It seems a price-war is breaking out in the electronic book market. British retailer WH Smith halved the price of its entire e-book range last week.
This raises an important business strategy question: How can the e-book vendors avoid ending up in a downward price spiral?
Consider the situation: the actual marginal cost of selling each book is very close to zero for all vendors. Sure there are a range of ‘lumpy’ costs in setting up the web interface, the transaction system, the relationships with publishers and developing a brand that consumers know and trust.
But selling the next electronic copy of any book is pretty much costless. The publisher needs to get their cut, but for the retailer there are no warehousing or inventory costs and no delivery costs.
Why chase a 100% margin in vain, while your competitor is selling the same title at a 50% mark-up? And if you drop to 49%, why won’t they drop to 48%? And on it goes?
This becomes a classic low-cost wins scenario. Can the retailers do anything to differentiate themselves?
And how to the retailers running both “clicks” and “bricks” stores cope? How do they reconcile their pricing of physical books relative to the e-versions?