Category Archives: Publishing

Amazon’s Clever Price Discrimination Strategy

Amazon likes to discount books. Here are some examples, starting with Game Theory 101: The Complete Textbook:

gt101

We are only looking at the print prices in this blog post. Originally $13.99, Game Theory 101 is yours for only $11.75.

It’s a similar story for The Rationality of War:

war

Down from $10.54, you can buy The Rationality of War for $9.30.

And finally, here’s Game Theory 101: Bargaining:

bargain

Originally $11.09, Bargaining now sits just under $10.

I suspect the average consumer is pleased to see these discounts. For authors who publish through CreateSpace, however, these discounts are incredibly confusing. We can set the original price. No matter how much Amazon discounts it, they pay us a set amount of money per sale. As such, we also like Amazon’s discounts. In fact, the larger discount is, the happier we are.

The problem is, the discounts are inconsistent. When you initially publish a book, Amazon will always tag it with the list price. Then, after some time and without any warning, Amazon might reduce the price. Or they might not. I have discussed this problem with other authors, and there doesn’t seem to be any explanation for what’s going on.

That said, I now have a theory. Amazon has found a clever form of price discrimination.

What Is Price Discrimination?
The maximum price any of us is willing to pay for a good or service can vary heavily. A lot of Americans will pay $10 or more to see Fifty Shades of Grey. Meanwhile, others may only be willing to pay $1 to see such a movie. We call such a maximum price an individual’s reservation value.

As a business owner, your dream is to charge everyone their reservation value. For example, suppose Fifty Shades’ potential audience consists of two people, one who is willing to pay $10 to see the film and the other who is willing to pay $1. If you could somehow charge the $10 person $10 and the $1 person $1, you would make $11. This makes you the most amount of money possible.

Of course, movie theaters cannot easily distinguish between those high value and low value types. As such, like most businesses, they offer a single blanket price of $10. The $10 person sees the film but the $1 person does not.

Despite the difficulty in price discriminating, businesses try it to varying degrees of success. Student and senior citizen discounts are perfect examples. Both of these groups live off of fixed (and small) incomes. Consequently, as a whole, they are less willing to pay high prices for entertainment. Businesses like movie theaters therefore offer cheaper prices to these groups than to people who tend to have larger disposable incomes.

Airplane flight prices work in a similar way. Vacation travelers are unwilling to pay $1000 for a flight across the United States. In contrast, many business travelers who need to get to New York on short notice are willing. Airlines thus charge relatively cheap prices on flights booked well in advance and massively jack up the prices on the days before takeoff.

Don’t let these discounts fool you. Although they may make it seem like the businesses are acting generously, the discounts exist to maximize profits.

Price Discrimination on Amazon
Broadly, people who publish through CreateSpace fall into one of two categories: vanity authors and what I will call profit makers. Vanity authors write books without the intention to make money. They simply want to “publish” a book so they can say they have. These authors will sell tens of books to friends and family, but their work will never catch on with a larger audience. They give self-publishing a bad name.

Profit makers use CreateSpace because they do not want to hand over a large share of revenue to a traditional publishing house. Vanity is not a concern here. They invest time in writing books and publishing through CreateSpace because they know their works will make a substantial amount of money.

Unfortunately for Amazon, it is very difficult to differentiate between vanity authors and profit makers. Further, there are substantially more vanity authors than profit makers out there. As such, Amazon’s best guess for any new book coming from CreateSpace is that the work is from a vanity author.

This is where I think Amazon’s price discrimination comes into play. Amazon suspects that every new book is vanity. Sales of vanity books do not operate like a normal market. Vanity authors are selling virtually all of their books friends and family. These individuals are willing to spend more money on these books because they know the author. Their reservation price is consequently higher than your average individual. In many cases, it may be substantially higher—a poorly edited vanity book is essentially worthless to the average consumer, but friends and family might be willing to spend $10 or $20 on the book.

If you are Amazon, what incentive do you have to cut the price? Any discount you offer directly hurts your bottom line, and these vanity books are not responding to standard supply and demand factors. Consequently, you don’t have any incentive to discount. The vanity books will be sold to the friends and family and no one else. No discount maximizes your profit.

Of course, Amazon suffers when the book is from a profit maker, not a vanity author. These books respond to supply and demand, so cutting prices by 10% can actually cause more people to buy them. So Amazon might want to reduce the price in these circumstances.

Put yourself in Amazon’s shoes for a moment. You want to discriminate here to maximize your profit. But how?

