Meissner Research Group

The iPad, Apple’s newest technological wonder, will be released on April 3^rd, just a few short weeks from now, but one thing probably missing from its advertised digital bookstore, iBookstore, will be the books from the world’s sales leader in publishing, Random House.

In the Financial Times article ‘Random House fears iPad price war’, Random House chief executive Markus Dohle said that Random House was still reviewing their options, as they fear that Apple’s pricing policy is of an interest to their stakeholders. The publisher was still in discussions with their agents and authors over the decision.

Random House is a division of Bertelsmann, whose profits declined over the past year, thanks in large part to the recession. And while the company believes they will make gains this year, they are not sure that allowing Apple to control the pricing policy of their e-books is the way to go about it.

Apple’s current e-book policy is that publishers will set the price for their own books, with Apple receiving 30 cents off every dollar. While the other five major publishers (which account for nearly all of Random House’s competition) have already signed on with Apple and their iBookstore, this new pricing scheme is very different from standard publishing policies.

In standard publishing pricing, the publishers sell books to the bookstores at a wholesale rate. The bookstores then make a profit by marking up the books from the wholesale rate. Bookstores can even return unsold books. Even Amazon, one of the world’s top bestsellers and one of the darlings of e-commerce, sells its book this way. While the publishers and Apple both agree that e-books are here to stay, neither is quite sure how to actually price them successfully to make both companies and their customers happy.

In the end, Random House must realize that a price war of any type is not beneficial to their company. If Random House takes Apple’s offer of controlling their own prices, they must quickly realize that trying to price their bestsellers at a price lower than their competitors will only result in spend-thrifty customers and low revenues. And if Random House decides to take Apple’s deal and then prices their books far too low, customers will always expect that price. And they will now be simply a few touches on the touchscreen away from picking up a book from Harper-Collins or Macmillan instead.

Bundling is the act of grouping services and products together to create a new price point. This technique is common in most industries, but the question remains of whether the buyer or the seller actually benefits more from the bundling itself.

In the recent article ‘The Pros and Cons of Bundling’ by Anthony Tjan (The Harvard Business Review, February 26, 2010), Tjan discussed how bundling, in his opinion, ultimately benefits the seller. His argument is based on the lack of transparency in bundling; the sellers can group products and services together in a way that hides how much the customer pays for each individual item. This illusion then prompts the customer to pay more for simple items than they would if the bundle had been broken into a product-by-product invoice.

An illustration of this idea is when customers buy all-inclusion cruise packages – the customer does not know how much they are paying for each individual part of the cruise but only the total price. For example, the overall price for one person could $1050, which doesn’t sound bad to the customer, but if they knew that when the prices were broken down, they were paying $50 for their breakfasts every morning, they might reconsider the price or demand a lower one, as they don’t eat breakfast anyway.

Tjan does point out that this is not always true. Fast food restaurants have the bundled (the value meals) and the individual item’s price points both visible on their menu boards. Customers can quickly see that the bundle of sandwich, fries, and drink is several cents cheaper than buying them separately. In this case, the bundling (having given up its inherent transparency) now benefits the customers. The company, however, does benefit from the increased speed and efficiency of the value meals, as their employees can greatly generate the meals. For a company focused on speed, this might be an overall benefit greater than the loss of a few cents per meal. This also benefits their marketing plans – by being able to advertise a lower price point, they could gain customers who are focused solely on price.

It should be noted, however, that customers are also less likely to purchase the whole package when not given a bundled option. If there were no value meals, many customers wouldn’t get the fries or drinks. They might just order a smaller meal. Or in terms of a car sales, the customer would be likely to not buy additional add-ons if they are all presented individually – customers are much more likely to either go all-in (all the add-ons available) or none (the bare minimum they can live with).

In these cases, therefore, buyers and sellers can both benefit from bundling. The lack of transparency in bundling does benefit the seller, especially when the seller wants to put a high price point on items that some customers would balk at paying. But the customer can also benefit when the seller’s objective in bundling isn’t the price, but the act of creating a better advertising market or a swifter, more efficient product.

In the end, bundling can also be seen as pricing based on value. The customers will pay the higher bundled price, if the extra add-ons were somewhat worth it (the fries) and doesn’t add that much to the price. The seller then benefits by the customers paying the higher, bundled prices for products they might not have purchased in the first place. This added value could possibly be seen as beneficial to both.

Customers have a habit of demanding lower prices, especially when they believe a product’s price represents a huge profit for the company. The case in point here is e-books, just one of many digital products facing the e-pricing dilemma.

In recent weeks, thanks to the soon-to-be-released Apple iPad, five of the six major publishers banded together to demand a change in price. Up until now, Amazon, the leading e-book seller, has set most bestsellers at a $9.99 price point, but by making a deal with Apple to price books from $12.99 to $14.99 and threatening to remove their products from Amazon’s online store and it’s e-reader Kindle, the publishers were able to push up the price.

