If you read through the self-publishing message boards, price point is a popular topic. Outside of writing process, selecting the right price might be the most important decision an author faces. I see a lot of different theories about what should determine price. Most of what people say is wrong. You only need to think about one thing when selecting your price:
Pick the price that maximizes your profit.
That’s it. That’s all. Just pick the price that maximizes the size of your monthly check. Picking anything else is stupid.
This is a tall order. It’s not immediately clear which price will generate the most money for you. Amazon offers 35% royalties on books between $0.99 and $2.98. Anything between $2.99 and $9.99 nets 70% (minus a usually negligible data transfer fee). So a $0.99 book needs to sell between five and six as many books as a $2.99 book to keep pace. Whether the higher demand from the cheaper price justifies selling at $0.99 remains to be seen and probably varies from book to book and genre to genre. An author might have to experiment with different price points before settling on the right one for him.
An author must also weigh the value of sacrificing extra profit from a single book to generate additional profit for rest of the author’s library. For example, the author of a trilogy might want to sell the first book at $0.99 and the other two books at $2.99. The cheap introduction brings more readers into the series, which in turn will lead to additional sales of the more expensive selections. I run a similar strategy with my game theory textbook, selling the first chapter at $0.99 and a larger version at $2.99.
Some people’s pricing strategy baffles me, however. Some people refuse to price books at lower prices because they do not feel it adequately reflects the amount of work the author put into the book. Absolute nonsense! The time you spend writing a book is a completely sunk cost once you are done. Placing a book at $4.99 because you think that is the value of the book is beyond ridiculous. The market determines the appropriate price. If selling at $0.99 or $2.99 brings in more profit, your resistance to lowering your price only makes it more difficult for you to pay your rent. It also leads to fewer people buying into your brand and therefore fewer sales of your other books. These authors need to get over themselves.
Just pick the price that maximizes your profit. It’s that easy…at least in theory.
William Spaniel 
thanks for your bottom line advice…
Good info, very interesting.
Cheers
William, I completely agree with the premise of your article. Revenue maximization is the ONLY way to price anything, ebooks included. BUT, you are leaving out an important element. What IF someone has a lot of “back end products” to sell like I do. This changes your calculus. Anyone should consider this issue as well when pricing books and ebooks.
I agree. I talked along similar lines when I mentioned my small game theory textbook versus the larger one.
I hope you don’t mind me making a small but (I think) important clarification: Pricing should be based on the maximization of profit, not revenue. For ebooks, profit maximization is the same as revenue maximization because the marginal cost is essentially zero. However, for most products, pricing to maximize revenue does not maximize profit.