From my personal experience and discussion with other authors, I think Amazon has figured out a way. They start by offering no discount, under the assumption that the book is from a vanity author. They then wait. And wait and wait and wait. Vanity books will see their sales fall off a cliff after a month or two. Profit making books will see continued sales over the long term. This differentiates the type of book. Amazon thus cuts the price of books that sell, knowing that doing so will lead to even more sales.

To be clear, this is speculation backed up with some non-random observations. Still, I think there is a good chance that price discrimination explains Amazon’s strategy. Although the discounts may seem to be applied randomly, I can’t imagine a company with $88 billion in revenue is doing this without purpose. Price discrimination explains it.

Kindle Unlimited and the Economics of Bundling

Today, Amazon announced Kindle Unlimited, a subscription service for $9.99 per month that gives buyers all-you-can-read access to more than 600,000 books. And it took, oh, five minutes before someone called this the death of publishing.

Calm down. This isn’t the end of publishing—it is a natural extension of market forces and is potentially good for everyone.

Amazon is taking advantage of the economics of bundling—selling multiple products at an identical price regardless of how much the consumer uses each component. Bundles are all over the place; cable TV, Netflix, Spotify, and Microsoft Office are all examples of bundles. These business plans are pervasive because they work, they bring in a lot of money for their providers, and they leave consumers better off as well.

Wait, what!? How is it possible that both providers and consumers are better off by bundling? A while back, I too believed that this was insane and that bundles were a scam to get me to pay more money than I wanted to. (Why should I pay $1 for Home and Gardening when all I want is ESPN?) But then I read up on bundling and understood my folly.

An example will clarify things (and potentially amaze you, as it did for me not too long ago). As usual, I will keep thing simple to illustrate the fundamental logic without getting us bogged down in unnecessarily complicated math. Imagine a world with only two books available for purchase:

Further, let’s assume that there are only two customers in the world. Let’s call them Albert and Barbara. Albert and Barbara have different tastes in books. Albert prefers Hunger Games to Game Theory 101; he would pay at most $4.99 to read Hunger Games but only $1.50 at most for Game Theory 101. Barbara has the opposite preference; she would pay at most $2.25 to read Hunger Games and $3.99 to read Game Theory 101. You might find the following graphical representation more digestible:

BOOKS

Finally, assume that the marginal cost of each book is $0.00. That is, once the book has been written, it costs $0.00 to distribute each book. This is a bit of an exaggeration, but it is close to reality for electronic books. However, it is definitely not true for physical books (printing, shipping, etc.). This distinction will be important later.

With all those preliminaries out of the way, consider how a seller should price those books in a world without bundling. There are two options. First, you can price a book at a low price to capture the entire market share. Second, you can publish the book at a high price; it will sell fewer copies but make more money per unit.

Let’s apply that decision to Hunger Games. Selling at the low price means a cost of $2.25 so that both Albert and Barbara purchase it. (This is because Barbara’s maximum price for it is $2.25). That brings in $4.50 of revenue. Alternatively, you could sell at a high price of $4.99. This ensures that only Albert will buy. But it also brings in $4.99 in revenue, which is more than if you had set a low price. So you would sell Hunger Games for $4.99.

Now consider the price for Game Theory 101. Selling at the low price requires a cost of $1.50 so that both Albert and Barbara purchase it. (This is because Albert’s maximum price for it is $1.50.) That brings in $3.00 of revenue. Alternatively, you could sell at a price of $3.99. Only Barbara would buy it at this price. But it also nets $3.99 in revenue, which is more than if you had set a low price. So you would sell Game Theory 101 for $3.99. (Not coincidentally, if you click on the books above, you will find that they are priced like that in real life.)

Let’s recap the world without bundling. Hunger Games costs $4.99 and Game Theory 101 costs $3.99. The seller brings in $7.98 in revenue. Neither Albert nor Barbara benefit from this arrangement; Albert is paying $4.99 for a book that he values at $4.99, while Barbara is paying $3.99 for a book she values at $3.99.

Now for the magic of bundling. Suppose the seller bundle of both books for $5.99. Who is willing to buy here? Albert values Hunger Games and Game Theory 101 at $4.99 and $1.50 respectively. Thus, he is willing to pay up to $6.49 for the pair. So he will definitely purchase the bundle for $5.99. In fact, he’s much happier than he was before because he internalizing a net gain of $0.50 whereas he had no gain before.

