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Pricing for Profit

By Brian Jud

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, this importance notwithstanding, some publishers establish the prices for their books by following the rule of thumb that says the price should be 8 times printing cost. Others price their titles the same as competitive ones.

There are problems with both of these strategies. In the first case, your list price varies according to the quantity produced. The unit printing cost for 1000 copies of a 6" x 9" 192-page softcover book could be $2.60. Eight times that is $20.60. However, if you print 3000 copies of that identical book the unit cost could be $1.45 and eight times that is $11.60. Given this dilemma you may simply choose option two and match your competitorsí 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 industryís traditional distribution structure this strategy may be untenable. The most favorable pricing strategy for your circumstances may not be maximum profits or sales growth -- but for optimum profitability and growth.

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

Step one. 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 2500 books at a list price of $12.95 yielding gross revenue of $32,375 (Columns A x B).

Step two. Calculate your net revenue after deducting your distributorís 70% discount. In this case your gross income is $9713 (30% of Column C).

Step three. Once your cost of goods sold (editing, design, printing) for producing the 2500 copies are deducted, you are left with $1963 for your efforts.

Step four. 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
ABCDEF
ForecastUnit PriceGross RevenueNet RevenueCost of Goods SoldGross Profit

2250

$ 16.95

$ 42,375

$ 12,713

$ 7,375

$ 5,338

2313

$ 15.95

$ 36,892

$ 11,068

$ 7,470

$ 3,598

2375

$ 14.95

$ 35,506

$ 10,652

$ 7,563

$ 3,089

2438

$ 13.95

$ 34,010

$ 10,293

$ 7,657

$ 2,636

2500

$ 12.95

$ 32,375

$ 9,713

$ 7,750

$ 1,963

2563

$ 11.95

$ 30,628

$ 9,188

$ 7,845

$ 1,343

2625

$ 10.95

$ 28,746

$ 8,624

$ 7,938

$ 686

2668

$ 9.95

$ 26,547

$ 7,964

$ 8,002

$ (38)

2750

$ 8.95

$ 24,613

$ 7,384

$ 8,125

$ (741)

2813

$ 7.95

$ 22,363

$ 6,709

$ 8,220

$ (1,511)

Step five. 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 2250 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 Profit Probability Most Likely Contribution

$ 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)

Of course, the validity of this method depends upon your ability to forecast sales volume at different price levels and the probability of that occurring. This intuitive skill comes from experience and testing, but it can be done.

This technique shows that pricing your books is more intricate then simply multiplying your costs or mimicking your competition. Analyze your sales forecasts by considering the likelihood of achieving them, and then implement your pricing strategy as part of a strategic marketing mix.