The agency model is the wrong trousers

Amazon’s public criticism of the agency model this week keeps the debate raging. Amid all the fuss, one important truth gets buried: retailers know best how their customers spend money.

The background

If you don’t know already, the agency model is one where the publisher sets the retail price for their books, and booksellers, as their agents, must sell the books for that price exactly. The revenue split is often standardized (usually 70% to the publisher, 30% to the agent). This is distinct from the traditional wholesale model, where a publisher effectively sets a wholesale price for their books, and leaves final retail pricing up to the retailer.

Everyone has a strong opinion. Amazon says publishers will slowly raise prices of ebooks to consumers’ detriment (of course, it’s Amazon’s detriment they’re worried about – Amazon’s low prices are a key strategic tool for them, and let them loss-lead with some content in order to sell other more profitable products). Many publishers claim that large retailers like Amazon are artificially forcing down the price of ebooks, damaging their long-term profitability. Smaller booksellers are split, though many seem to think agency pricing allows them to compete with Amazon. However, the costs of building back-office systems to support the agency model could be prohibitive.

One retailer I spoke to said they were worried that agency pricing may qualify as illegal price-fixing under their local laws, and therefore can’t sell books under it (for what it’s worth, I think their legal advisor is being over-cautious, but others would agree that it’s illegal in some places). Many authors are beleaguered by the constant flux. Others shrug. Scott Westerfield says: “Amazon has the right to set prices (even if the pricing seems predatory to, say, an indie bookstore going through tough times) and to negotiate for the cut they’re taking. If they want to burn their own money to make electronic books cheaper, I may shake my head for the future, but I can’t stop them.” (That post is long and thorough and includes links to other excellent posts.)

Apple, who pretty much started the debate by offering publishers agency terms for the iBooks store (following to some extent the terms for its App Store), have got to choose their own prices anyway, by requiring publishers to set certain prices.

The issue

The real problems, though, are these: publishing staff rarely have retail skills and access to detailed consumer data. They just aren’t the right people to make pricing decisions. They must and will always set their own wholesale prices. But retailers will just be better at setting retail prices in ways that encourage sales. Random House CE Markus Dohle suspects it: “The question is if publishers know how to find the right retail price”. A key issue here, as Kassia Krozser explains, is that “Publishers have made bad arguments when it comes to ebook pricing. They confuse in-house value (often based on the price paid for the book) with consumer perception of value.”

Moreover, most retailers are closer to their customers not only in spirit but also in body. A retailer in Johannesburg knows a lot more about optimal retail pricing strategies there than a publisher in London.

Put simply: for retailers, agency pricing is the wrong trousers, Gromit. Let them wear their own.

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