What about Barbara? She was willing to pay respective prices of $2.25 and $3.99. Consequently, she is willing to pay up to $6.24 for the pair. So she will also definitely purchase the bundle for $5.99. And similar to Albert, she is internalizing a net gain of $0.25, up from no gain before.

So Albert and Barbara both win. But so do the producers—rather than bringing in a total of $7.98, the producers now earn $11.98. Every. Body. Wins. (!)

(Yes, I know that Kindle Unlimited costs $9.99 per month. If we added another book to this puzzle, we could get Albert and Barbara to want to pay that price. But that would require more math, and we don’t want more math.)

Why does this work? Bundling has two keys. First, as previewed earlier, the marginal cost of the products must be very small. If they were larger, those costs would make distributing more goods look comparatively less attractive. This would drive up the cost of the bundle and make it less attractive for the consumers, perhaps forcing them to prefer the a la carte pricing. That helps explain why book bundling is just now catching on; electronic books only cost server space whereas physical copies involve UPS.

Second, it helps when customer preferences are negatively correlated. This pushes everyone’s reservation price for the bundle closer together, which in turn makes the producer more likely to want to sell at the bundled price.

Before wrapping up, bundling has an important secondary effect for authors. The main takeaway here is that producers of the materials can make more money through bundling. This gives authors more incentive to create additional materials—an author who would otherwise only make $10,000 from a novel could now make, say, $15,000 instead. So an author on the fence whether to produce the book is more likely to follow through. This further enhances consumer welfare because those buyers can now read a book that would otherwise not exist.

Finally, “producers” here has meant a combination of authors and Amazon. A skeptic might worry that Amazon will end up taking away all of the revenues. That may be an issue in the long run if Amazon becomes a monopoly, but the revenue share is more than fair for now. Indeed, Amazon is giving authors roughly $2 every time a Kindle Unlimited subscriber reads 10% of a book, which is substantial. And with Kindle Unlimited reaching more consumers than a la carte pricing would, writers can earn revenue from a larger share of readers.

If you want to know more about bundling, I highly recommend you read the Marginal Revolution post on the subject.

Calculate Day-of-Week Sales Averages on KDP

For the longest time, KDP aggregated all sales information by week. Now KDP has nice graphical breakdowns of daily sales. Naturally, I wondered if my sales averages differed significantly by the day of the week. I compiled an Excel spreadsheet to give me a quick answer. Apparently the day of the week does not an impact for me, at least not in any significant way.

Still, I figured others would want to know the same information. As such, I did a little bit of extra work on the spreadsheet to make it usable for others. You can download it here. It is very simple to use. Just follow these four steps:

1) Select the tab in Excel that corresponds to the current day of the week. (For example, if today is Tuesday, use the Tuesday tab.)

2) Go to KDP’s sales dashboard. Use one of the pull down menus to open the last 90 days of sales. This will give you the most days to average over.

3) Copy each day of sales from the graph to the spreadsheet. This will require some work because you have to do it manually and need to pay close attention to graph to make sure you are copying down the correct number.

4) Excel will automatically calculate each day of the week’s average sales.

Again, you can download it here. Let me know what you think.

averages

“I Was a Digital Best Seller!”: NY Times’ Bizarrely Misleading Op-Ed

A couple days ago, the New York Times published an op-ed from Tony Horwitz, a Pulitzer Prize winner, chronicling his publishing of BOOM: Oil, Money, Cowboys, Strippers, and the Energy Rush That Could Change America Forever. A Long, Strange Journey Along the Keystone XL Pipeline. Ostensibly, it is the story of how online publishing does not live up to its hype. In reality, it is a parable of someone without good strategic or business sense committing a bunch of mistakes. And the best part: despite a lack of self-awareness, he gets paid off anyway.

To recap the important points from the op-ed, The Global Mail offered Horwitz $15,000 (plus $5,000 for expenses) to write a long-form piece on the Keystone XL pipeline. By the time Horwitz finished, The Global Mail had folded. He thus approached Byliner, who offered to publish the story as a digital book for 33% of the profits and a $2,000 advance. After a month, his book had only sold 800 copies, not enough to pay through the advance. This leads Horwitz to conclude that digital publishing is a failing enterprise.

However, the op-ed is actually a story of Horwitz making a bunch of mistakes and not realizing it. To wit:

1) As far as I can tell, he never signed a contract with The Global Mail. If I were going to spend a large percentage of my year writing a single story with the promise of $15,000 at the end, I would want a legal guarantee to that money precisely because of the issues he encountered.

