Wednesday, January 12, 2011

Two Households, Both Alike in Dignity

The sample sizes aren't quite identical yet, folks (232 votes this round compared to 342 last round), but currently 54% of those of you who responded own an e-reader, as opposed to only 42% in June 2010. Granted, this is an entirely unscientific survey, but it seems to me that e-reading is on the rise. Not that we couldn't have guessed this already.

Speaking of e-books, I thought I'd take a moment to rehash the two primary ways they're sold: via either the agency model or the wholesale model. How does this affect you? Well, let's just say it's in the area y'all have in common with Queen Elizabeth II. That is, your royalties (/royal teas).

With jokes like these, I will be the best/most awkward dad ever.

The Agency Model

The agency model of e-book sales is the one you've heard about most recently. As opposed to the previous model (see below), the agency model assumes that the publisher is selling directly to consumers, with retailers like Amazon serving as intermediaries. Therefore, the publisher sets the the price the consumer will pay, and the retailer gets a cut for each copy sold.

For example: a publisher prices an e-book at $10.00. They sell it to consumers via an on-line retailer like Amazon, and Amazon gets a 30% cut. Each time a book is sold, Amazon gets $3.00 and the publisher gets $7.00. Those $7.00 are used to pay the publisher's overhead (everything from utilities and the purchase of new software/equipment to employee salaries and marketing budgets) and to pay you, the author.

Depending on your royalty agreement, which may range anywhere from 25% to 50% of net receipts, you'll get anywhere from $1.75 to $5.00 per book (depending on the royalty rate and the publisher's definition of net receipts). As far as I know, the going royalty rate is stuck down at around 25%, but many organizations (including the Authors Guild) are trying to increase it.

The Wholesale Model

The wholesale model of e-book sales is the method that has been used almost exclusively in the industry for the past infinity billion years and is ported directly from the world of physical book sales. In this scenario, publishers sell e-books directly to retailers, who then have the right to re-sell them to consumers for whatever price they want.

Again, let's imagine a $10.00 e-book. The publisher sells it to an on-line retailer like Amazon at roughly a 50% discount, at which point Amazon can sell it to you for whatever price strikes their fancy. Amazon could sell it for $5.00 and make no profit, they could sell it for $10.00 and make a $5.00 profit, or they could sell it for $0.99 and take a $4.01 loss.

Regardless, $5.00 flows back to the publisher to cover overhead and pay you your royalties. This time, however, there are $2.00 fewer floating around to cover those expenses, and depending on how your royalties are calculated, you'll only get between $1.25 and $2.50 (there's no question about whether the retailer's commission figures into net receipts, since under the wholesale model no such commission exists).

Granted, your royalty rates will probably come in closer to the $1.00 – $2.00 per book end of the spectrum for a $10.00 e-book, but $0.75 to $1.00 difference per book adds up quickly if you're moving a lot of units.

While I don't imagine a lot of publishers do this, it's possible for them to get into trouble if they're selling physical books via the wholesale model and e-books via the agency model. Because the publisher controls the price of one and the e-retailer controls that of the other, you can get into situations where the e-book costs more than the physical book, and in those situations consumers are (rightfully) angry.

Not that it costs $0.00 to produce an e-book, mind you, but it does cost substantially less than producing a physical book.

After hearing this and e-self-publishing success stories like that of J.A. Konrath, your first reaction may be: "Eff it, I'm putting my novels up as e-books on Amazon right now!"

Not so fast, Speed Racer. Unless you're a near-professional cover artist, e-book designer, and editor (in addition to your authorial skills), you're going to need help producing a quality e-book, and you're almost certainly going to have to price it below $9.99. Without the seal of approval of a traditional publisher—which, contrary to popular belief, is still useful social currency—you'll have a hard time selling your 150,000-word fantasy e-epic at $12.99. Especially if no one knows who you are yet.

So: while I encourage you to explore all the e-options available to you, keep these two models in mind when seeking traditional representation for our newest and least traditional format.

Tomorrow: a lesson in brand management!


  1. Wait, I'm confused. Why is Amazon paying $7 in the agency example and $5 in the wholesale example? Couldn't the wholesale model just as easily be done with a $7 price? And in that case, the royalties would be the same, wouldn't they?

  2. Hi Livia,

    Amazon doesn't pay anything under the agency model; they simply receive $3.00 as a commission for selling a $10.00 book.

    As for the price differential: yes, the publisher could raise the price of the book and therefore increase the money due to them from the retailer, but for the sake of the example I assumed the same book at the same price for each model.


  3. Ha! I just went through jury duty and as we were waiting around for the judge and stuff, five of us whipped out our various e-readers. The rest of the jury, who didn't have e-readers looked at us and we proceeded to show the non-electronic folk how the readers worked. I think we probably sold three more e-readers in one trial!

  4. Now I have to go re-examine what my e-publishers do. They prefer (naturally) to sell via their own websites, but also have my books available at Amazon (as well as a number of other sites).

    On my publisher's site, my e-books are $6.99. At the Kindle store, one is listed at $9.99 and the other at $6.29. They show the publishers suggested list price at $13.98 for both. According to my royalty statement, my percentage is the same for sales via either venue.

    But the lag time between statements and what's up on the Amazon site as far as pricing goes means what I see today on the site won't necessarily match my current royalty statement.

    Color me confused.

    Terry's Place
    Romance with a Twist--of Mystery

  5. You always give such good educational posts...the examples really helped me understand what the heck you were talking about too. I'm looking very forward to the brand management post next week.

  6. Thanks for the great post, Eric.

    I've seen several books on Amazon where the eBook ends up being more expensive than the physical book, and it's usually the instant bestsellers, where Amazon has the hardcover priced at $9.99, but the publisher has the eBook priced at $12.99. This makes me NUTS.

    (An example right now is MATCHED by Allie Condie, where the physical book is currently $9.99, and the Kindle version is $10.99.)

    I really appreciate you explaining why this is happening. I don't agree with it, but at least now I understand it.

    Are physical books going to move to an agency model one day? What do you think?

  7. Thank you for this post! Eric, you have a talent for breaking things down without dumbing them down. Your jokes might make you an awkward dad, but you're a natural teacher, as all the best fathers are. :)

  8. I've been moving on Smashwords e-books and that format is way more difficult for me than the Amazon one was/is. Smashwords really helps one offer a readable ebook by showing you all the errors of your way. As soon as I put my books up, one sold within 24 hrs. Now I'm in the process of corrections. They offer reasonable priced help if an author, like me, isn't computer smart. P.S. I learned about Smashwords HERE from the Pimp. Let's talk about audio books as I get a lot of request to do that (from readers of my novel.)

  9. Perhaps the major publishers ought to get together and develop their own universal ereader good for all their books and sell them direct through it and cut out the Amazons and the Barnes & Nobles. They then control their prices and keep more money. Amazon's monster Kindle has them at its mercy. It reminds me of the beautiful swordfish in The Old Man and the Sea. He strapped that fish to his dingy, a beautiful specimen, but sharks kept nibbling at it and by the time he got to shore all that was left was the head and tail. Nothing of substance was left. He might have had it stuffed and mounted since he had the head and tail, good for that. But the only ones that got any real benefit were the sharks. Publishers need to repel the sharks. Otherwise they will be nibbled to nothing.

  10. Don't publishers price the paper version more cheaply to try and encourage people to cut off the spine, chuck the cover and scan the book into PDF format? That's what I usually do, though I usually buy a used copy which is even cheaper.