Discounting and the end game

You'll notice that I plan to make Trang a freebie. If you had asked me just after I finished writing it if I wanted to make the book free, I would have said, No way--I've put too much effort into this! But other people have found it helpful to make the first book in a series free, and the responses in the Trang reviews suggests that this approach should work for me. (Which I would say is another benefit to doing a giveaway and then reading the resulting reviews: It's basically market research.)

Anyway, the point is that the purpose of discounting and promotion is not to be a big ole generous goofball who never makes a dime. The purpose is to make money. A successful promotion leaves you richer in the end.

Which I think is something people tend to forget. If you make your books very cheap or free, that needs to be done strategically, not just for the heck of it (unless your only goal is to let the world know what's really going on with President Obama).

The same thing holds true for corporations: If they're going to discount something or make it free, they're doing so with the hope of making money.

I throw that out because there's a lot of genuine angst over how Amazon will handle pricing now that agency pricing is history. I've said that I don't think there's going to be a huge drop, but the worry is that Amazon will go ahead and sell both e-books and Kindles at below cost in order to drive other e-book retailers under.

The problem with this theory is that there are essentially no barriers to entry in the e-book market. It's actually pretty easy to start an e-bookstore, and new ones seem to be cropping up all the time.

Selling things at a loss to drive competitors under is something that can be an anticompetitive, monopolistic practice. But there's an end game: After you drive your competitors under, you raise prices sharply, all the while twirling your mustache and going, "Mwa-ha-ha-ha! I'm rich!!!"

You can't ever raise prices if competitors can easily enter your market. Selling at a loss to drive competitors under works great if you're, say, making industrial turbines and someone else has to spend a gazillion dollars to build a turbine factory. It works great if you have a small army of goons to burn out any new competitors. It works a lot less well if you're a glorified five-and-dime store like Wal-Mart, and all anyone has to do to compete with you is open a shop. In fact, if you're Wal-Mart, you have to keep your prices low all the time, otherwise you're screwed. That's why Wal-Mart has such an unusual supply chain--they have to keep prices low and make money at the same time. They can never reach the spot where they raise prices sharply and twirl their mustaches, going "Mwa-ha-ha-ha!"

Amazon is in an even worse pickle. If they start selling books at a loss to drive under their competition, they can never stop. The minute they let up--oh, crap, there's another competitor! A decision to wipe out the competition by selling books at a loss is a decision to lose money on books forever.

What they've done instead is more like what Wal-Mart's done--they've radically altered their relationship with their suppliers by enabling self-publishing. That way they can sell books that are really cheap--like super cheap--and still make a profit.

When people say that these low prices are unsustainable, they mean (whether they know it or not) that they are unsustainable for traditional publishers. And that's true. They're plenty sustainable for many self-published authors, though, not to mention plenty sustainable for companies like Smashwords.

And when people say that Amazon is willing to take a loss on books in order to drive traffic to its Web site where it sells other goods, well, guess what? If it works, there's nothing to stop another company from doing the exact same thing.