Pricing Digital

Textbooksfor growth and profits

Team Project15.567 Economics of InformationMIT Students

Exponential growth forecast, but pricing is key

18.8%

10.45%

5.5%

2.5%1%

20142013201220112010

25

20

15

10

5

Year

% o

f U.S

. tex

tboo

k m

arke

t

Digital Textbook SalesFive-year projection

Image by MIT OpenCourseWare.

Pricing in the ‘textbook’ category is less variable

Source: Amazon.com

Fiction TextbooksPrice

Sample #0 10 20 30 40 50 60

New (AMZN)

New (ALT)

Used

Kindle

0

20

40

60

80

100

120

140

0 20 40 60 80 100 120 140

Hypothesis

In a market with

• a well developed 2nd hand market1

• where goods do not degrade significantly through use

pricing will be less variable 2nd hand pricing indicate WTP for rental

1 50-60% of textbooks are purchased 2nd hand. Source: Survey of MIT Sloan students. 49 respondents.

Data suggests WTP for rentals is ~30% of list price

Source: Amazon.com

0

20

40

60

80

100

120

140

0 10 20 30 40 50 60

New (AMZN)

Used

Linear (Used)

Sample #

Price

Survey confirms WTP for rentals ~30% of list price

Source: Survey of MIT Sloan students. 49 respondents.

0

2

4

6

8

10

Q: At what discount rate do you expect to sell your books at the end of the semester?

Many versions exist in the current market

Source: Survey of MIT Sloan students. 49 respondents.

Buy-new-to-

keep, 25%

Buy-new-to-

resell, 10%

Buy-used-to-

keep, 26%

Buy-used-to-

resell, 34%

Buy digital textbook,

4%

Rent, 1%

Digital textbook limited to one version: Purchase at ~20% discount

Source: Amazon.com

0

20

40

60

80

100

120

0 10 20 30 40 50 60

New (AMZN)

Kindle

Linear (Kindle)

Sample #

Price

Current price point fails to maximize growth & profits

• 29% willing to pay full price to own

– But currently purchase at 20% discount

• 44% would not buy digital as buying and reselling print is better value

– Slows growth in digital textbook sales

– Printing + shipping costs reduce profits

• 30% of new and 55% of used books purchased will be resold

– No value captured on these transactions

Source: Survey of MIT Sloan students. 49 respondents.

Hypothesis II

Enabling resale of digital textbooks would create a 2nd

hand market and increase growth and profits

• Buy-to-own

• Buy-to-maybe-own

Resell fee controls size of 2nd hand market

Source: Amazon.com

0

2

4

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8

10

10

%

20

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30

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%

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%

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0%

0

20

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60

80

100

0% 5% 6% 12% 15% 25% 39% 46%

Next: Use survey data to establish supply curve and optimal fee

Current conclusions

• 2nd hand textbook market enables us to establish the value of temporary ownership and hence WTP for rentals

• Enabling resale of digital textbooks, whilst controlling the size of 2nd hand market through resale fees, would increase profits

Could this help maintain higher price points for other digital goods?

Pricing Digital

Textbooksfor growth and profits

Team Project15.567 Economics of InformationMIT Students

MIT OpenCourseWarehttp://ocw.mit.edu

15.567 The Economics of Information: Strategy, Structure and Pricing

Fall 2010

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