Monday, August 15, 2005

The Dangers of Deep Discounts

Greetings from the Left Coast! I’m in San Diego (notice, I did not say “sunny” San Diego) for a few days and noticed something on the way here that seems pretty interesting from a publishing perspective: The “read and return” program at airport bookstores that’s being pretty heavily promoted.

Do you know about this deal? You buy a book at an airport bookstore and then you bring it back after you’ve read it. They refund you 50% of your purchase price and then sell the book you just returned for half off. Now, you may say, this seems reasonable. They clearly don’t profit if they pay half the cover price and sell it for half the cover price. And that made me wonder, why do they do it? A clerk told me it really increases the traffic in the store. Okay. But now let’s ask the big question: Is this good for publishing? Is this good for readers? And I have to say I don’t think so.

The used book market is a complicated thing. Selling “stripped” books—where the cover was stripped off and sent back to the publisher for the purposes of being issued credit and the book reported as destroyed, but then often sold without the cover—was clearly illegal. But selling used books is not. But only one party makes money on a used book: the person selling it. The publisher makes no more money and the author certainly doesn’t make any more money if the publisher doesn’t.

I sometimes think that people believe there’s a system in place where authors earn money every time one of their books is sold, whether new or used. Someone once even told me she thought libraries paid authors each time one of their books was checked out.

Allow me to clarify for those who believe either of those things: In the bookselling system, the last person to get paid, and the person who gets paid the least is the author. Authors get paid royalties based on sales. Your standard hardcover pays 10% of the retail cover price on the first 5,000 copies sold; 12 1/2 % on copies 5,001–10,000; and 15% on copies sold thereafter. But this is only as long as the discount granted to the bookseller is within a certain range, generally less than 50%. Well, I’m fairly confident that if we could look at the sales to all of the big bookselling chains and websites; all of the major retailers; and all of the “wholesale” clubs, we’d find that very few are getting a discount less than 50%. That means that authors are very often receiving less than their full royalties on sales. In fact, I once received a statement where more than 80% of sales were at a “deep” discount and the author received 7% royalties instead of 10%. On a $25.00 book, that’s $1.75 instead of $2.50. Multiply by 1,000 copies sold and it’s a $750.00 loss to the author, by 10,000 copies…well, you can do the math.

Now, did the publisher lose money here? After all, they gave a bigger discount. No, the publisher did not, because it recovered the bigger discount from the author. In fact, in some formulas, the publisher will make more money selling books at a 51% discount than a 49% discount because it will recover more from the author than it lost in granting the higher discount to the retailer, e.g., two points granted, but three recovered!

So, what does this all mean to you, the reader, and what does it have to do with used books? Well, for starters, when an online retailer offers you new books and then, by the way, gives you the opportunity to buy that same book used and for less money, it is doing it because it makes more money selling you the used book. Moreover, that “used” book may be a brand new book that the retailer paid nothing for, since it might have been sent to a reviewer for free and that reviewer decided not to review it, but just to sell it online via a major online bookseller. Authors don’t get royalties on copies given away for review and publishers lose money because they paid to mail it to that reviewer who is now just profiting from it.

We have become obsessed with the discount in this country and it’s hurting you the reader because it’s raising prices. When big chain X demands a 60% discount, how do you think the publisher responds? By raising the retail price, of course. Only by raising the starting price on which the discount is based can the publisher protect its profit margin. So, yes, you get 30% off your best-seller, but is it really costing you any less?

When I worked in a bookstore in 1983, the standard discount was 42%. That means the bookseller would pay about $14.50 for a $25.00 book. Often they’d sell it at full price, or best-sellers might be discounted 10%. So, you’d pay $22.50 for that $25.00 book.

