There it is, in one word.
While it may seem harsh or unsavory at first blush, price discrimination is the most valuable strategy you can apply as an author.
What do I mean by price discrimination?
Use price to select and segment when customers with different buying inclinations purchase your product.
Let’s begin with some pricing basics and why using different price points over time will build you the most profitable audience that responds to your work.
Price demands response.
Many markets experience price elasticity of demand. Price elasticity is an economic term for measuring how demand changes with price changes. There’s a formula and all kinds of the theory behind its use.
The problem is you’re not participating in a market with conventional supply-demand constraints where price matters.
If publishing were that way, no one would make money because consumers would see all books in a genre as equal substitutes, and with the massive supply of free books, no author could profit.
But that’s not how this market works. It’s the opposite.
A few winners take all the profits. It’s a power law market where popularity drives choice to a favored few.
In a winner-take-all market, price has little to no impact on demand.
So, if the market is this arbitrary, how can price make a difference or even be considered a strategy?
In the case of Amazon, they have sent an unambiguous signal that they don’t want you to be regularly priced at 99 cents. The signal is their reduced royalty rate.
They are not saying you can’t do it, because that would get them into the price-fixing territory, but they make doing so unprofitable.
Therefore, we have obvious math as to what needs to happen if you are using the lower price to juice up demand.
Suppose you sell a book for $3.99 and reduce the price to 99 cents. You need to sell 7.98 times more of your discounted books to equal the profit of selling one full-price book. Do you think that the 99-cent strategy will create that much demand?
It works the other way as well…
Increasing your price can be scary.
Most businesses worry they will drive customers away. Just like we can estimate the volume increase we need to offset a price decrease, you can also figure out the number of sales you’ll need to lose with a price increase. In the case of increasing from $3.99 to $4.99, you would have to lose 25% of your demand to offset the profits created by the price increase.
Simply put, not all customers are equal, and while it may take more work to build a list of full-price customers, each customer is as much as seven times more valuable than a discount customer.
“But I bring them in on my discount book and then sell them the rest of my backlist!” you might say.
Okay, but that doesn’t change the fact that that customer is still less valuable. So, does a discount promotion really build your list faster?
Moreover, do you have a way of segmenting that customer and understanding the buying behavior when you show them a new release?
What should be the right full price?
This tends to be genre-based, and you can see where various e-books and audiobooks are priced in stores. My recommendation is if you are putting out a well-edited book with an on-brand cover, you should be charging the market average or better.
If you don’t think your product is worth it, don’t publish it at all.
Will you get better over time?
The point is that if the average price in the genre for well-reviewed books is $5.99, then charge $5.99.
Ask yourself has price has anything to do with your book purchase choice? In the grand scheme of variables in the product selection process, price rarely ever impacts book sales, however it has a huge impact on profit—more so than a promotion.
Below is a heat map of pricing by genre from August 2021. You can use it to give some genre guidance.
When they won’t read free
I began by showing you the demand response you need to get to the same profit of one book at full price versus 99 cents, but how can you implement a price strategy when people don’t even read your free books?
Authors have a powerful marketing tool in offering free samples of a book to build an audience. There are also great tools to help readers looking for free books and new authors.
The big problem is that most people that give an email address in exchange for a free book don’t go on to read it. If they’re not willing to pay money for the book, why would they pay for it in time?
“Free” removes the financial cost; it doesn’t eliminate the time-benefit cost a reader may perceive.
This is why your pre-purchase strategy to get someone to read your free book is about earning attention and trust. Before you ever try to sell them another product, get them to trust you enough to read your free book. If that free book doesn’t convince them to buy future books, then your writing doesn’t sell itself, and no promotion can work without a product that delivers.
While we’re not getting into other marketing concepts, not the topic of price strategy, don’t confuse your inability to get people to read a free book with its value and thereby devalue what you should charge for your book.
At launch, your existing audience is what drives demand. The composition of this audience is what matters. You want those buying to be willing to pay full price and have homogenous characteristics that the sales platform can identify and then market to based on those characteristics. This is what I call latent marketing.
Most importantly, you want there to be above-average conversion, not traffic. This gives you the highest probability of triggering latent marketing, even if only for a short time.
