookstores).

So, now having the data to use for the 4th question, how soon will your set costs and time costs be back in your pocket?

Electronic… 25 copies x $5.19 = $129.75

Paper… 25 copies x $2.19 = $54.75 (adjust for higher rates on sales direct or through Kindle and/or less copies sold. This is just an average for this example.)

Total income per month (assuming these sales numbers) is $129.75 + $54.75 = $184.50 per month.

$2,214.00 per year.

Less than three years to recoup your set and time costs at that level of sales. And all sales from there are just pure profit after production and distribution costs.

(I can say this right now, since a number of you questioned my math on the short fiction post. WMG Publishing Inc, without any real bookstore distribution yet, is doing better than this number on four author names and a dozen different books. I used very low numbers here for my calculation.)

As promised, let me give you an example of a 20,000 word five-story collection.

Using the same calculations as above….

With a decent trim size (5.5 x 8.5) and decent font (not too large or too small), a 20,000 word collection will run about 110 pages or so in a paper edition. Price the paper collection at $7.99or $8.99 to keep it in the same price range as the major digest magazine prices of the same look.

Your cost is about $2.20 for that book from CreateSpace. Extended distribution will get you about $1.00, which is fine for a short collection. (Longer collections should be priced like a novel for the most part.)

$7.99 x 40% = $3.20. Minus $2.20 = $1.00 profit per sale on outside distribution, about the same as the extended distribution number.

Now move to electronic pricing.  

Remember you have a $7.99 – $8.99 trade paper edition on the screen.  What electronic book price will look good and normal to a book buyer?

$4.99. That looks fine even though it isn’t exactly under half the price. At these low prices, book buyers do not expect the half price for electronic, but they do expect the price to be considerably less than the paper and near half price.

This is what every buyer will see on all electronic bookstores for a short collection.

TRADE PAPER…$7.99

KINDLE EDITION… $4.99

Looks fine and reasonable and professional.

Summary

Electronic pricing should not be done in a vacuum.

I know all of us started this indie publishing road just pricing our books with no consideration to anything but how we felt and what we would buy. And a lot of us followed some seemingly-good advice to price our books and stories into the bargain bin on some strange thinking that we were in competition with traditional publishers.

Books and publishers are not in competition except to publish the best fiction possible. But honestly, that’s up to the writers to write great stories and the publishers to get them into the hands of as many readers in as many forms as possible.

Sound familiar since you are now wearing both hats as an indie publisher?

I have grown to hate the price discussions because all I tend to get is comments like “I don’t feel like pricing my books that high.”  Or, “My mother would never buy a book priced that high.” Please, hold on those comments this time, would you?

In my opinion, it’s now time for some logical thinking when pricing electronic indie books. That’s the kind of discussion I would love to have.

Also, I am sorry to bust a real tightly-held myth about traditional publishing, but electronic books DO HAVE COSTS for traditional publishers. They have author costs, employee costs, expensive overhead, art, proofing and so on. All very real out-of-pocket costs for a traditional publisher.

So should traditional publishers just give those electronic books away for 99 cents and hope to get all the money back on the paper books only? Of course not. Electronic books are just another way to distribute books to readers and need to be figured into any profit and loss calculation.

And why electronic books are near the half price of a paper book is because of the costs of production of a paper book and the costs of delivery of a paper book and the return system that is still somewhat in place for traditional publishers. The costs are still there, but not as much and readers know that, which is why readers expect the lower electronic prices, but don’t expect them to be too low.

The vast majority of traditional-published books follow the basics I laid out above and price their electronic books to a profit and loss calculation, trying to predict sales and time of sales just as I did above. And for the same reasons.

Are there exceptions in both directions? Yes, and I don’t want to hear about them here to be honest.

So when pricing your next novel, do the calculations for your time. What kind of hourly wage do you get at work? Use the same number for your writing and production time. Add in exact costs, and then figure out how long at each price level it will take you to earn back that money.

A hint: Three years is a good time period. And what traditional publishers tend to use on their profit and loss statements.

Stop pricing your ebooks because it “just feels right” or “because I’m afraid I’m not worth more” or “because I’m afraid to go that high.”

Use math, use basic business practices to understand the value of the product, the art, that you create.

I’m having a blast with both the writing and the publishing these days. But that doesn’t mean I don’t want to be paid for my writing and my work.

I value my books and my writing and my time. I will price my books like the were priced when I sold them to a traditional publisher. Readers are used to that.

And I want to make the publisher’s slice of the pie as well for my work as a publisher.

And that’s even more fun, to be honest.

Have I said lately how much I love this new world?
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Copyright © 2012 Dean Wesley Smith

Cover art copyright Philcold/Dreamstime
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