I recently saw some news pieces about Kindle book pricing based on a statement by analysts from a think tank called Bernstein Research. From the start this sounded odd - Amazon doesn't even release sales numbers for Kindle so how could anybody come up with good financials? Of course they couldn't and ended up either inventing numbers or analyzing available data, depending on how you want to view it. The only reason I'm spending any time on this isn't because it's important - the report is misinformed and will quickly vanish - but because it shows a type of thinking I see often in business world people where they base judgments on something they don't understand.
I can't find the original but the most detailed report is called Analysts: Kindle Book Price Hikes Are Coming. Interesting headline that's strictly accurate but not really true: analysts do indeed say that there will be price hikes but the force of the headline is that price hikes will happen when this is really just a guess.
Look at the first chart ("Exhibit 34"). Where did they come up with a COGS of 8.73 on a 9.99 e-book? At about 13% that's a much lower margin than a physical trade book which ranges from 40-46%. For all I know it's completely accurate (it's an open secret that e-books are artificially priced too low) but it doesn't seem right. What does appear wrong is that when they bump the price point up to 12.50 they increase the COGS. Why? Is it to disguise the fact that basically all the analysts are saying is that if you increase a selling price while maintaining steady costs then you'll have more profit? For e-books the cost should be fairly stable since there are no physical materials - in fact for Amazon the physical costs, warehousing, print run size, etc won't matter since the COGS is what they're paying the publisher. If the publishers are creating Kindle e-books then it seems as if the COGS could be whatever they want, even the standard 40%.
But then this doesn't even match the other charts. Chart two shows the same breakdown for the 12.50 book that's on the first chart but chart three for 9.99 shows different numbers. Chart three now has a 50% margin instead of the original 12.6% with no obvious reason except that it makes the publisher profits smaller than the first chart. Because if you use the original numbers then this calculates out to a 52% margin for the publisher, oddly enough exactly what the analysts say you'd get with the higher price point.