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Pricing for Profit

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Price is the element of a marketing mix with the greatest impact on revenue. (The others–distribution, product development, and promotion–produce revenue indirectly.) Yet some publishers establish prices by following a simplistic rule of thumb that says the price should be eight times printing cost and others just match the prices of the competition.

There are problems with both of these strategies. In the first case, your list price will obviously vary with the quantity produced. The unit printing cost for 1,000 copies of a 6″ x 9″ 192-page softcover book could be $2.60. Eight times that is $20.80. However, if you print 3,000 copies of that identical book, the unit cost could be $1.45 and eight times that is $11.60. Given this framework, you might choose to print 3,000 copies in order to match or be below your competitors’ prices. However, if their prices were based on larger print runs, it could be financially dangerous to match them.

So what is a publisher to do? Your immediate response might be to set an arbitrarily high price to maximize your revenue even if you sell fewer books in the process. Unfortunately, this typically results in only a short-term gain. On the other hand, you might decide on a low price to sell more books. But given the book industry’s traditional distribution structure, this strategy may be untenable. The most favorable pricing goal for your circumstances may not be maximum profits or sales–but optimum profitability and sales.

In most cases, the best way to optimize your financial performance is to forecast sales at different price levels and then to choose the level likely to contribute the most money to you over the long term. In this scenario, your costs or your competitors’ prices may or may not have any bearing on your final price. The table below (which can easily be set up as an Excel file) demonstrates one way to calculate your optimum price.

 

The Optimum Price Process

Step #1.

Subjectively decide upon a list price and create a sales forecast that you feel is reasonably attainable–i.e., one that you have at least a 50-50 chance of reaching. Exhibit 1 begins with the premise that you are reasonably satisfied that you can sell 2,500 books at a list price of $12.95 yielding gross revenue of $32,375 (Columns A x B).

Step #2. Calculate your net revenue after deducting your distributor’s discount. In this case, with the discount at 70%, your gross income is $9,713 (30% of Column C).

Step #3. Once you deduct your cost of goods sold (editing, design, printing) for producing the 2,500 copies, you are left with $1,963 for your efforts.

Step #4. Select alternative prices at $1.00 increments above and below your initial price. Then assign a sales forecast to each. In Exhibit 1, the sales decrease 2.5% for each incremental price increase and increase 2.5% for each price decrease. Unfortunately, many publishers stop at this point and price their books at $16.95, thinking that it will maximize their gross profit.

Exhibit 1

A B C D E F

Gross

Net

Cost of

Gross

Forecast

Unit Price

Revenue

Revenue

Goods Sold

Profit

2,250

$16.95

$42,375

$12,713

$7,375

$5,338

2,313

$15.95

$36,892

$11,068

$7,470

$3,598

2,375

$14.95

$35,506

$10,652

$7,563

$3,089

2,438

$13.95

$34,010

$10,293

$7,657

$2,636

2,500

$12.95

$32,375

$9,713

$7,750

$1,963

2,563

$11.95

$30,628

$9,188

$7,845

$1,343

2,625

$10.95

$28,746

$8,624

$7,938

$686

2,668

$9.95

$26,547

$7,964

$8,002

$ (38)

2,750

$8.95

$24,613

$7,384

$8,125

$ (741)

2,813

$7.95

$22,363

$6,709

$8,220

$ (1,511)

 

Step #5. You can find your point of optimum profitability if you go one more step and calculate the likelihood of reaching that sales volume. If there is only a 10% probability of selling 2,250 books at $16.95 then your take-home pay is only $534. Exhibit 2 demonstrates that you will most likely optimize the money you ultimately receive by pricing your title at $13.95.

Exhibit 2

Gross

Most Likely

Profit

Probability

Contribu-tion

$5,338

10%

$534
$3,598

20%

$720
$3,089

30%

$927
$2,636

40%

$1,054
$1,963

50%

$982
$1,343

60%

$806
$686

70%

$480
$ (38)

80%

$ (30)
$ (741)

90%

$ (667)
$ (1,511)

100%

$ (1,511)

 

This technique shows that the best pricing process is more intricate then simply multiplying your costs or mimicking your competition. Instead you need to analyze your sales forecasts by considering the likelihood of achieving them, and then implement your pricing strategy as part of a strategic marketing mix. Of course, the validity of this method depends upon your ability to forecast sales volume at different price levels, and this intuitive skill comes from experience and testing.

Brian Jud is a book-marketing consultant and President of Book Marketing Works. He is also the host of book-marketing seminars jointly hosted with “Publishers Weekly,” PMA, iUniverse, and “Writer’s Digest” and featuring presentations by John Kremer, Dan Poynter, and Jan Nathan. Contact Jud at P.O. Box 715, Avon, CT 06001; phone 860/276-2452; fax 860/276-2453; or e-mail brianjud@msn.com. You’ll find his Web site at http://www.strongbooks.com

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