In the first ninety days after publishing, your existing audience consumes the book. Those buys give your book a ranking on Amazon. After that, gravity kicks in and demand dies off. It’s natural to see this happen.
This shift in pricing philosophy during that initial phase conflicts with all those things you are told to do around stacking free or discount promos and advertising to discount platforms.
Well, if you do all that, and send those people to a full-priced book, they will bounce, and that is precisely the wrong move. That’s traffic without conversion.
You trade off profit for volume if you discount during that period. If you do not see an 8x increase in volume from an undiscounted launch, then your strategy failed. Furthermore, are you attracting the right fans if there is a significant demand response?
A huge list of discount readers costs more to activate and maintain and needs to be eight times bigger than your list of full-price purchasers.
The lifetime value of a product
We often talk about the lifetime value of a customer or the value of your backlist. These are all excellent measurements and help us to extract value.
There is also the lifetime value of your intellectual property. There are ways to increase it by putting it in various formats and languages to get more from the same asset. There is also an understanding that over the product’s life, price discounting can help you extract more value over time, just like video game and technology providers do.
A newly released video game will sell for its full price at launch. There may also be higher price points with bonus or limited edition content to extract additional value.
This is price discrimination.
Value customers won’t show up and pay full price, but they know if they wait, they can eventually get the same or more products for less money by trading off time.
They may be able to later get the same content for 10% of the launch price just by waiting six to nine months.
We segment and segregate. You can still do your discounted stacked promotion deals, but don’t do it during your prime profit period.
Launch at full price
Let’s begin with the simple strategy that provides the most power.
Launch your books at full price and keep that strategy until your existing audience is exhausted. In the beginning of your career, the audience will exhaust quickly because your audience is small. Over time, as you retain readers, the launches will go higher, the consumption time will go longer, and the revenues will increase.
Be sure to give your existing fans time to purchase and have preferred access. The access strategy becomes part of the price and product features.
Use price to discriminate and segment
With price discrimination, you can create a value hierarchy that allows customers to determine what they are willing to pay. A customer that is only willing to use subscription services gets the product later or a limited time, as does the bargain shopper.
Being the everyday low supplier is a hard slog. If you have regular ongoing deals and promotions, you will train your best customers to become bargain shoppers.
Limit the number and duration of promotions. Make them the exception to the rule. If you offer a discounted box set, then remove it from distribution after a particular time frame.
Kindle Unlimited is a price strategy
Participating in exclusive subscription services like KU doesn’t have to be an either-or choice.
Understand, you don’t have customers in Kindle Unlimited. You are a vendor for a subscription service. If you pull your books out, readers will substitute others because the value proposition for them is comparing the monthly fee versus having readable material. If you’ve established them as a full-price fan, they will make the exception and buy your books, but most won’t and will just pick something else to fulfill the need to read.
With the recent changes in how bonuses are handled, I expect to see more authors thinking about KU not as an all-or-nothing strategy and as a “season and a reason” strategy. I mean that if you know you have a solid KU audience, you design their access to specific titles based on how it fits with the timing of your overall pricing strategy.
This leads to segmentation and having a KU list that you can direct market to and activate when the season is starting or ending for your books in Kindle Unlimited. This means managing segment expectations and training them that your books won’t be available always and forever in the subscription.
If you just read that and are thinking, But if I weren’t in KU, I would be back at my day job.
That may be the case, and what you plan to do with a business that fragile is an important topic of another day.
How to Teach a Machine
In my book Advantage, I unpack how this popularity market works. In my newsletter and presentations, I have developed these ideas further and shared a model of how a feedback loop informs the market.
Recognizing that the book market is skewed to favoring a few may be overwhelming, but you can use its natural self-organizing principles to your advantage.
It takes time and patience, but when you get these forces working for you, the market perpetuates and amplifies your efforts.
Sales platform algorithms and recommendation engines are based on machine learning. What we have personified as some machine god behind the curtain of Amazon is nothing more than logic to help simplify customer choice selection in the face of an almost infinite supply of products.
All the algorithms do is amplify what it can decipher from purchasing data it is given and reward products that are selling better with more visibility to similar customers.
