Amazon and the Myth of Perfect Pricing

For the "world's most consumer-centric company," Amazon has real trouble actually talking to people. Their corporate communiques tend to be written in clotted, hermetic language; are few and far between; and appear only when posted on obscure corners of their own site. Amazon's managers and leaders are never quoted in the media, except for an occasional Bezos sighting. And both customers and suppliers struggle to connect with a human being at Amazon at all times.

And yet Amazon has a universal reputation for making customers happy, driven primarily by low prices and lenient return policies -- in this, as in so many other things, they've been using their investors' money to buy customers for almost two decades now. It has definitely been a successful strategy: they outcompeted, outlasted, and outgrew their Web 1.0 rivals to become the dominant online retailer and one of the world's top retailers, period.

Now, though, there's a sense that Amazon has to actually become strongly profitable soon -- like Bullwinkle and the hat, this time for sure! There's finally some mild pressure from the investing community to show profits commensurate with their valuation and sales, and the stock took a minor hit from the lousy recent quarterly results. For most companies, this would be an everyday occurrence, but Amazon has had a charmed life with investors for a long time -- they've gotten more time and benefit of the doubt than any other company in American history.

This is what's behind Amazon's current simmering conflict with Hachette: Amazon wants to be able to continue as it's gone (discounting to equal or better the competition's prices; expensive loyalty programs to lock in customers; aggressive expansion into new devices, new business models, and new territories; benign neglect from The Street and an ever-soaring stock price) and also generate more cash. The easiest way to generate more cash, as Walmart discovered before them, is to squeeze your suppliers: once you're that big, they're more dependent on you than you are on them, so you're likely to win that squeeze.

Amazon, though, wants to be loved. It's not enough that they force their suppliers to pay to have buy buttons that work, or pay to have their products actually show up in searches, or pay for an Amazon employee that the supplier can actually talk to and get results from. (Though Amazon has been forcing their suppliers to do all of these things for a long time. And Barnes & Noble forces their suppliers to do similar things, as do Walmart and your local grocery-store chain.) Amazon is an Internet-era company, so they need the world to admit that they are right and that their way of doing business is better and more special than anything the world ever saw before the Glory of Bezos was unfurled.

And putting their urge to be loved along with their borderline-incompetent public relations causes some interesting results: lots of wonky talk about "demand-weighted units" (what you or I would call books) and naked attempts to subvert the authors of the world away from their current publishers to the Glorious Land of Amazon, where payments are currently 70% (but can be changed, without notice, to any figure, at any time, on Amazon's sole discretion -- including giving it away for free to anyone who might want your book). This has not been notably successful: authors are fractious and squabbling -- and have never been terribly happy with publishers in the best of times -- but can all read, and most of them recognize bad contracts when they see one.

So Amazon's boosters remain who they have always been: the few self-publishers who won that particular lottery and have made a lot of money because of Amazon's terms and market. (Every publishing ecosystem is a lottery, and only a very few writers are ever big winners in any of them -- the trickier question is which ecosystems are better for the vast majority of authors who will never hit big.)

But they keep trying. Even after a couple of failed "offers" to Hachette, for both sides to give away their profits to compensate authors, they keep trying. (Those offers were very carefully chosen -- Amazon is full of smart, sneaky people, and their tactics are routinely brilliant when they don't have to account for the preferences of small groups of individual, grumpy authors -- to do the maximum damage to Hachette, cause the minimum damage to Amazon, and seem the most generous possible offer to authors. Unfortunately for Amazon, the authors realized this.)

Now, they're going back to one of their favorite tactics: the naked unsupported statistic, carefully deployed. Their latest salvo against Hachette -- again, remember that their real audience is Hachette authors; they're trying to demoralize the rank and file of the opposing army and force a capitulation -- relies on declared Amazon experience on the sales of ebooks to "prove" that $9.99 is the best price for an ebook.

(And many Amazon boosters have missed that message, actually -- they're crowing that Amazon has declared that lower prices are always better. Read more closely: Amazon is declaring that $9.99 is better than $14.99 for maximizing revenue. They say nothing about lower prices, which may be because they don't want to spook traditionally-published authors, or may be because prices lower than that decrease revenue. Or there may be some other reason: we don't know. What we do know is what Amazon is implying -- that $9.99 is the price point that maximizes revenue from an ebook.)

But note what Amazon is ignoring: primarily, the existence of other formats of that same content, with varying prices and varying responses to ebook discounting. (And secondly, the existence of a market outside of their own site -- though any damage to sales elsewhere due to their pricing changes would clearly be a feature rather than a bug.) That $14.99 ebook is likely also a $19.95 trade paperback or $24.95 hardcover. Presumably, Amazon can track the effect of sales on Amazon of print editions correlated to changes in ebook pricing, but they say nothing about such sales.

Does dropping the ebook to $9.99 lower hardcover sales by 25%? Or 75% Or none? Could it perhaps slightly increase sales of the hardcover, due to greater buzz and publicity? Amazon doesn't say; it takes no stance on the changing sales of print editions. (And note that, according to the latest BookStats report, ebooks are approximately $3 billion of the total $27 billion book market, having dropped very slightly from 2012 to 2013. There's a massive not-ebook market to be concerned about.)

Given that silence, one could assume that print editions take a hit when ebook prices lower. That fits expectations, and is a reasonable assumption. (Which means that it's certainly wrong, in at least some cases.) And it would only take a slight drop in print sales to wipe out the revenue gains Amazon trumpets as the whole point of moving all ebook prices to $9.99.

Authors: you each need to weigh your own situations, your own contracts, and your own sales, and do what's best for your own careers. That may even mean maximizing units sold rather than revenue -- particularly if you write the kind of nonfiction that leads to more lucrative consulting work, for example -- depending on your particular goals. And you need to be clear what data Amazon is extrapolating from, and what pieces of that dataset they know but aren't talking about.

But please don't forget that Amazon is explicitly trying to drive a wedge between you and your publishers. They would prefer that authors deal with them one-by-one, because in that situation they have all of the power and can use those we-change-them-when-we-feel-like contracts. Always know what your contracts allow -- the worst-case details were written in there for a reason, by someone specific, and they weren't put in frivolously. (This applies to contracts with anyone, mind you.)

There's less to say to consumers: you generally prefer lower prices, obviously. Everyone prefers that prices are low when they buy and high when they sell. And arguments that a certain level of revenue are necessary to keep an industry running at such-and-such a level are not likely to convince anyone: I'm not about to agree with some blogger who says I need to make sure I pay at least $2.50/pound for my apples to maintain that industry, so I won't try to make an argument like that about books. But I do buy apples from my local greengrocer, because they're fresh, because I can inspect and pick them myself, and because that business pays people who live in my community. And a similar argument can be made for books.

(Of course, if you disagree, you can use this link.)