2) He had a publisher (Byliner) that apparently did nothing for him. With digital publishing so easy now, the only reason to use a publisher is because they will actually do something for you. After all, Amazon will give you 2/3rds of the purchase price if you go it alone. If you are giving half of that to your publisher, you had better be getting a lot back. Instead, the publisher gave him a cover and siphoned off a large chunk of money.

3) He used an incompetent agent to sign the deal with Byliner. A good agent here would make sure the contract forces Byliner to do its job by publicizing the book to warrant its share of the revenue. Apparently there is no such language in the contract. If you are planning on signing a contract without giving it much forethought, why let the agent steal a percentage of your money as well?

4) Okay, #3 is not completely true—Byliner’s publicist “wrote a glowing review of “Boom” on Amazon, the main retailer of Byliner titles.” Amazon’s review policies make it clear that this is a flagrant violation: “Sentiments by or on behalf of a person or company with a financial interest in the product or a directly competing product (including reviews by publishers…)” are not allowed. So Horwitz is openly admitting that he has used false reviews. In the process, he implicates his publisher as well.

5) He thinks that being on the best sellers list for a particular subcategory means that he was selling a lot of copies. For someone with an extensive publishing history, this is remarkably naive. In fact, you can sell a handful of copies and get on these lists; you should not expect to make it rich unless you are on the overall best sellers list.

So we have a publisher that is completely unhelpful and an author who lacks business and strategic sense who are not making much money on a book venture. Does this warrant a New York Times op-ed on how digital publishing is full of false promises? Hardly.

The irony? The New York Times provides great publicity, even if your op-ed is completely wrong. As it stands, the book is #445 on Amazon’s best sellers list and was probably higher a couple of days ago when the story was first published. The real lesson here is that you can be horribly incompetent and still make a lot of money by writing about all of the mistakes you make—as long as you can convince the New York Times that it is the system’s fault, not yours.

This post has been very negative overall, so I feel like I should end on a kinder note. Tony Horwitz may be a fantastic writer. (I don’t know—I’ve never read anything of his. But a Pulitzer is a good indication.) His book on the Keystone pipeline might be great too. (The reviews on Amazon are good, likely even if you take out the fake review(s).) The takeaway point is that you need more than just good writing to succeed in the publishing world. Horwitz showed a lack of good sense here, and these are mistakes that you should avoid making yourself.

Do Book Sales Determine Number of Book Reviews?

In a word, yes.

That is not what I thought I would say when I first considered writing this blog post. Authors frequently complain that a book of theirs has sold very well and yet does not have very many reviews over on Amazon. And, in fact, that is what inspired me to look into this–my Rationality of War has sold better than I expected it to for the past two years or so, yet it still has zero reviews. Perhaps stranger, Game Theory 101: The Basics is by far my best seller, yet Game Theory 101: The Complete Textbook has the most reviews despite selling only a fraction of the copies.

Aside: I’m being intentionally vague about the exact number of sales any particular book has made because that is a part of my contract with Amazon. The graphs that follow will also be unlabeled. Apologies.

I understand that readers choose to review books for different reasons, so we should not expect reviews to be consistent across genres or even otherwise very similar books. But it seems weird that the difference is so big. Right?

Well, I figured doing some math could help out here. One obstacle to doing a large study on this is having data on a large number of books. Outside of New York Times best sellers, we simply do not know much about sales figures. And looking only at NYT best sellers is problematic since they are all very similar–they have all sold a tremendous number of books.

I can provide a partial solution. I have twelve books up on Amazon and have kept extensive sales records on all of them. While twelve is not a huge number, it will still provide a useful picture on the connection between sales and reviews.

My first thought was to plot the number of sales and the number of reviews each book had. This was not particularly helpful:

notlogged

The diagonal line is the OLS “best-fit” line. Sales do increase the number of reviews, but the graph is not particularly meaningful because of the bunching on the left side of the graph. This is common for data of this type. Book sales have an exponential distribution–many, many books only sell a handful of copies while very few sell a substantial amount. My library also follows this distribution.

To solve this problem, I logged my sales figures and recreated the same graph:

loggedsales

Ah, much better. We now see a clear trend: more sales lead to more book reviews, though the expectation becomes murkier for the best selling of books.

It shouldn’t be surprising that more sales lead to more books–more people reading increases the number of potential reviewers, after all. However, I was surprised by just how strong the relationship is: the correlation between logged sales and reviews is .896! (Positive correlation ranges between 0 and 1, so it is difficult to get much higher than this.) Even the unlogged data have a strong correlation of .757. The number of sales really is determining the number of reviews.

