Remember when flat screen televisions were priced over $3,000? Or when cell phones and associated monthly service plans were strictly for the well-heeled? The typical pricing strategy for innovative technology products is to target aficionados with high prices and if consumers adopt, new competitors enter the market and more advanced models are rolled out. This pattern is a form of "market-based" research for new products. With little reason to discount, duds eventually disappear. Conversely, pushed by competition, manufacturers of hit products view discounts as their ticket to mainstream riches. Such is the historical pricing pattern of successful products.
Mass adoption typically results when one manufacturer concludes, "there is a big market for our product and a drop in price will lead to blockbuster sales." After this mass market discount is implemented, rival manufacturers have little choice but to lower their prices too. This is exactly what happened this week: Barnes & Noble dropped the price of its Nook to $199 (also offered a basic Wi-Fi version for $149) and Amazon retaliated within hours by discounting its Kindle e-reader to $189. Saddled with memories of the consumer backlash that resulted from dropping iPhone prices too quickly after its release, Apple opted to sit on the sidelines and maintain its iPad prices.
While 25% price cuts make for a few days of interesting news, these discounts have larger long term implications to publishers, brick and mortar retailers, and device makers.
Instead of wishfully hoping that e-books will remain a niche product, publishers now have to realize that e-books are officially a game changer. If an increasing percentage of readers choose to read electronically, it's foolish to thwart e-book sales (which are more profitable due to cost efficiencies) with tactics such as delaying the digital release for months after the hardcover is in stores. Consumers aren't going to wait. The pathway to survival for publishers is straightforward: publish (and promote) e-books or perish.
With print sales destined to slowly wither, brick and mortar book retailers also need to adapt to the realities of this movement towards e-books or go the way of record stores. Numb from disbelief, the music industry and record stores twittered their thumbs as consumers switched to digital. As a result, how many record stores are in your area today?
In the music industry, digital profits come from the device while content is essentially given away. While margins are thin on 99 cent songs, the bulk of Apple's digital music profits come from iPod sales, for instance. The opposite business model is emerging in the publishing industry. With margins being squeezed on e-reader devices, the profits from consumers switching to digital will be from selling e-books. In publishing, the device is the razor and e-books are the profitable razor blades. To remain viable, device makers will have to ally themselves with or be a part of a digital book selling operation.
This week's e-reader device price war was a shot over the bow -- the future of publishing has been clarified: digital books are set for explosive growth while print books are slowly headed toward extinction.
Rafi Mohammed, Ph.D. is the author of the newly released pricing strategy book, The 1% Windfall: How Successful Companies Use Price to Profit and Grow (HarperBusiness).
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