Textbook economics

I do want to write a little bit about why my textbook Corporate Finance: An Introduction is priced so high. The price of $180 seems unreasonably high, at least at first glance (although, if you look at amazon, you can purchase the book alone for as little as $150, which includes the $40 MyFinanceLab service). Well, the competitor books sell for the same price, and they do not have the online test bank bundled. The point is really not the high price of my textbook, but of all textbooks. Let me explain my understanding of this pricing.

Text Book Publishing Economics

First, here is how the economics of book publishing works (and how the money is split):

End Distributor:

The average college book store (or Amazon) receives about $60 for each book sale. (This has to pay for the license that most book stores pay to the local university.)

Publisher

The publisher keeps "only" $100. The publisher also has to handle the printing, handling, and marketing costs. The publisher "profit" after the marginal costs is probably around $50/book. This has to cover the fixed book development cost. In my case, the publisher invested about 5 years of work by a team of about 5 people. Order of magnitude, the fixed cost may be around $1 million, so the break-even point is around 20,000 books. (For an introductory economics textbook, the market is a whole lot larger than it is for an introductory finance textbook. 20,000 finance textbooks are not easy to sell.)

Author

My own take is about $20/book. Given that I have spent 5 years of my life working on this book, even at this high a price, it was not an economically smart decision on my part, given my alternatives. It was truly a labor of love.

Somewhere between one in five and one in ten textbooks really succeeds and takes a significant market share. (Subjectively, each author [me!] believes his own book will succeed. Publishers understand how low the chances are.) A high price is simply necessary to make it worthwhile to publish another book.

Of course, if my book is a great success, we get economies of scale. I will then suggest to my publisher not to raise the price in the future. However, the pricing decision is contractually their's, not mine.

Larry Dignan from ZDNet produced a nice graphic of his own calculation, which further broke these components into sub-components:

Ownership Economics

This book economics calculation is little comfort for a student, but the following calculation is:

The typical textbook today resells three times, so the cost is about $60/student/class (of which about $40 goes to the publishes). A one-year old book should go for about $120, a two-year old book should go for about $60. If you pay $180/book for a new print this year, you can probably resell the book for about $120 to students next year.

$60/student/class is not unreasonable in light of how much a good book can add to a course costing many thousands of dollars in tuition.

There will also be an ebook edition for a little more than this (about $80, I believe), which reflects that ebooks are difficult to resell.

Who Suffers and Better Alternatives?

There are a set of students who definitely suffer from how this market has changed over the years: it is students who want to keep their textbooks with them for the rest of their lives. In the old days, this was common—resale used to be rare, and many of us old fogies still own their old college books.

It is a reasonable guess that if resale were rare today, a book price of $80 would probably be the norm. How can we get back there? This is probably impossible. I wish the publisher had a good mechanism to price a normal print edition of book at $80 that prohibits resale or lending—but prohibiting resale or lending is not legal in the United States. I especially regret this because I would hope that my finance book accompanies many students for a long time—not just for the duration of the course.

In an ideal world, I would have suggested that publishers send a check for $80 to all student purchasers who paid for a book themselves (proof via receipt), who sign that they have only used this book themselves and no one else has, and who can prove continued book ownership after 3 years. Unfortunately, this cannot easily be implemented. Sigh...