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Discount Creep

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Fifteen years ago, a typical independent-press retail discount schedule looked something like this:

1 copy 20%
2-5 copies 40%
6-49 copies 42%
50-99 copies 44%
100+ copies 46%
(FOB publisher)

The point of the sliding scale was to induce the booksellers to order more copies. Individual publishers set the discount thresholds at levels that reflected the size of their lists: the more new books, the farther apart the discount thresholds. Wholesalers were content to work with a 50% discount, less if the number of books ordered was small. The wholesalers paid the freight.
Then came the mall chains-B Dalton and Waldenbooks. Since they did their buying centrally, they argued that they should qualify for the highest quantity discount, even though the books had to be shipped to each of their outlets individually and invoiced individually. Initially three or four large publishers objected to this bending of the discount rules, but the mall chains insisted and the publishers quickly gave in.

Next came the superstores. At first, they merely enjoyed the highest retail discount, but then Borders succeeded in establishing the concept of the “captive wholesaler.” This is an in-house entity, now called a DC (distribution center), which receives shipments in bulk from publishers and then reships books as needed to the various stores in the chain it supplies.

Since the existence of a DC eliminated the need for publishers to ship and bill each outlet, the chains were able to insist that orders shipped to their DCs should earn a 50% discount, just like books shipped to an independent wholesaler. Barnes and Noble, Crown, and a number of other chains now also have DCs through which most of the books flow.

Most readers of this summary will have detected a certain looseness in the logic used by the chains to extract their extra discount. More discount for central ordering (but not central shipping) and then even more discount for central shipping? The large publishers, who could have prevented this discount creep, chose not to because in fact they welcomed the new energy, marketing savvy, and capital investment the chains brought to bookselling.

Where did all of this leave the independent booksellers? In deep trouble. They were buying their stock at 7 to 10% less discount than their competition, and this in a business where the profit margin was often only a few percents to start with.

To keep their independent bookseller customers alive-which they certainly needed to since their business with the chains was being drastically reduced by the DCs-the independent wholesalers began to offer free freight and more discount. This, of course, put pressure on the independent wholesalers’ profit margins, and they began to ask for more discount, often 55%, and free freight where they could, i.e. from the smaller independent presses.

The better terms offered by wholesalers to booksellers in turn put pressure on the discount schedules of publishers. Why would an independent bookseller order direct from the publisher when the wholesalers’ discount was similar, the freight free, and the bookkeeping much simpler?

Something had to give or all of the business was going to run through the wholesalers at the higher wholesale discount. Here is what an independent publisher’s or distributor’s retail discount schedule is likely to look like now (again, the discount “breaks” need to be adjusted to the size of the list being sold):

1 copy 20%
2-4 copies 40%
5-9 copies 42%
10-100 copies 46%
100+ 50%

So where do all these changes leave us as publishers? The average trade discount (wholesalers included) is now in the range of 47 to 48%. It used to be about 43%.

It is somewhat comforting to remember that the real issue is not discount; it is margin. You can give away any amount of discount if what you get back from the copies sold is still enough to cover your production costs, overhead, and profit. In other words, if you can raise the price high enough, you can preserve the needed margin, whatever the discount.

A little reflection, however, takes away much of this comfort. The prices of books can no doubt go somewhat higher-but not much higher, because books now must compete with many other forms of information and entertainment. Recently the relentless pressure for more discount seems to have eased. I think the reason is that most players in the bookselling business now recognize that demands for ever higher discounts could drive the price of books too high.

There is however one very ugly trend that we must all fight to the death. A few retailers, not the biggest or the best customers, are trying to increase their effective discounts by charging penalties for violations of their very complicated and idiosyncratic shipping instructions. It is simply not possible for publishers to keep track of special policies for each of their many customers. Retailers who impose such penalties should be instructed to get your books from a wholesaler.

The terrible mistake made by publishers great and small was not to have offered better discounts to the independent booksellers much, much sooner-so more of them could have survived. Now even the largest publishers find themselves in the weak position of companies that sell most of their widgets to Walmart. The power to set discount has passed from the big publishers to the big retailers.

Never having had the heady market power that comes from being a large vendor to many small customers, independent presses will not much feel its loss. But we surely do feel the loss of that 5% of discount.

This article is from thePMA Newsletterfor January, 1998, and is reprinted with permission of Publishers Marketing Association.

 

 

 

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