Cost-Plus Pricing: It Can't Explain The Price Of E-Books

Jul 04, 2016

It's clear it costs less to distribute e-books than printed books, so why do e-books cost as much or more if price is determined by a cost-plus formula?

Ebooks are interesting. They clearly cost less to produce and distribute than e-books (no printing, binding, shipping, etc.) but, as shown here, they often cost as much or more than the printed version. If price is a function of cost, as dictated by the traditional cost-plus formula most of us are familiar with, shouldn't they be cheaper?

The people that sell books now argue that it actually costs very little to produce and distribute books – less than $4 for a hardcover and less than $2 for a paperback. This is probably less than most consumers would expect and, if true, would explain why discounts on ebooks aren't as big as readers might hope.

But... ebooks are clearly cheaper than paperbacks, but (as shown above) the ebook costs more. If the retail price is based on the cost this makes no sense.

The reality is that the sellers are using a kind of value-based pricing, something nobody likes to admit to. In this kind of pricing model prices are based not on costs, but on what customers are willing to pay.

Lower costs only equal lower prices if the seller uses a cost-plus formula in which price is a function of cost.

Ebooks offer some significant advantages over paperbacks (instant delivery, less clutter, greater convenience) and consumers have proven willing to pay a premium for these advantages. And the retailer is happy to charge a premium for them.

This willingness to pay more is the reason ebooks often cost as much or more than printed versions of the same content.

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