You influence search, rank, and latent marketing systems by sending the cleanest signal to your ideal audience that demonstrates an above-average conversion.
Direct digital marketing has always had a traffic and conversion focus.
It makes sense to a point…
The more people you can bring at the lowest price (organic traffic) or by keeping your ad cost low (paid traffic), you keep down your cost of conversion and remain profitable. Rinse and repeat.
The problem with the strategy is traffic isn’t rewarded. Conversions are.
Amazon has the best latent marketing system, with over 200 million customers in the United States. They have no shortage of traffic. People have been duped into sending them traffic for years.
What they lack are conversions.
That’s what Amazon rewards.
In fact, if you send traffic that doesn’t convert, you will get sent to the penalty box. Each visitor who clicks away without buying signals to the algorithm that your book isn’t interesting, and thus not worth suggesting to the next potential customer.
You want to align the price with the customer and segment. Send customers willing to pay full price to a full-price page. Send discount shoppers to a discounted promotion.
Don’t send them all at once and hope for a good result because, in the end, the machine god just takes sales divided by page impressions to calculate the conversion. If it’s below average, you’ll be treated accordingly in search and rank visibility.
The average keeps going up
By applying the ideas I’ve laid out in Advantage and using a pricing strategy as I describe, you’ll deliver an above-average conversion rate and trigger more latent marketing on sales platforms, getting exposure to more prospects until your results fall below average.
Every success further creates a divide between those that can get above average conversions and those that can’t. By definition, the average is a number that is the central value of a data set. By succeeding this time, you add higher conversion numbers to the data set and make it harder for all next time.
For those authors using cumulative advantage to collect more resources in the current round for use in later rounds, this increasing average doesn’t present the same problem. For those that don’t, you’ll be left behind.
Funds and Fans
The resources we are trying to collect for future rounds are funds and fans. There is an interesting relationship between the two, as our fans are the source of all our funds outside our investment. A fan becomes a continued source of funds, and funds can be reinvested in the business to win more fans.
This is an essential concept in understanding pricing strategy. Most authors think of fans in terms of quantity, not quality.
Do you want more fans, or do you want more of the right fans?
I would argue that you can have both if you go about this the right way, and if you do, it means changing many commonly accepted practices for launching books.
How does advertising play into pricing?
My clients have some of the lowest advertising costs as a percentage of sales in the industry. I don’t believe you need to advertise to succeed in the industry and have the results to prove it.
That doesn’t mean we don’t advertise. It means that when we do, it’s part of our marketing strategy.
Take Facebook ads, for example. There used to be a time when they were an ideal way to find new readers. That is much harder now, and the cost can be prohibitive.
An ad that sends a prospect to an Amazon sales page has to be a pretty amazing ad to develop the trust to convert so quickly.
On the other hand, if you are doing direct advertising to your existing audience to wake them up, you could get spectacular results.
What’s the difference?
In the first situation, you send cold traffic with limited attention and low trust to an immediate call to action. In the second, you’re retargeting and activating your existing audience to the right purchase occasion for them. They are ready to buy; they just didn’t know you had a new product to purchase.
If I’m looking for a value extraction after my full-price customers buy, a discount might make sense. Then I’ll use discount promotions and advertisements to activate this different audience and send them to a favorable deal.
Doing things this way also helps to associate costs better. You may find that running promos to discount customers doesn’t pay off when the results are separated from sales from full-price customers.
Where do you go from here?
The following checklist for your pricing strategy should help you think through and execute a true pricing strategy designed to extract the most value from a range of customers.
- Segment your audience based on how they purchase
- Full price through other storefronts
- Develop a pricing timeline
- Use access to the product and price to provide favorable treatment to your customers willing to pay the most. Exploit your segments over the lifetime of the product.
- Communicate your strategy
- Let customers know that to expect and why.
- Limit cannibalization
- Lower-cost box sets and deals can be limited-time offers to reduce sales cannibalization.
- Plan promotions based on where you are at in value extraction, not to drive traffic.
- Never treat customers the same
- People who behave the way you like (buying full price directly) should have status and preference. We all want to feel special.
- Understand the customer or volume you expect to attract with each price-point strategy you implement.