TL;DR

  1. Book sales are extremely correlated with book reviews.
  2. Variance in the number of reviews increases as books become better sellers.

gt101

Game Theory 101: The Complete Textbook Update

Two years ago today, I published the first incarnation of Game Theory 101: The Complete Textbook. (It was incomplete back then, heh.) Every summer, I like to go through it and make changes where I can. This time around, I decided to add a new lesson on games with infinite strategy spaces, like Hotelling’s game, second price auctions, and Cournot competition. I have correspondingly added some content to the MOOC version. Videos below.

Initially, I was hesitant to add more material to the textbook because Amazon’s fee increases as the file size of the book increases. Yet, the size of the textbook shrunk because I cut down on unnecessarily wordy sentences. (Switching “is greater than” to “beats” probably chopped off 300 words from the book.)

The optimistic interpretation: Readers now learn more while reading less!

The pessimistic interpretation: I really, really need to work on writing shorter sentences.

 

gt101

How to Format Images for Kindle

Formatting images for Kindle is a huge drag. The official KDP FAQs are laughably underdeveloped here, basically telling you that the four most common image types are supported (gee, thanks!) and not much else. Personally, I have completely redone the images in my textbook Game Theory 101: The Complete Textbook at least three times now, most recently because the way Kindle compresses images changed without any notice. I am writing this post to impart my knowledge on you.

Here are the most important time/money saving tips:

  1. This process is going to suck. You will think you are doing everything right, then the Kindle uploader will find a way to completely screw you over. An image will stop appearing. The image will appear blurry. Your document size will suddenly explode. You will become unbelievably frustrated at some point. Accept it now, and understand you will likely have to do some experimentation to fix these problems later.
  2. Kindles (and the .mobi file extension) were created to display text. Images were very clearly an afterthought. However pretty your image looks on your computer screen, it is not going to look nearly as pretty once you have uploaded it. Sorry.
  3. Do not use fine lines in your images. To compress file sizes, KDP evidently eliminates random lines of pixels from your images. If parts of your image contain lines that are only one or two pixels thick, those lines may magically disappear in the final version. In other words, make your images as blunt as possible. You can’t control which lines disappear, but that will not matter much if no single line is crucial to the image as a whole.
  4. By extension, if your image contains words, be careful which font you use. I originally used Cambria in many of my game theory payoff tables, but Cambria has a lot of numbers and letters with very thin lines. (The middle part of an e has this feature, for example. Without that middle line, you are looking at a c.) I switched over to Franklin Gothic Demi. It is blocky and ugly in PDFs. But Kindle is not PDF world. Blocky texts look great in Kindle world. You can also consider bolding other fonts to manually create blockier text.
  5. Do not create images larger than what you are using for your final product. In the normal publishing world, you should blow up all of your images, save them as large files, and shrink the dimensions once you have put them in the file. This ensures that the dpi (dots per inch) of the images remains large, which is important for printing purposes. But Kindle world is not the normal world. Following normal advice leads to two problems. (1) Kindle will randomly decide to remove lines of pixels, creating the problem described above. (2) Kindle will retain the larger file size, thus increasing the size of the document without changing the quality of the image on the screen. This means you will be unnecessarily paying greater delivery costs.
  6. You should also compress your images. To do this, I use IrfanView, which is the greatest image cropping software ever created. Simply paste the image into IrfanView and press “s” to save. When you choose to save as a JPEG, it will give you a range of quality options from 0 to 100. I suggest selecting 50 here, which is in line with KDP file size control guidelines. If you choose a smaller amount, the colors of the image will start to bleed into one another. Anything more hardly changes the observable quality of the image in the Kindle but sucks up file space. (And we want to shrink this to save on delivery costs.)
  7. Finally, some basic infromation: If you are writing your book on Word, you need to use the INSERT -> PICTURE command. If you copy/paste an image directly into the document, the image has a nasty tendency of disappearing when you upload the book. If you have a lot of images in your book, I suggest adding this to Word’s quick access toolbar.

Following these guidelines has decreased Game Theory 101‘s delivery costs by $0.03. While that might not seem like much, if you sell eight copies a day, that’s almost $90 over the course of the year. It has also increased the attractiveness of the book, which one would imagine correspondingly increases sales.

Let me know in the comments if you have any other tips, and I will be glad to add them here.