A Blog by Jonathan Low


Nov 7, 2013

Price Elasticity and All That: Dropping Price to $1 Catapulted Year Old eBook Onto NY Times Bestseller List

There are relevant questions about whether the rules of economics apply online. After all, the notion that 'the net changes everything,' has been firmly embraced, at least by everyone who has a stake in it, so the fact that this might also apply to the laws of economics seems a reasonable contention.

The issue of volume and its impact on profits has been a source of particular dispute. There are concerns that lowering prices to increase demand diminishes reputation, especially for quality, and that the resultant denigration reduces sales and profits.

The opposing point of view has always been that one can make up profits on volume. And certainly the experience of enterprises as disparate as fast food retailers to Amazon.com suggests there is something to be said for lower prices. H.L Mencken seemed to capture this best with his comment that ''no one ever went broke underestimating the taste of the American public.'

Qualitative judgments aside, the following article explains that for commerce based on the sale of intangible assets on ephemeral media, the economic laws encompassed by price elasticity of demand do hold. JL

Mike Masnick comments in TechDirt:

For all the talk about "devaluing the book," who is actually going to complain if lower prices bring in both more readers and more money?
Last month, we wrote about continuing confusion by the major publishers about ebook pricing, and how many wanted to keep them artificially high, because they still think that's the best way to maximize profits. However, in that post, we also noted that Rob Reid's funny sci-fi novel about aliens wanting to destroy the earth over our copyright laws (they owe all the money in the world to the record labels because they've been infringing), was being price-tested for a while at $1. The book had been out for over a year, and apparently Random House was willing to do some price experimentation. The result? The book that came out 15 months earlier jumped back in the NY Times best seller list, coming in the 22nd spot on the ebook fiction list.

Of course, anyone who's followed Gabe Newell at Valve knows all about how price elasticity works. Dropping your price significantly doesn't always mean a decrease in revenues or profits -- and can actually mean an increase due to significantly greater volume. So, again, this isn't revolutionary, but it's still quite amazing how resistant so many publishing companies are to this idea that selling for less might actually be a good idea.


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