Monday, March 1, 2010

eBook Pricing Calculus and A/B Testing

You've probably read about how book publisher Macmillan has won a big battle with Amazon over the pricing of ebooks. By shifting to an "agency" model, publishers will gain the ability to control the price that consumers pay for ebooks. A much discussed question has been whether this is really a win or a pyrrhic victory for publishers.

My question is a bit different. How will book publishers determine the correct pricing?

In Econ 101, we learned that markets set pricing by matching supply and demand curves. The publisher's task in the ebook economy is to find a price that will maximize their profits. Too high a price will result is low unit sales, while too low a price will leave money on the table.

The Blind Side (Movie Tie-in Edition) (Movie Tie-in Books)One of the frustrations you encounter trying to apply Econ 101 lessons to the real world is that you quickly find that most supply and demand curves are completely hypothetical. When W. W. Norton & Company set a retail price of $13.95 for The Blind Side (Movie Tie-in Edition) they didn't solve a set of equations that told them their profit would be maximum at this value. Norton doesn't know how many copies they would sell at $99.95, and they don't know how many they would sell at 99¢. It's likely they know how many total copies they're selling, but they probably don't have solid numbers telling them how many of those are selling at $9.81, the current price on Amazon.

But Amazon does.

Booksellers like Amazon can map out a large part of a demand curve using A/B testing. In A/B testing, website visitors are divided into two groups. The A group sees one version of a website and the B group gets another. The behavior of the two groups is then measured and compared. For example, the two groups could be shown different pricing for The Blind Side, and the rate that they purchase the book would be measured. Using repeated measurements of purchase rate vs. price, a dominant retailer such as Amazon is able to measure the consumer demand curve for a book or group of books. Pricing and profit can be optimized accordingly.

Amazon's pricing calculus will be somewhat different from the publisher's calculus, however. If the price they pay publishers is fixed (as it is for books), then the optimum price for Amazon will be higher that the optimum pricing for the publisher. You can do the math.

Amazon is well known for doing A/B Testing- see Bryan Eisenberg's description of the evolution of the Amazon shopping cart for a great example. Google is also notorious for depending on the technique. It even tested 41 shades of blue when it couldn't decide on a color for a design element.

Book publishers, on the other hand, have little experience with running e-commerce websites. A successful web merchant will optimize their site for search engine ranking, and will make it simple for users to find and get what they want.

Try a Google search for "The Blind Side". Since the book has become an Oscar-nominated major motion picture starring Sandra Bullock, it's not surprising that the top hits relate to the movie, not the book, but the complete absence of publisher results is striking. Here are the links my Google search pulls up:
    The Blind Side: Evolution of a Game
  1. Movie times
  2. IMDB (Amazon property, links to Amazon)
  3. the movie web site (Warner Bros., with move commerce links)
  4. Wikipedia (film)
  5. Google News Results (no book links)
  6. Google Image Search results (First one a book cover at AOL shopping)
  7. YouTube (official trailer) (no book links)
  8. Amazon page for the book At last, a place to buy the book!
  9. Rotten Tomatoes (movie reviews, no book links)
  10. Yahoo Movies (no book links)
  11. Apple iTunes Movie Trailers (no book links)
  12. Fandango (no book links)
  13. Moviephone (no book links)
  14. Google video search results. The second result is a link to a YouTube interview with The Blind Side Author Micheal Lewis, labeled "WW Norton: The Blind Side". It seems the publisher ponied up for some promotional video! But are there any links from the video to a book related page? Of course not!
On the second page of google results, the book gets a Wikipedia link and another Amazon link. On page 3, there's a book link to Powell's. On page 5, there's an  excerpt from the book on the NPR website.

Perhaps the publisher web presence for The Blind Side has been swamped by the movie pages.  If we add "book" to the search term we might expect to see a publisher presence for the book. On the third page of that search, there it is: a result from WW Norton. It's their home page, and no mention of The Blind Side at all. A message there tells me that WW Norton has
"recently relaunched our website, and many things have moved around. If you're looking for a book, try the search field above, or browse all books by subject." 
Oh, and when I search Norton for "the blind side", I find this page, which says the book is out of stock! If a competant merchant were running the site, it would tell me that the version without the movie-tie-in cover was in stock, but no such luck. However, there's a tiny link way on the other side of the page that says the book is available on the iPhone/iPod Touch iTunes App Store! Although no one has submitted a review on iTunes, I'm told I can buy it there from Kiwitech for $13.99.

There are so many things wrong with Norton's attempt at e-commerce that pricing is almost the last thing you would want to test with an A/B study.

So the funny thing about the shift to an "agency" model for the selling of ebooks is that the power to call the plays (set prices) now belongs to the one player (Norton, Macmillan, Random House, etc.) that has the poorest view of the ebook playing field; in fact, I'm not sure they all know the rules. The big huge left guard (Amazon) has just been benched even though he blocks like a superstar, because he's urged Norton to run the ball. Norton wants to pass the ball, to his stylish wide receiver, Apple, but the other team's blitzing, and a speedy right defensive end named Google is bearing down on Norton from his blind side.

I'm not sure I want to look.
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