To illustrate why publishers keep pushing for the higher price, the recent New York Times article ‘Math of Publishing Meets the E-Book’ by Motoko Rich broke down standard hardcover book pricing and compared it to the new iPad digital pricing, also suggesting, according to Rich, that “customers have exaggerated the savings and have developed unrealistic expectations of how low the prices of e-books can go.”

A hardcover books costs about $26. After all the production, editing, marketing, and author’s royalties are paid (see graph), the publisher actually only sees about $4.05 in return, but that’s before any of the overhead bills are paid. Compare this to $12.99 digital price. In the new set-up with Apple, the publishers make between $4.56 to $5.54 in profit (see graph).

But this profit does not actually represent how much profit a publisher makes off any book. Like movie producers, publishers expect a loss on most of their products. Most books are published and disappear from the bookstore shelves long before the publisher recoups the author’s original advance and the original run’s printing costs. In the end, publishers truly only make money off major blockbuster books, further creeping into the publisher’s profitability.

On the other side of the pricing debate is the booksellers themselves. America only has two major booksellers left: Barnes N Noble and Borders, and many of the smaller independent have started shutting down due to Amazon. If the digital revolution takes hold with book-buying customers at too low a price point, it could also mean the end for traditional printed books, as there won’t be any bookstores left o sell them. Borders has already closed the majority of their stores in the U.K.

Some are advocating that the publishing world should step away from digital publishing and should discourage their customers from buying e-books by setting a high price for them. A similar idea has been put forth to save newspapers, which seems to be failing.

Many, however, realize that trying to hold back the digital revolution simply won’t work. Anne Rice, one of the most popular paranormal and horror writers in the world, said, “The only thing I know is a mistake is people trying to hold back e-books or Kindle and trying to head off the revolution by building a dam. It’s not going to work.” Publishers, a notoriously conservative business as a whole, are going to have to find a way to start looking towards the future, if they want to make their products viable and profitable once more.

With a vision to create a four-year doctoral program in statistics and operations that was based in practical knowledge and real-world implementations for managerial science, Lancaster University has opened its newest Doctoral Training Centre in Statistic and Operations. Named STOR-i, for “Statistics and Operational Research – excellence with impact”, the new 4 year program is focused on creating a new generation of advanced problem-solvers with high technical knowledge and the ability to create significant methodological contributions to STOR.

The program’s history started in December 2009 when the Engineering and Physical Sciences Research Council (EPSRC) announced a new investment of 13 million pounds to create Doctoral Training Centres at Lancaster, Cambridge, and Warwick universities. Lancaster’s program, with the combined 6.7 million pound award shared jointly between the Departments of Mathematics and of Statistics and Management Science, will build on its leading reputation in these fields. Recent accomplishments in these programs have included the success of the EPSRC Science and Innovation award in Operational Research (the LANCS Initiative) and the HEFCE-funded Centre for Excellence in Teach and Learning in Postgraduate Statistics. STOR-i will quickly add its real-world focus to the programs’ accomplishments.

STOR-i has partnered with industrial multinational companies, like Unilever Research and Shell Research, who will be directly involved with the students’ training. They will provide real-world experience throughout the program. After the student completes the first year coursework to provide a practical grounding in STOR’s mathematical core and an overview of current methodology, the student will work towards the PhD under the guidance of supervisory teams. Half of these projects will include actual industrial involvement and the added guidance of an industrial collaborator.

The Centre, led by Chairman Kevin Glazebook, Director Jonathan Tawn, and Deputy Director Idris Eckley, will train at least 40 students over seven years, and will begin to admit the first of these students in October 2010. More information about the program and how to apply can be found at www.stor-i.lancs.ac.uk.

The story of the digital price wars is all about change. As each new technology develops and transitions into part of the mainstream culture, the way the average customer buys their goods is dramatically altered. And the price that customers pay must change right along with it.

According to the recent article ‘Is the price right for e-books?’ by BBC blogger Rory Cellan-Jones, the war over the price for e-book content is poised to become a major issue for the publishing world over the next year in the United Kingdom.

With Amazon, Sony, and Barnes N Noble all developing their own portable reading devices, UK patrons still complain that high prices and lousy access to the books they want have stopped them from purchasing e-books. This has allowed smaller companies like Kobobooks to develop e-readers that allow for easy reading across platforms (portable device, TV, computer, etc.) and easier, faster downloads.

However, it appears most customers care more about the price of the book then how they get it or where they can read it. With Amazon in a power struggle with publishers both in the UK and in America over who determines the price of books, the standard pricing for any book is far from being decided. In fact, just last month Macmillan, one of “Big Six” English language publishers, blocked Amazon from selling any of their products, in a move designated to keep digital book prices high. Macmillan and Amazon may have compromised, but this was surely just one skirmish in a long war.

Perhaps Amazon should focus on how Apple transformed the music world with iTunes. By designating a simple pricing scheme (99 cents per song), Apple was able to give customers the access, speed, and (most importantly) price they wanted. They also won many court cases that gave them the right to determine their own prices. If Amazon and the other e-readers can follow suit, a bottom line price could help drive e-books and e-readers into the hands of every UK citizen.