Selling digital goods

In writing about publishing, I touch upon the topic of price a fair amount (no surprise there). Some of those posts examine the implications of dynamic pricing for products, like books, that have long been sold in fairly static ways.

In 2009, one of the posts I wrote about dynamic pricing provoked a conversation about disruption and price theory. Talking about digital content, at one point I responded:

“If you buy the notion that content is increasingly provided by entities that “surround” a community and effectively own the relationships, then you are absolutely matching price and demand dynamically.  You’re always testing pricing strategies (including free) and measuring aggregate revenue.  Costs mean a lot less; revenue maximization is the primary game.”

This earlier post came to mind while I was reading “Amazon’s diminishing discounts”, an article by David Streitfeld that appeared last month in the New York Times. In it, Streitfeld uses a small set of examples to ask if Amazon is backing away from its long-time commitment to providing its customers with the lowest prices.

Streitfeld argues that Amazon’s strategy to date has been to provide books cheaply. I think this idea is misplaced. The company certainly has been aggressive in matching prices of its competitors, and it also hosts used-book offers at prices that can undercut its new-book offers.

But few people have come to terms with what Amazon may be doing as well or better than anyone: using dynamic pricing to find the point at which everyone – author, publisher and retailer – can gain maximum revenue. That Amazon and publishers are playing very different games is a point made earlier this year by Eric Hellman in his post, “Publishing’s Amazon-powered future”.

Focusing on the discount relative to the list price, as Streitfeld and much of publishing has done, leads us to think that Amazon is pricing to drive everyone else out of business. The day after that happens, says prevailing wisdom, Amazon will jack up prices and we’ll all be worse off for it.

As Hellman observed, that scenario makes sense to publishers who would do just that if given the opportunity (ask librarians how they feel about journal publishing). But for digital goods, Amazon is more likely to seek the point at which (price) x (volume) maximizes revenue.

Brian O'Leary

About Brian O'Leary

Founder and principal of Magellan Media Consulting, Brian O’Leary helps enterprises with media and publishing components capitalize on the power of content. A veteran of more than 30 years in the publishing industry and a prolific content producer himself, Brian leverages the breadth and depth of his experience to deliver innovative content solutions.