Understanding Wholesale Pricing

One of the more difficult things for indies to wrap their heads around is how to price print books. This is generally because the current nature of the digital publishing infrastructure is convoluted in terms of how authors get paid. Authors THINK it is simple: They sell a book on Amazon or Apple or Smashwords, and the retailer pays them a royalty.

The problem is that what you are paid is technically NOT a royalty. It is your net profit from a consignment sale. But paying “net profits on consignment sales” sounds much scarier than “royalty,” so the digital industry has adopted the royalty vocabulary.*

However, thinking in these terms makes it difficult for authors to wrap their heads around how to price print, because they don’t really understand the normal retail chain. So the goal of this post is to provide a bit of background and explanation.

First, we need to understand the two types of pricing indies are dealing with.

Agency Pricing: Manufacturer (author) sets the price for which the product will be sold to the consumer. Manufacturer (author) is paid profits only when product is sold to consumer This is the dominate structure in digital publishing. Authors upload their files to retailers directly or use a service to handle the distribution. Retailer pays nothing unless a consumer purchases a copy.

Wholesale Pricing: Retailer sets the price for which the product will be sold to the consumer. Manufacturer is paid when product is sold to the retailer. If Amazon buys ten print copies of your book to have on hand for fulfillment, those sales are credited to your account when AMAZON buys the copies. Even if it takes Amazon six months to sell those copies, it doesn’t matter. When AMAZON buys the copies to have in stock, those sales are credited.

With agency pricing, the manufacturer and the retailer have a pre-agreed payment structure, usually based on a percentage of the final sale price. So if your agreement is 60% and the book is sold for $2.99, you would be paid $1.79. If the book is sold for 99 cents, you would be paid 59 cents.

With wholesale pricing, the retailer purchases copies at a percentage of the list price. If the list price is $14.99 and the retailer gets a 30% discount, then the manufacturer is paid $10.49. With wholesale pricing, the price the retailer sells the book for has no bearing on the manufacturer’s profit. If the retailer sells the book at $12.99, the manufacturer still gets $10.49. If the retailer sells the book at a $9.99 and takes a loss on the sale, the manufacturer STILL gets $10.49.

Now, let’s discuss actually setting your list price.

The LIST PRICE is used to calculate what a retailer will pay for a product. Your distributor (for most indies, this will be Createspace or Ingram Spark) offers retailers a discount on the list price. For purposes of our examples, we are going to use Createspace policies. Createspace offers what is referred to as a “short” discount. Standard print wholesale rates are generally between 45-60% off the list. A short discount is commonly between 20-35% off the list. The reason for this difference is that Createspace is distributing print-on-demand books, which have higher production costs than bulk printed or offset printed books. For our example, we are going to use 35% as the discount rate.

For our example, we are using a 250 page trade paperback to calculate profits from sale. As both the printer and distributor, Createspace subtracts the printing and distribution costs from the sale and pays the difference as a royalty. If we set the retail price of the book at $14.99, the profit on a sale made through through expanded distribution to bookstores would be $2.14.

At a 35% discount, the bookstore would be paying $9.74 for the book.

Typically, indies approach print like they approach digital: they want to sell their products at the lowest price possible to encourage impulse buys. This works in digital, but can backfire in print. Because the lower the price you set, the more you reduce the opportunity for the retailer to make a decent profit.

Let’s talk about retail.

Retailers have fixed costs. Rents. Utilities. Wages. These fixed costs have to be paid regardless of sales volume. Because of this, retailers add their overhead to the wholesale price they pay for a product to calculate their actual profit. This is normally calculated as a percentage based on the product category, and most retailers have complex processes that are used to determine the amount of overhead added to different categories of product. But for purposes of our discussion, we are going to set a fixed overhead charge of 10%.

In our example, the retailer paid $9.74 for the book. After adding their overhead, the minimum sale price for the book is $10.71. If the list price is $14.99, the retailer has $4.28 of profit to play with. They can chose to include the book is sales promotions, or discount the book on their own, and still make a profit on the book.

Indies may be inclined to say, “Well, all the other books by the trade publishers are listed at $14.99. So I am going to set my price at $9.99 to encourage sales.” THIS IS WRONG.

On the most basic level, your profit from expanded distribution sales plummets to 14 cents! This is because your fixed production costs on the book do not change. The lower your list price, the less you make per sale. Now you may think that the lower price would encourage more buyers, but that isn’t the reality.

On a $9.99 book, the retailer is paying $6.49. After adding the overhead, the minimum sale price is now $7.14. This gives the retailer a buffer of only $2.85 to play with. At the lower price, the retailer is going to be less likely to place the book on sale or include it in discount promotions.

Retail is driven by the ability to run sales. Particularly brick and mortar stores: they live and die on their ability to discount products and run sales. A product that can’t be discounted is a product that sits on a back shelf taking up valuable shelf space. Think like a consumer. Which book do you grab (all things being equal): The book that is always $9.99 and buried on a back shelf, or the $14.99 book on sale for 25% off and is sitting on the sales display at the front of the store?

This is all particularly problematic for bookstores because POD books are generally non-returnable. Low profit potential compounded by non-returnability means many retailers won’t even stock a book if they can’t see a way to make money on it. Remember, they have FIXED COSTS and finite shelf space. To maximize revenue, they need to stock their shelves with books that they can sell.

This phenomena is also relevant on online vendors. Even Amazon has to spend money on warehousing and shipping costs. Amazon’s ability to make a profit will determine if they order copies of your book for stock, or if your book says “Available in 2-5 days.” If Amazon doesn’t have books on hand, Prime members can’t take advantage of their free shipping, which is often a driving factor in purchasing decisions.

This will also impact whether Amazon and others include your books in site-wide sales. With a properly priced book, Amazon will often put your books on sale for you. And when they do, not only do you get the boost from the sale, you still make the same profit!

*There is a long, convoluted explanation of why your profits are referred to as royalties that goes back over a decade to the beginnings of POD publishing, but that is a discussion for another post.

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