Patrick E. McLean : Just what it says on the tin.

E-book Pricing and the Elasticity of Demand

this was a guest post that originally appeared on the Creative Penn

As a writer raised by Economists, I have some perspective that others don’t have, and maybe don’t want. (There’s a reason it’s called the dismal science after all.) But when approaching the question of how to price an e-book, sound economic theory (not that macroeconomic crap that everybody is currently lying their ass off about) can lend some interesting perspective.

Price vs. Cost

A price is only part of what a good or service costs you. Especially a book. In the economic sense, the true cost of something is what you give up to have or consume it. In the case of the book, you spend some money on the book, but the bulk of the cost is in the time you spend reading it. So book price + time cost = the true cost of the book.

So let’s say I buy an e-book for $3 ($2.99) and it takes me 8 hours to read it. Apply some guesstimate for what my time is worth (say $30 an hour) and you get to a true cost of $243 dollars for me to read a book. A little over 1% of which is the actual price of the book.

This is fascinating. And moves me to ask.

Does it matter what the Price of a Book is?

If my estimate of the cost is correct, are people really that sensitive to a change in price? Or, more importantly, if I double the price of my ebook (a 1% rise in the true cost of consuming a book) are sales going to change at all?

Economic theory cannot answer this question for us. The only way to know the answer for sure is to try it for a specific book at a specific time. And even that is not a true experiment in the scientific sense because there are too many factors to control. All we can know it what happened with that one book for that one period. So here’s what happened when I raised the price of How to Succeed in Evil from $0.99 to $2.99 —

Sales went up. I was averaging about nine books a day. Now I’m up to fourteen.

It’s crazy to think that an increase in price causes and increase in sales. I think if I had left the price at 99 cents I would now also be at 14 e-books a day. I don’t think price matters that much. Especially within the accepted range. Economic theory can really say nothing about this particular case, but it can help us understand the forces at work. And before you discount this, please consider, this is really more help than it may first sound. To draw an imperfect analogy, even if you don’t know what the gravitational constant is, it is still very helpful to know that gravity sucks.

The Elasticity of Demand.

The Law of Demand states that the lower the price of a good or service, the more of it any one person will buy. For example, When cars are expensive, a family only has one. When cars are cheap, everybody gets their own car.

The question is, how much does the price of something have to rise or fall to make a difference. That’s the Elasticity of Demand. For example:

Cigarettes have very inelastic demand curve. They are addictive, so when you want them, you want them. Price goes up, still gonna smoke. Kidney Dialysis is inelastic. Unless you get another kidney, dialysis is perfectly inelastic. You get dialysis or you die.

So what about books?

Fans and the Elasticity of Demand.

By definition a fan is somebody who is addicted to an entertainment product. They have a highly inelastic demand curve for whatever that product is. For example, people who are fans of Game of Thrones or Harry Potter. When the next book comes out, they simply HAVE to have it.

Creating Inelasticity

First, you’ve got to be able to write well. That’s price of entry. If you can’t do that, no knowledge of economic theory (or any other kind of theory) will make up for lack of talent. But assuming you are a fair hand at pushing a noun against a verb there are a couple of conclusions we can reasonably draw.

Be unique. If there aren’t any other good substitutes for what you put out, then people have no alternative but to buy from you. I think that well-written fiction is a pretty inelastic thing. When somebody wants a Stephen King novel, pretty much only a Stephen King novel will do. Because he’s the only guy who sees the world the way Stephen King does.

Create rich characters. This is pretty obvious. You can put a character in the most interesting suspenseful situation you like, but if the reader doesn’t care what happens to them, why continue? I think this is why mystery is such a popular genre. It lifts a lot of weight off the characters. People can either like the character or need to know how it turns out.

Don’t screw up the plot. There’s an eternal tension between character and plot. And, in the larger sense, story construction is a gigantic, difficult subject. But the fact remains, if you plot well, you suck the reader in. They want to know what happens next. They need to know what happens in the next book. Which leads us to the last point.

Write a series. When a reader is bought in, they want more. They want more of you as a writer and they want more of the characters they have invested so much time in. It is not a coincidence that the best-selling Kindle authors, the ones that are really putting up some numbers have series. As a personal note, this may be kinda hard for me, as the number of ideas I have are always threatening to draw me off into new challenges. I believe that I, you and everybody needs to follow passion — that’s what keeps us working — but, if your bliss allows it, a series is a good way to create that inelasticity which all authors crave.

To sum it up

I can’t pretend that common sense won’t get you to all of these conclusions. But having names for things allows us to think about them more clearly. The elasticity of demand is no exception.

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