Today, that discount to the bookseller could be 55% or so. The bookseller pays $11.25 for that $25.00 book and discounts it 30%, costing you, the reader $17.50. But the publisher can’t give up that $3.25 between $14.50 and $11.25, so it raises the retail price to, say $28.50 and decreases the author’s royalties by 3% or so to ensure it makes the same money it made before (in fact, it makes $14.81 or more money in this scenario). So, now you are paying $19.95 for the $28.50 book. Wait! That’s cheaper than you were paying for the $25.00 book. Well, not really. You see, this math applies pretty much across the board to all books, not just best-sellers, so you are paying more for books overall and authors are earning less. Since the price of just about every book has gone up in response to the pressure for big discounts, but only best-sellers are vastly discounted for readers, the end result is that if you read anything but best-sellers, you are paying more for books.

Honestly, I sometimes think there’s a Ph.D. thesis in all this. “How discounts raise prices” seems like an easy topic for some economist, eh? Let’s simplify. If I own a store and sell widgets at .99, and I decide to hold a 10% off everything in the store sale, but first I raise all of the prices to $1.10, did you save money buying the widgets on sale? That, in a nutshell is what deep-discounting has done to the book business, in my humble opinion.

Now, let’s see if I can bring this all back full circle to the “buy and return program.” If the bookstore buys the books at a 55% discount and sells them full price, but then repurchases it from you at 50%, it still makes money. If you buy another book full price with that 50% cash back, it still makes money on that new book. Granted it’s not a lot of money, but if enough people do it, the volume begins to expand. If the availability of books at half off brings you into the store, where you also buy overpriced candy, gum and t-shirts, then it’s not even a loss leader. It’s a profit generator. Only if you restrict yourself to applying that 50% cash back to a previously read book and buy nothing else does it become a wash. And I doubt many people at airport bookstores do that math on the transaction.

So, now that I’ve done my best Dennis Miller impression and ranted at length on this subject, I bet you’re wondering what I expect you to do. I have to say, I’m not sure. There’s no obvious answer. If I said go to independent bookstores only and pay full price, I’m sure most would think “%@#& that!” but in a way that’s part of what we need. Because, if we continue down the current path, authors will make less and less money, best-seller lists will dominate even more shelf space than they already do, and smaller, often important books, will not get published because the profit margin won’t be there. Granted, that’s the Darwinism of American economics at work, but is that really where we want to go?

How about, for starters, we just avoid the used books if the book is still in print? Don’t get suckered into buying a “used” book when the new one is available. That just makes that big online retailer more money, not the publisher and certainly not the author. That would be start.



Nancy said...

I agree with you. Also, when I am buying a book, I am buying it for my home library. I have NEVER not kept a book. When people tell me to go to the library to get a book I want to read my first thought is, "But I can't put it on my shelf when I'm done." I've been known to read a book I have liked over and over again.

Another thought that occurred to me while reading this is: What about the book stores that sell at a REALLY BIG discount?

I can remember when we lived in Ohio not far from us was a bookstore that looked like it sold overstock from other bookstores. If you waited long enough you could find a bestseller there for less than $5.00. If I'm able to buy a hard bound bestseller for under $5 then what did the store pay for the book originally? Did the author even get any money from that sale?

Andrew Zack said...

There are stores that buy remainders from publishers and then sell them at very deep discounts. There is even a chain that sells just those books, I believe. My guess is you ran into such a store. And, no, authors rarely, if ever, get royalties on sales of remainders. On the positive side, though, you want a few remainders since if there were no remainders, it means you lost full-price sales. Remainders are the books that were returned by bookstores and then there were no new orders waiting for those books, so they were remaindered.

Jan said...

Wow. That is all very enlightening. Just curious. How does it work with sellers like Wal-Mart/Sam's Club? What kind of impact do they have on an author's royalties?

Andrew Zack said...

Wal-Mart, Sam's and Costco are almost certainly buying at a deep discount. After all, you can't sell something at nearly half off if you don't get a better discount wholesale. Some publishers likely account all of those sales at a reduced royalty. Keep in mind, though, that most of the titles sold at those places are bestsellers and thus are a drop in the bucket of millions of copies sold for the authors involved.

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